Key Requirements of Recurring Revenue Recognition

Transcription

1 Whitepaper Key Requirements of Recurring Revenue Recognition Cloud Based Billing and Subscription Management Expert Series

2 EXECUTIVE SUMMARY Revenue Recognition Management For Recurring Revenue Business Models New technologies, business models and challenges We live in interesting times, where the innovative application of new technologies to challenges can enable entirely new business models, and any one of these enabling technologies would be sufficient for driving substantial value to existing or completely new markets. Cloud computing is one great example of this, as it has become a principle driver for a great deal of innovative computing solutions. Web-based services over the internet are delivering on-demand computing infrastructure, platforms, and applications, creating tremendous opportunities for small, medium, and large business innovators. These new opportunities are often defined primarily by new business models and depend on solutions that make the delivery of products and services as seamless and transparent as possible, with a very high degree of reliability and utility, and the ability to monetize virtually any future commercial model epiphany. Many of these new models are intrinsically dependent on arrangements or agreements made by providers with their customers that are based on recurring billing, which in turn is driving recurring revenue. The recurring billings can be flat-rate time-based subscriptions, variable-rate usage-based charges, or a mixed base of flat-rate and variable-rate usage charges. Recurring billing is a more complex yet must-have business function for many of these new recurring revenue business models. Recurring billing also brings another set of challenges that are associated with revenue recognition. It is relatively easy to properly manage and execute revenue recognition when the products are tangible goods that are physically delivered to the customer and billed on delivery. Properly dealing with the creative array of possible recurring billing options for digitally-delivered offerings is much more complicated, and requires a focused solution. This paper examines what an effective and complete Revenue Recognition Management solution should provide for Recurring Revenue Business Models. Revenue Recognition Requirements The best recurring billing management results are realized by making all of the critical aspects of the billing process function as smoothly as possible for both the seller and their customers, ensuring their relationship is enhanced by their combined billing experiences. The associated revenue recognition management solution must support the full range of demands of various combinations of flat rate-based and variable usage-based recurring revenue management scenarios and transactions. It should deliver a single solution paradigm that enables the seller to extend its business offerings to include services, and to initiate, expand, change, and monetize their business model as they desire. Revenue Recognition Key Needs: 1. Full compliance with the revenue recognition accounting and reporting requirements of AICPA, EITF, FASB, SEC, GAAP, and SOX principles, standards, and regulations. 2. Comprehensive support for the full spectrum of transactions possible with extremely flexible and agile recurring revenue business models. 3. A single-source system of record for all recurring revenue recognition activities associated with accounting, reporting, and forecasting applications. 4. Automated accounting processes, with controlled access to configurations and data. WHITEPAPER 2

3 5. Seamless integration of the solution with the enterprise accounting general ledger, other financial systems, and all analytics applications at the macro summary entry levels and at the detail transaction and audit control levels, throughout the company. 6. User interfaces that are task-focused, simple, and consistent, making the complexity associated with revenue recognition transparent to the seller s internal operations as well as their customers. Each of these deliverables is discussed below in greater depth. A General Basis for Revenue Recognition must meet the primary objectives of revenue recognition practices, ensuring that Balance Sheet and P&L (Profit and Loss) statements provide a consistent and meaningful representation of the company s performance and health in each reporting period. It accomplishes this by mapping the revenues generated by the business and the expenses incurred to generate that revenue in the same accounting period. In the case of recurring revenue business models, services are rendered to a customer over a period of time or the seller has provided the customer with the rights to use the seller s assets over a continuously extending period of time. The basis of compliant relevant revenue recognition might best be summarized with the following statements and criteria. Revenue must be realized or realizable and earned before it can be recognized.»» Revenues are realizable when the related assets received or held are readily convertible to known amounts of cash or claims to cash.»» Revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. Another way of expressing this is that revenue is realizable and earned when the following is true: There must be clear, objective and persuasive evidence that an arrangement exists between the seller and the customer. Delivery has occurred or the services have been rendered to the customer. The seller s price for the product delivered or the service rendered is fixed or determinable. There is a reasonable assurance that the payment will be collected by the seller from the customer. Compliance with Governing Requirements The values associated with effective revenue recognition are made possible only when the solution complies with the various associated accounting standards, principles, and regulations. There are a number of key control organizations that one should be aware of in this regard, and each of them provides one or more key artifacts that define the expected accounting and financial reporting results. The organizations are presented here, followed by a brief introduction to the key artifacts that should be considered in an effective and compliant revenue recognition solution. must assure compliance with these governing bodies content or all applications of revenue data is severely compromised if not corrupted. The American Institute of Certified Public Accountants (AICPA) The AICPA is the national professional organization of certified public accountants (CPAs) in the United States that sets ethical standards for the profession, and provides U.S. auditing standards. It issues SOP s (Statement of Position) periodically to provide direction on new subjects or clarification on existing subjects regarding accounting and reporting. SOP s 91-1, 97-2, and 98-9 are relevant to revenue recognition. The Securities and Exchange 3

