NetSuite Accounting for ASC 606 and IFRS 15 Revenue Recognition

As a seasoned Head of Finance, you’ve likely navigated the complexities of revenue recognition. With the advent of ASC 606 and IFRS 15, the landscape has shifted, and NetSuite accounting has evolved to meet these new standards. With NetSuite’s robust revenue recognition capabilities, you can automate revenue scheduling, allocation, and reporting, ensuring compliance with ASC 606, IFRS 15, and other standards

In this article, we’ll delve into the world of revenue recognition under ASC 606 and IFRS 15, and explore how NetSuite accounting can help you master these complex regulations.

The Five-Step Revenue Recognition Model

ASC 606 and IFRS 15 introduced a five-step revenue recognition model, which has become the cornerstone of revenue recognition. These steps are:

1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue when (or as) the entity satisfies the performance obligation

NetSuite Accounting has been designed to support this five-step model, providing a robust framework for revenue recognition. NetSuite’s revenue recognition engine enables you to create specific recognition rules for each product or service, linking them to individual line items in customer contracts. Automatically recognize revenue based on predefined schedules or milestones, ensuring compliance with evolving revenue recognition mandates.

Revenue Recognition Challenges in NetSuite

Despite implementing NetSuite, many finance departments continue to struggle with revenue recognition. The introduction of ASC 606 and IFRS 15 brought about a five-step revenue recognition model, which can be complex to navigate. Without utilizing NetSuite’s advanced features like Revenue Recognition or Revenue Management module, finance teams may face numerous challenges.

Key Challenges:

1. Configuring and Maintaining Complex Revenue Recognition Rules: NetSuite’s revenue recognition capabilities require careful configuration and maintenance to ensure accurate revenue recognition.
2. Managing Multiple Revenue Streams and Contracts: Companies with multiple revenue streams and contracts may struggle to manage and track revenue recognition in NetSuite.
3. Ensuring Compliance with ASC 606 and IFRS 15: Even with NetSuite, finance departments must ensure that their revenue recognition processes comply with the latest accounting standards.
4.  Providing Transparency and Visibility into Revenue Recognition: NetSuite users may struggle to provide clear visibility into revenue recognition processes, making it difficult to analyze and improve revenue recognition.
5. Optimizing Revenue Recognition Processes for Scalability and Efficiency: As companies grow, their revenue recognition processes must scale to meet increasing complexity and volume.

Mastering Revenue Recognition with NetSuite: A Five-Step Approach

NetSuite provides a range of tools and features to support this configuration, including the Revenue Recognition module, which provides a centralized platform for managing revenue recognition. Let’s delve into NetSuite’s capabilities in supporting each step of the revenue recognition process under ASC 606 and IFRS 15:

Step 1: Identify the Contract with the Customer

NetSuite’s revenue recognition capabilities enable you to create specific recognition rules for each product or service, linking them to individual line items in customer contracts. Automatically recognize revenue based on predefined schedules or milestones, ensuring compliance with evolving revenue recognition mandates.

Step 2: Identify the Performance Obligations in the Contract

When dealing with contracts that involve multiple components delivered at different points in time, identifying performance obligations becomes a critical step. This is because revenue recognition hinges on how and when each component is delivered.

NetSuite’s capabilities support this step by providing a robust framework for managing multiple performance obligations. With NetSuite, you can create configurable revenue schedules that cater to even the most complex agreements, ensuring that revenue recognition is accurate and compliant with ASC 606 and IFRS 15.

Step 3: Determine the Transaction Price

Determining the transaction price is a critical step in the revenue recognition process. However, managing complex allocations can be challenging, especially when products and services are delivered over multiple accounting periods. Industry standards dictate how contract prices must be allocated based on what is being delivered when.

NetSuite’s comprehensive allocation features support this step by enabling systematic compliance with ASC 606/IFRS 15. Specifically, NetSuite provides two key capabilities to manage complex allocations:

• Dynamic Standalone Selling Price (SSP): NetSuite allows you to define the SSP as either a constant or a dynamic formula. This enables you to allocate contract prices accurately based on the specific products or services being delivered. For example, you can define an SSP for support based on a percentage of licenses within a contract.
• Powerful Allocation Calculator: NetSuite’s allocation calculator leverages the SSP to automatically allocate arrangement consideration across all elements within the arrangement. This ensures that revenue is recognized accurately and in compliance with ASC 606/IFRS 15.

Step 4: Allocate the Transaction Price to the Performance Obligations

Allocating the transaction price to the performance obligations is a critical step in the revenue recognition process. Companies across various industries, including software, technology, and services, have traditionally been required to follow industry-specific guidance for revenue generating activities.

NetSuite’s revenue recognition capabilities support companies across these industries, providing a robust framework for allocating the transaction price to performance obligations. Specifically, NetSuite provides the following support:

• Revenue Recognition Over Time: NetSuite enables you to recognize revenue over time based on output (e.g., units produced, hours delivered) or input (e.g., resources consumed, costs incurred). This allows you to accurately reflect the transfer of goods or services over time.

• Percentage-of-Completion: NetSuite supports revenue accounting for projects leveraging percentage-of-completion mechanisms. This enables you to recognize revenue as the project progresses, based on the percentage of completion.

• Event Driven Revenue Plans: NetSuite allows you to align revenue recognition with event triggers, such as the fulfillment of an item, the generation of a bill against an order, or work beginning on a project. A single performance obligation can be associated with multiple plans in order to support partial fulfillments or billings.

Step 5: Recognize Revenue When (or as) the Entity Satisfies the Performance Obligation

The final step in the revenue recognition process is to recognize revenue when (or as) the entity satisfies the performance obligation. In today’s globalized business environment, companies must navigate multiple accounting standards, including GAAP and IFRS.

NetSuite’s powerful multi-book accounting engine provides a robust framework for revenue recognition in accordance with multiple accounting standards. Specifically, NetSuite provides the following bookkeeping support:

• Standalone Selling Prices, Revenue Rules, Plans and Arrangements: NetSuite enables you to define book-specific standalone selling prices, revenue rules, plans, and arrangements. This allows you to accurately reflect revenue recognition in accordance with multiple accounting standards.
• Foreign Currency Management: NetSuite provides book-specific foreign currency management capabilities, enabling you to use book-specific functional currencies when calculating the general ledger impact. This includes realized and unrealized foreign currency gain/loss amounts per transaction.
• Financial Reporting: NetSuite enables real-time revenue visibility for any book, anywhere, anytime. This allows you to accurately report financial results in accordance with multiple accounting standards, ensuring compliance and transparency.

Key Benefits of NetSuite’s Revenue Recognition Capabilities

Now that we’ve explored how NetSuite supports the five-step revenue recognition model under ASC 606 and IFRS 15, it clearly gives these key benefits. By leveraging NetSuite, you can:

1. Automate revenue policy for compliance, reducing hours spent managing and recording revenue
2. Comply with industry guidance and mandates for today and tomorrow, leveraging NetSuite’s Multi-Book Accounting capabilities
3. Analyze actual revenue impacts and forecasts, dynamically responding to actual postings to give an updated expected revenue picture for future periods. Revenue Recognition for Complex Sales Agreements

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Maanoj Shah

Director Growth Strategy & Alliance

Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.