Revenue Recognition Methods
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When combing through financial statements, revenue numbers are almost always a focal point. It’s crucial that your revenue is properly and accurately recognized, measured, and presented - so that your organization is working with the right data to conduct business. There are various methods of revenue recognition, but not all of them are appropriate for every business model.
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The revenue recognition processes
Today’s increasingly complex business models have become the norm. The single revenue model—one product, one price, one time—is a dying strategy. Instead, businesses must offer flexible and personalized pricing, billing, and even monetization options. Revenue recognition–itself a complex process–has gotten even more challenging. It’s not just the revenue methods to track, but also having to factor any ever-changing accounting standards and regulations.
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revenue recognition methods
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Warning: Your ERP may not support all your revenue models
Finance teams often rely on Excel because their ERP platforms are missing key features. For example, a growing number of businesses have introduced subscription-based and hybrid pricing models. But many popular ERPs do not support them, or they require clunky, bolt-on solutions. For example, building spreadsheets to accurately recognize revenues per ASC 606 guidelines, is an extremely time-consuming exercise for finance teams and may require contracting third-party experts, increasing audit fees, or even hiring more staff. Maintaining these spreadsheets, scrubbing data, and running reports can fully occupy your finance team and take them away from strategic planning.
By nature, spreadsheets are not designed to synchronize with source data in real-time, so the data they contain is most often out-of-date. Moreover, refreshing that data typically requires manually extracting and normalizing many different sets of data from multiple subsystems—an extremely time-consuming process. For example, creating a simple revenue forecast might require pipeline data, contract data, sales orders, billing terms, and more.
Also, spreadsheets are not designed for collaboration, and they are difficult to share. When any part of your O2C process relies on spreadsheets, it can get bogged down. In fact, according to a classic Genpact study, 7–12 percent of combined revenue in working capital is stuck somewhere in inefficient O2C processes at top global organizations.1
Different revenue recognition methods include:
- Sales-basis method: Revenue is recognized at the time of sale, which is defined as the moment when the title of the goods or services is transferred to the buyer
- Completed-contract method: Revenues and expenses are recorded only at the end of the contract
- Cost-recoverability method: No profit is recognized until all of the expenses incurred to complete the project have been recouped
- Percentage-of-completion method: Revenues and expenses of long-term contracts are recognized as a percentage of the work completed during the period (common with constructions and engineering where projects take years).
- Installment method: The installment method of revenue recognition records proportionate profit when an installment is received (common where customer collections are unreliable)
- Brokerage agreement: Observes certain proprietary rules if the broker intends to work clearly along the guidelines of both the IRS and the SEC
- Accrual method: Prepayments are initially recorded as prepaid assets but are later classified as an expense when the goods are delivered or services are performed and accepted
- Appreciation method: Through this method, there is a way for a real estate agent to reduce the gain recognized from selling the property sold at its appreciated value
- Proportional performance method: Recognizing profits under this method is a modification of the percentage of completion method
- Deposit method: Used for monies held as deposits that are subject to cancellation agreement by both parties
- Transactions Under Bill & Hold: Used for several fraudulent transactions, often to bloat a company’s assets
FinancialForce supports your revenue recognition methods
Regardless of the business models you run on or the revenue generation methods you choose, solutions like FinancialForce Revenue Management give your finance team the tools required to serve the needs of an entire business - from an enterprise-class, secure, and scalable platform.
FinancialForce Revenue Management automates recognition calculations, eliminates error-prone, and time-intensive spreadsheets, and adheres to key revenue recognition standards. Built on the Salesforce platform, FinancialForce seamlessly integrates with Salesforce CRM and other FinancialForce ERP solutions, ensuring that all customer data is interconnected.
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Centralize revenue streams in a single revenue recognition solution. Get compliant with the new ASC 606 & IFRS 15 standards. Automate calculations, reduce your period-end close and gain a complete picture of your organization’s revenue - both recognized and deferred.