4 Commission (SEC) The SEC protects investors, maintains fair, orderly, and efficient markets, and facilitates capital formation by creating and enforcing regulations that set the standards for the public disclosure of financial information by public companies. It will periodically issue Staff Accounting Bulletins (SAB s) affecting its topics to make this interpretive guidance consistent with current authoritative accounting and auditing guidance, and SEC rules and regulations. SEC Topic 13 covers Revenue Recognition. The SAB s relevant to revenue recognition accounting and reporting are 101, 101A, 101B, and 104, bringing Topic 13 contents into alignment with current GAAP. Generally Accepted Accounting Principles (GAAP) GAAP provide the combined set of authoritative accounting principles, standards and procedures that companies must apply in recording and reporting accounting information used to compile their financial statements. Their application in this manner insures that investors have an acceptable level of integrity and consistency in the financial statements they use when analyzing companies for investment purposes. GAAP covers such things as revenue recognition, balance sheet item classification and outstanding share measurements. The Financial Accounting Standards Board (FASB) FASB is a seven-member independent board consisting of accounting professionals that establishes and communicates standards of financial accounting and reporting in the United States. FASB standards are expressed as generally accepted accounting principles (GAAP) that govern the preparation of corporate financial reports, and are recognized as authoritative by the SEC. The Emerging Issues Task Force (EITF) The EITF assists the FASB in improving financial reporting through the timely identification, discussion, and resolution of financial accounting issues within the framework of the FASB Accounting Standards Codification process. This codification process is the source of authoritative standards of accounting and reporting to be applied by nongovernmental entities in combination with those issued by the SEC. The EITF was created to reduce unacceptable diversity in expected practice, and to address specific implementation, application, or other emerging issues that can be analyzed within existing GAAP, on behalf of FASB. The EITF abstracts that are relevant to revenue recognition are EITF 00-21, 08-01, and A key focus of these abstracts, and the SOP s identified earlier, was dealing with multiple-element arrangements, e.g. contracts, agreements, or packaged bundles of products and services. A primary means to a solution was defining various acceptable methods of assuring optimal revenue recognition by distributing the value between the components of the bundle. These methods were established as VSOE (vendor specific objective evidence), TPE (third party evidence), or ESP (estimated selling price). These changes are critical to revenue recognition for recurring revenue applications that encompass bundles of software, hardware, and services. Sarbanes-Oxley Act of 2002 (SOX) The rules and enforcement policies outlined by the SOX Act amend or supplement existing legislation dealing with security regulations, emphasizing that the senior management of a company must assume responsibility and accountability for their company s accounting and reporting integrity. Two key provisions of the Sarbanes-Oxley Act that revenue recognition management solutions will affect are Sections 302 and 404. Support for Flexible and Agile Recurring Revenue Business Models You might recall the Henry Ford axiom that You can have any color Ford, as long as it s black. That won t work today, especially in this area of billing applications. Recurring revenue business models are quite diverse in the variety of billing elements, pricing, billing schedules, performance characteristics, products and services covered, etc. This degree of flexibility and agility is required to meet one of the primary core objectives of these business models: The recurring revenue solution must ensure that virtually all possible monetized models can be supported, as new business model opportunities are pursued and new competitive demands are exposed. WHITEPAPER 4

