Transitioning From ASC 605 To 606 In NetSuite
What is the Revenue Recognition principle?
The revenue recognition principle determines the accounting period in which revenues are recognized. According to this principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.
Why the new rule?
Revenue is a core element in comparing one company to another, as well as comparing the performance of a company over time. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) had differing guidance on appropriate handling of revenue recognition which made comparing company performance difficult. The FASB and IASB collaborated and developed the ASC 606 guideline. The purpose of changes included with the ASC 606 rule include:
- Removing inconsistencies and weaknesses in revenue requirements
- Providing a more robust framework for addressing revenue issues
- Improving comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets
- Providing more useful information to users of financial statements through improved disclosure requirements
- Simplifying the preparation of financial statements by reducing the number of requirements to which an entity must refer
What are the deadlines to switch?
- Public Organizations – reporting periods after 12/15/2017
- Private and Not for Profit Organizations – reporting periods after 12/15/18
- Some non public organizations were eligible for a delay until 12/15/19 (seek guidance from your CPA for specifics)
History of ARM module from rollout through today (a brief summary of the differences between the classic and ARM modules)
- With classic Revenue Recognition in NetSuite (legacy only), the revenue treatment is assigned on the sales order or invoice transaction. The revenue schedule is also associated to the transaction and can be directly managed there. The amount of revenue to be recognized is driven from the invoices amount only. Alternately, revenue commitments can be used to begin recognizing revenue before any invoices have been generated. Revenue commitments are useful in a subscription environment where you recognize revenue over the life of the subscription but don’t always invoice in equal amounts.
- With Advanced Revenue Management (ARM) the item drives the revenue treatment. Rules are created and then applied to the item record. The revenue treatment cannot be changed or managed on the revenue transaction level. Once a revenue transaction is created, a revenue arrangement transaction is generated by NetSuite. This is a control transaction that manages all the aspects of the revenue recognition including allocating the revenue between items when using a fair values instead of the sales price.
In order to be compliant with GAAP, companies should convert their open revenue recognition to ACS 606 requirements. NetSuite has a tool to manage this process for those clients currently using ARM that is set up according to the ASC 605 requirement. The conversion tool will take all open Revenue Arrangements and update the revenue plan amount and posting periods to be ASC 606 compliant. There are several steps involved in this process, but it is a pretty simple process to follow
NetSuite conversion process:
NetSuite offers a tool to streamline the conversion from the ASC 605 rule to the ASC 606 rule when using Advanced Revenue Management. This is a controlled tool from NetSuite, with access limited to NetSuite Professional Services or an authorized NetSuite Partner. The tool will evaluate all open Revenue Arrangements and will create an updated revenue plan based on the new revenue recognition rule and fair value price assigned to each item. Anywhere the amount recognized has been over or under realized, an adjust will be posted in the open period.
There are several prework steps to be completed prior to enabling the tool. They are outlined clearly by NetSuite and often require engaging with your revenue team to ensure proper treatment according to the ACS 606 rule. Here is a high level review of the steps involved:
- Disable AUTOMATED Revenue Arrangement and Plan processing
- Process all transactions through the cut off date using the current configuration
- Post all Rev Rec JE’s through transition period
- Close all periods through the transition period
- Create new revenue recognition rules
- Review and update Item records with the appropriate rule and other Revenue Recognition values
- Setup fair value price list for each item as appropriate
- Create a saved search that includes all arrangements you want to migrate to the new standard
- Use the tool to migrate – this will create an adjustment in the last open period, update all revenue plans to meet new requirements.
For those using the classic revenue recognition in NetSuite there is no tool to convert your current schedules to ARM. 79Consulting’s team of experts is well-equipped to aid you in the options to convert to ASC 606 requirements.