5 This objective applies as well to the revenue recognition management solution that will be driven by the recurring billing activities. The following models and transactions should be supported by the revenue recognition management solution. The recurring revenue solution must ensure that virtually all possible monetized models can be supported, as new business model opportunities are pursued and new competitive demands are exposed. Recurring Revenue s Typical Models Revenue recognition management must support the expected business models. The following are examples of the revenue models that should be covered by an exceptional solution. Free Trials Free trials are a basic way of providing an opportunity for the customers to recognize and want the values they would obtain if they became a paying customer. These trials may be limited in functionality and/or limited to a number of user seats or access. There is no externally reported revenue recognition for this activity, but the provider may wish to use internal memo accounting or inter-company billing to chargeback to its internal sales or marketing departments at a market rate for sponsoring these free offerings, etc. These charge entries would be eliminated from external reporting, but they could be useful for the purpose of recognizing the cost of the free program and potentially affecting the prices to the paying customers that the program actually generates. Freemium Model A very limited set of services and functions provided by the client to customers for free might be established as the Bronze or Freemium service level. The sellers s rationale here is that the incremental costs to support a very limited set of functions for these customers will be negligible, while this offering provides an opportunity for the customers to recognize and want the values they would obtain if they became a paying customer. Again, there is no externally reported revenue recognition accounting for this, but once again the client may wish to use internal memo accounting or inter-company billing to chargeback to its internal sales or marketing departments at a market rate for sponsoring these free offerings, etc. These charge entries would be eliminated from external reporting, but they could be useful for the purpose of recognizing the cost of the free program and potentially affecting the prices to the paying customers that the program actually generates. Subscription Revenue Model Subscriptions can be flat-rate, usage-based, or a combination of these. Flat-rate subscriptions are often also referred to as membership subscriptions. This is a recurring revenue model that encompasses fixed-rate charges where the amount of the charges will not vary across a specified period of time. There is typically a service provision or coverage start date and end date. The services, products, or content that is provided during this period can vary depending on the expected level of services and performance. There could be several levels of services and performance that a seller has chosen to provide. One example could be a Silver or base service level that would be charged to the seller s customer. This service level typically provides a set of services and functions delivering incremental value (over the Bronze offering) to the seller s customer. There is external reporting of the revenue generated by these services because the customer is an external customer that will be billed for these services. There will be traditional accounts receivable, earned revenue, deferred revenue, and unbilled receivables entries. Usage Revenue Model Usage-based recurring revenue occurs when the client has offered to charge a customer for 5

6 actual units used over a period of time at an agreed rate per unit. Unlike the subscription flat-rate revenue model, the recurring revenue from usage-based services varies. Usage units could be: hours, minutes, messages, miles, seats, I/O volume, storage, memory, CPU compute time, network packets, etc. Subscription Plus Usage Combined Revenue Model An example of this model would be a Gold advanced service level package that would also be charged to the seller s customer. This service level typically provides a set of services and functions delivering incremental value (over the Silver offering) to the client s customer. The package would basically provide flatrate service subscriptions plus usage-based charges. There is external reporting of the revenue generated by these services because the customer is an external customer that will be billed for these services. There will be traditional accounts receivable, earned revenue, deferred revenue, and unbilled receivables types of entries. Continuing this example of service level offerings, a Platinum or premium service level package would offer all possible services with unlimited usage for a very high all in subscription rate. In every other way, it could be similar to the Silver and Gold packages described above. Flexible Billing Schedule Options Recurring revenue models typically cover several schedule options, and the revenue recognition solution must accommodate each option. There is the old stand-by of invoicing the customer as the product is delivered or the service is deemed to have been rendered to the customer. This is still a basic requirement of any billing solution, including a recurring revenue billing solution. Then there is another high-frequency recurring billing arrangement where the customer is billed in advance of the service term. Advance billing or prepaid billing options become more prevalent when the seller has leverage as the market leader, or perhaps offers a reduced price to the customer for advance payments. The seller benefits because it has greater predictability in future revenue streams and it has the funds before it actually delivers or renders anything to the customer. The revenue recognition solution will produce a trade receivables amount billed to the customer offset by the recognition that the associated revenue is not yet earned, and is therefore a liability for the seller to its customer. Arrears billing or postpaid billing options are also a significant option when the market expects to pay only for the services it has actually already consumed. The buyer benefits because it only gets invoiced after it has consumed the resources. The seller has less predictability and perhaps greater exposure to bad debts, but it may have the opportunity charge higher rates. As the products are delivered and the services rendered, the revenue recognition solution will produce an unbilled trade receivables amount offset by the recognition that the associated revenue is earned, and is therefore a reported in its P&L and its various reports. It is also possible that a billing schedule for a customer s term might be advance billing at the frontend of a quarter on the second month of that quarter, while the last three quarters of an annual subscription will be billed in arrears in the second to last month. The revenue recognition management system should be able to handle this or even more complicated scenarios. Going back to the revenue recognition management goal of assuring that revenue is recognized as earned and mapped to related expenses in the same accounting period, these various billing options will require that the revenue recognition management solution must be able to discern a liability for amounts that are billing in advance of revenues earned, from an asset for amounts where delivery or rendering has been earned without a corresponding invoice having been issued to the customer. These assets and liabilities in the Balance Sheet of the seller allow the billing schedule options while still assuring the integrity of the P&L and Balance Sheet statements during the overall term of the agreement with the customer. should permit the assignment of default account codes and location codes for Trade Accounts Receivable, Unbilled Receivables, Deferred Revenue, and Accrued Tax Liability entries, with override configuration possible at the individual charge type level. Charge Classes and Types There are many different classes of charges that a recurring revenue model might process. A revenue recognition management system should support each of these classes of charges, and recognize that there are an unlimited number of WHITEPAPER 6

7 charge types that the seller might create within each of these classes. Revenue-centric Charge Classes and Types These charge classes and types are the primary sources of revenue, and the revenue recognition management solution should provide preconfiguration of a default earned revenue account code and location code elements to be set for each charge class with an override opportunity at the individual charge type. Flat-rate subscriptions are typically timebased, covering periods of service defined in time-based units of measure e.g. a day, a week, a month, or a year at fixed rates that will not vary over time. An example of types here might be the monthly subscription for telephone service, text service, internet service, etc. Usage-based subscriptions are typically driven by the reported usage of resources by the customer. There are several types of usage units of measure that are possible here, and the solution must be able to deal with them all. The subscription amount varies as usage varies over time. An example of types here might be the usage subscription for telephone minutes, storage used for IT infrastructure provided as a service, etc. The combination of flat-rate and usage-based subscriptions, where a specific resource is made available to the customer up to a maximum flat-rate covered level, and usage that exceeds this threshold is charged separately. Call minutes, text messages, etc. are examples of charge types that might apply here. State of completion is a recurring revenue model that relies on a project s recognition of progress to generate revenue recognition, with or without the benefit of aligned progress invoices. Use-it-or-lose-it charges that provide a limited number resources available to the customer for a period of time, where any unused resources under the limit will be earned at the end of the term. Prepaid charge discounts might be provided to incent customers to pay in advance of the service coverage period. Tiered-usage pricing reflects volumedriven decreasing price rates that promote increased usage by the customer. Content-based services for media might be a good example here, where the more you use the lower that rate that is charged. Tiered-usage discount fees reflect volume-driven increasing discount rates that promote increased usage by the customer. The example above would also apply here. Tiered usage penalty fees reflect charges made to customers that are consuming resources at a higher rate than the flat-rate or base usage rates have assumed. It is a progression of increasing penalty rates associated with increasing usage volumes. Where the resource has limited flexibility or capacity, there might be charge types for peak electricity demand or summer water usage limits, etc. One-time charges represent fees or charges that occur as unique events during a subscription term. They can represent revenue to the seller that occurs in the course of using subscription or usage-based recurring revenue models. They can include fees such as those listed below:»» Setup fees may be an initial charge to set up the customer s devices, application software, infrastructure, etc. to initiate service.»» Admin charges may be levied when the customer requires excessive changes or support.»» Shipping and handling fees may be charged when the devices or other tangible goods are shipped to or received from the customer.»» Early termination is a charge for canceling service before the agreement period has expired. Taxes on sales and usage should provide tax accounting as associated with the tax jurisdictions regulations and codes for the recurring billing items. Tax liability to a tax entity may exist for the seller performing the role of a collector of taxes. This liability may be created and recognized based on billing and/or usage. 7

8 Transaction Class and Types There are several business scenarios which a recurring revenue business model might apply and require revenue recognition management in a standard and consistent manner. The solution should use these transaction classes and types to produce the desired accounting and reporting treatment. The default accounts of the class should be allowed to be overridden at the charge type / transaction type combination level. The Billing Transaction Class This class of transactions is defined around the basic recurring billing events that occur in the course of initiating and maintaining the normal basic business activities. It does not include all billing activity transactions, as there are several special case transactions that should be covered in a separate class. 7. Standard billing as delivered or rendered: This transaction type should typically produce a direct entry to trade accounts receivable offset by earned revenue in the same day s entries. The offset to the billing should depend on the sequence of earned revenue recognition activity relative to the billing accounting activity. The default should be that earned revenue is a daily process that occurs prior to the invoicing activity. Given this default, the trade accounts receivable entry would be offset by a contra entry to the unbilled receivables account. 8. Advance billing: Any time the billing is prepaid or in advance of the related product delivery or service rendering, the solution should typically recognize a direct entry to trade accounts receivable offset by a contra entry to deferred revenue. 9. Arrears billing: Any time the billing is postpaid or arrears after the related product delivery or service rendering, the solution should typically recognize a direct entry to trade accounts receivable offset by a contra entry to unbilled receivables. The Earned Revenue Class This class of transactions is defined around the basic recurring revenue recognition events that occur in the course of initiating and maintaining the normal basic business activities. It does not include all revenue recognition activity transactions, as there are several special case transactions that should be covered in a separate class. 1. Standard revenue recognition as delivered or rendered: This transaction type should typically recognize earned revenue, where the default sequence of processing earned revenue before invoicing activity should make the offsetting contra entry to unbilled receivables in the same day s entries. 2. Earned revenue offsetting deferred revenue: Any time the billing is prepaid or in advance of the related product delivery or service rendering, the solution should typically recognize a direct entry to earned revenue offset by a contra entry to deferred revenue (reducing the deferred revenue credit balance). 3. Earned revenue prior to billing: Any time the billing is postpaid or arrears after the related product delivery or service rendering, the solution should typically recognize a direct entry to earned revenue offset by a contra entry to unbilled receivables (increasing the unbilled receivables debit balance). 4. Subscription renewals require the revenue recognition solution to accurately manage the end of one term s balances and earned revenues while effectively setting up the next term. Special Case Transaction Class All of the remaining transaction types will fall under this transaction class. Despite the fact that every one of these transactions may affect one or more of the earned revenue, trade accounts receivable, deferred revenue, unbilled receivables, or tax accounts, these transaction types are isolated in a separate class because they are the special cases that the recurring revenue business model encounters. Some of the key special case themes in dealing with revenue recognition management are: Treating earned revenue as representing the company s performance-to-date against the customer s expectations. The product has been delivered to the customer or the service has been rendered to the customer. The selling company is entitled to invoice the customer and receive payments from the customer for performances. Bad debts write-offs are made against outstanding unpaid trade accounts re- WHITEPAPER 8

9 ceivable balances up to the value of earned revenues, not necessarily the total amount that has been billed. Voiding transactions are only to be made when no revenue has been earned, because this transaction should be intended to correct a mistake in the transaction. When the customer has received the value of the product or service that earned revenue represents, the billing processes should write-off the value of the earned revenue to a bad debt or other internal expense. The default sequence of processing for the revenue recognition should place special case class transactions first in the queue to deal with any effects on advanced billing balances, followed by earned revenue transaction class processing, followed in turn by billing transaction class processing. The solution should use the adjustments made during the special case transaction class processing to enable the normal earned revenue and billing transaction class processing. Special Case Transaction Types The special case transaction processing should adjust any advanced billing values down to the end date of the revised service term (should be equal to the expected earned revenue performance end date), and the subsequent earned revenue and billing transaction class processing will make the necessary adjustments to their affected balances. There are several special case transaction types listed below: 1. Credits: Credits can only be given when there has been an associated invoiced value that requires adjustment. The original billing contra account should be used in this entry. There may or may not be a corresponding earned revenue impact, but this adjustment should be left to the earned revenue transaction class processing to adjust the affected earned revenue, unbilled receivables, and deferred revenue balances. Any subsequent billing transaction class processing should only be executing a standard billing accounting process, determining the offsetting contra accounts to the trade accounts receivable based on the current balance (after special case and earned revenue processing) in unbilled receivables. 2. Returns / Service Performance Adjustments: When the customer has returned a product or has shown that the expected service was in fact not rendered to the customer, the recurring billing solution should be generating an adjustment that corrects the existing agreement. The revenue recognition management solution should keep things simple and auditable. It should employ the billing adjustments to reverse the associated earned revenue entries with the offsetting contra entry being made to the unbilled receivables account (this the result of the default process sequence). When/if the billing adjustment transaction is recorded, the trade accounts receivable entry will have the offsetting contra entry made to the unbilled receivables account. 3. Upgrades and downgrades: Changes in the service level may occur during the service term. The special case transaction class processing will create any appropriate advance billing-related adjustment entries. The subsequent earned revenue and billing transaction class processing will make the normal adjusting entries in earned revenue, deferred revenue, and unbilled receivables accounts. 4. Cancellation: Service or agreement cancellation applies the downgrade solution, except that, after setting the current term end-date to the cancellation date, there is no new term to be initiated. 5. Voided agreement transaction: Voided transactions are valid when a subscription must be completely reversed, resulting in the complete reversal of all revenue recognition entries affecting trade accounts receivable and deferred revenue, taxes, etc. There should be no earned revenue or unbilled receivables possible with this type of transaction. 6. Bad Debt write-off: These write-offs occurs when, after dunning and other collection efforts have failed, a customer s unpaid trade accounts receivable balances are to be written off to either an out-for-collection balance or a bad debts expense. The prevailing revenue recognition assumption here is that there was a highly reasonable expectation that the customer was going to pay the debt 9

10 before the services were provided and revenue was recognized as earned. The revenue recognition solution should reverse only the amount associated with the unearned portion of the agreement services against the trade receivables. The invoice should be corrected to reflect the remaining earned receivables, the agreement cancelled, and the remaining receivables can then be written off. The revenue recognition management solution must be the single source or system of record for the company regarding all recurring revenues and the associated trade receivables, unbilled receivables, and deferred revenue. A Single System of Record One of the greatest challenges to companies is using the same information for a number of different applications. A company s revenue data is one example of very critical information that can be used many different applications. The revenue recognition management solution must be the single source or system of record for the company regarding all recurring revenues and the associated trade receivables, unbilled receivables, and deferred revenue. The financial statements must reflect the revenue recognized according to the standards, principles, and regulation requirements for accounting and reporting. The P&L that is created by the company for its corporate filing statements is a critical element for revenue data application. But recognize that every other profit center within a company must also use P&L s that consolidate into the company P&L. These P&L s revenue data should be driven by the data from the revenue recognition management solution. Performance metrics may be focused on billings, revenues, subscriptions, etc. But the revenue data in these reports should be reconcilable with the pertinent related data employed and managed by the revenue recognition management solution. Planning, forecasting, business case, and optimization analyses should employ the accounting and future revenue streams data from the revenue recognition management solution as the source of their foundational data. Seamless Integration should provide a library of predefined and extensible API s (application programming interfaces) for data exchange and interoperability with external general ledger and other financial systems, and other analytics applications, using revenue recognition data in their creation of accounting and analytics reports. The integration should be seamless to the affected users of the data in both the solution and the other systems. Integration can be unidirectional or bidirectional, so the API s should be able to support either model. The optimal solution should be platform-agnostic and would be best delivered as a complete SaaS (software-as-a-service) solution, with the appropriate API s to provide revenue recognition management solutions for any recurring billing applications, whether an on-premise system, a web-enabled legacy system, or another SaaS system. Automated Accounting Processes with Controlled Access should provide a fully automated solution with access control and support for its accounting users across three major roles. The following three roles reflect the related major accounting activities and functions: WHITEPAPER 10

11 Modeler for design-time configurations; Accounting Manager for runtime execution, encompassing accounting reports, balance reconciliations, data access management, and audit controls; and, Accounting Systems Manager for integration setup, supporting all external interfaces where the revenue recognition accounting data is made available to other applications. The Modeler Performs Design-time Activities should permit preconfiguration of related control objects to accomplish the automation of the runtime accounting activities in the desired manner. The solution should support the design-time user s ability to perform the following activities. 1. Setup users access and permissions for the three accounting roles: The solution should support user profiles that assign access control and authorization covering all of the design-time, runtime and integration setup activities. 2. Activate revenue recognition charge classes and types: The solution should support the configuration and activation of valid charge classes and types in process controls, and the definition of accounting keys for account code and location code assignments. 3. Activate transaction class and types: The solution should support the configuration and activation of valid transaction classes and types in defining process controls and accounting keys for account code and location code assignments. 4. Report activations: The solution should support the configuration and activation of default report settings for all reports. 5. Report personalization: The solution should support the configuration for personalization of: Reporting screen masks, regarding colors, branding, etc. Titles and labels, sort preferences, rendering preferences (online versus print), scheduling, distribution, archiving, etc. Standard report derivatives, and ad hoc reporting capabilities, etc. 6. Setup Account Location Transformation Table: The solution should allow for the configuration of the GL accounting code structure to fit the specific needs of the targeted interface general ledger requirements, and that overall view of the account and location code assignments made through the charge and transaction configurations. 7. Setup sandbox applications: The solution should support the setup, configuration and maintenance of the sandbox or staging tenant for copying, working, testing, migrating, etc. The Accounting Manager Performs Runtime Accounting Activities should permit runtime accounting processes and activities in the following key areas of execution: Accounting Reports There are basically three types of accounting reports that the revenue recognition management solution should provide to the runtime accounting users. 1. Standard subsidiary ledger reports The solution should provide its runtime accounting users with a complete set of subsidiary ledger reports, in both online and print forms, in both on-demand and scheduled contexts. Default report sorting should be configurable, and the user should be able to create (and save for later runs) ad hoc sort overrides on scheduled or on-demand runs. The primary objectives of these reports is to provide sufficient critical assurance that the accounting results generated by the revenue recognition management solution conform with GAAP and the configuration expectations, as well as providing a balanced accounting ledger. These reports should include: A summary trial balance report with the account class (assets, income, etc.) balances listed in total, then an initial default sorted by individual account code totals, and then by unique location code, effective as of the specified point in time. 11

12 A detail trial balance report that contains all of the individual entry details, with appropriate transaction entry control ID s for drill-down auditability and an initial default sort by the same hierarchy as the summary report. An audit control report that provides a complete picture of the detail accounting entries and balances for an account and its agreements. This should allow users to see both fiscal yearto-date and individual agreement-todate details. Various sorts should also provide data by charge class and type, including special cases. 2. Subledger Balance Management Reports will be making high volumes of transaction entries into both real and nominal accounts. The real accounts will include trade accounts receivable, unbilled receivables, and deferred revenue. The solution should provide subledger balance management reports that allow the runtime accounting user to have a highly automated reconciliation solution for these real account codes. Each report should be constructed with beginning and ending balances for the account code, based on the dates or period provided by the user, and separate columns for new charge entries, billing offsets, adjustments, etc. The user should be able to drill down to audit control details as desired. 3. Forecasts Based On Predictable Revenue Streams should support the other analytical demands that are associated with its revenue data. One of the great positive values provided by recurring revenue business models is the highly predictable revenue streams that one can use to forecast future revenue levels with a relatively high degree of accuracy. Most business models with non-recurring revenue streams typically end each fiscal quarter and fiscal year with the typical hockey stick pattern of growth, where they make a very large portion of their sales and revenues by intense practices at the end of the period. They begin each year fighting the same battle of starting from zero and building to meet their revenue plans. In direct contrast with this situation, companies that employ a recurring revenue business model begin each quarter and year with a substantial level of future revenue streams already defined and known, with a high degree of certainty. This predictability and accuracy will effectively serve the revenue performance reporting against plan and forecast. This is a key deliverable of the revenue recognition management solution, and it ensures that there is only one source of recurring revenue data for all accounting, reporting, and analyses applications throughout the company. Accounting Systems Manager for Integration Setup Activities The third role that is critical to the success of the revenue recognition management solution is tasked with configuring, implementing, monitoring, and managing the ongoing integration between the solution, as the system of record, with external general ledger, as well as all analytic systems employing revenue recognition data. This encompasses the definition and configuration of interoperability data maps, translation and transformation rules, scheduling of on-demand and batch process jobs, assuring appropriate security access and permission controls in the external applications systems, etc. The User Interface User interfaces can be quite unique in the ways that they work and communicate with their users to accomplish the desired tasks. The best user interfaces share a number of common key characteristics that the revenue recognition management solutions should embrace and include in its interface. Task-focused The user interface should be task-focused, reflecting an understanding of each task s goals that the users want to achieve. The solution should ensure that at every point in an interaction, the information users need is available, prominent, and maps clearly to revenue recognition task goals that users will notice and use. Terminology should be familiar thereby reducing the time it takes for people to mas- WHITEPAPER 12

13 ter the application, and allowing its use to become automatic. The solution should employ the standard lexicon typically applied to the task, and provide instructions and feedback to the user regarding the various task steps and where they are in terms of task completion. Simple The solution should make the use of its interface as simple as possible. The fewer the number of concepts that a model has for users to master, the better, as long as it provides the required functionality. Less is more, provided that the solution fits well with users goals and tasks. Every extra unnecessary concept increases the complexity of the solution because it is one more thing that users will have to learn, each concept and application interacts with most of the other concepts, and those interactions result in even more complexity. As concepts are added to an application, the complexity seems to grow exponentially. Consistent The solution should emphasize consistency. Consistency assures that all functions have the same actions and attributes, and that the user s physical movements required to execute them are always the same. Consistency affects how quickly users progress from a controlled, consciously-monitored, slow operation to automatic, unmonitored, faster operation. The screen components should always be in the same places and operate the same ways. The more predictable the operation of the system s different functions the more consistent it is. The operation of a particular function is predictable from its type, so users quickly learn how everything in the solution works and actions quickly become habitual. Terminology should be consistent and familiar to the user for the task, thereby reducing the time it takes for people to master the application, and allowing its use to become automatic. Users want to focus on their revenue recognition goals and tasks, and an interactive solution should ensure that each concept has one and only one name. And where a user interface and other non-user interfaces exist to accomplish the same tasks, there should be no difference in scope, data, faults, messaging, etc., except where the difference has been carefully analyzed to determine that such a difference is appropriate, pre-approved and accepted by the solution s users and management. In short, the revenue recognition interface should make the user extremely productive, secure in their knowledge of the solution, and confident that their interests are being served by the solution. Consistency assures that all functions have the same actions and attributes, and that the user s physical movements required to execute them are Conclusion always the same. We have discussed the various challenges that need to be addressed by an effective revenue recognition management solution for recurring revenue models, as well as the many opportunities available. We will summarize with six critical capabilities an effective recurring revenue recognition solution will include: 1. The solution should deliver full compliance with the revenue recognition accounting and reporting requirements of AICPA, EITF, FASB, SEC, GAAP, and SOX principles, standards, and regulations. This is critical to the solution s value to a company at many levels, not the least being the avoidance of criminal prosecution for the company s executive management. 2. For many companies, employing recurring revenue models represents their application of new technologies in the pursuit of new business opportunities that will be the centerpiece of their business or will significantly expand their business through new channels, perhaps targeting new markets. The revenue recognition management solution should provide comprehensive support for the full spectrum of transactions that will be possible with extremely flexible and agile recurring revenue business models. 13

14 3. Most revenue recognition processes in companies today involve the use of one or multiple legacy solution methods, ranging from desktop spreadsheets to home-grown applications to on-premise ISV solutions that were expensive to implement and are increasingly costly to maintain. Assuring that all applications employ the same data for revenue-related analytics and reporting is difficult. The revenue recognition management solution should deliver a single-source system of record for all recurring revenue recognition activities associated with accounting, reporting, and forecasting applications. 4. The solution must also serve to automate the affected accounting processes through flexible configuration available in a design-time context, delivering substantive subledger reporting for runtime accounting operations, and support accounting integration setup for interoperability with other applications. There should also be controlled access to accounting configurations and financial data. 5. Seamless integration of the solution with the enterprise accounting general ledger, other financial systems, and all analytics applications is a paramount requirement to support the company s ability to have optimal accuracy and timeliness in all of the revenue-related applications, at macro summary levels and at detail transaction and audit control levels, throughout the company. 6. And all of this power and utility is best offered to its users through an interface that allows users to run virtually on auto-pilot. The user interface of the solution should be process-driven, taskfocused, simple and consistent, making the complexity associated with revenue recognition transparent to the seller s internal operations as well as their customers. We know that recurring revenue business models bring challenges associated with revenue recognition, because properly dealing with the creative array of possible recurring billing options for digitallydelivered offerings is more complex and requires a focused solution. We hope our discussion here has addressed many of the attributes that the most effective revenue recognition management solutions should provide. Thank you for your interest! About Aria Systems Contact Aria Systems Today! sales@ariasystems.com info@ariasystems.com Aria Systems is the subscription billing and management market leader serving Global 2000 companies. The Aria Subscription Billing Platform is the industry s only enterprise-class solution that automates the entire subscriber life cycle for all recurring revenue models. Disney, Ingersoll Rand, DreamWorks, EMC, Internap, Roku, VMware, Taleo, and Hootsuite all rely on Aria for fast time-tomarket, low operational costs, and monetization flexibility. Aria Systems, Inc. 274 Brannan Street, Suite 602 San Francisco, CA Phone: Fax: Sales Toll Free: Aria Systems, Inc. 600 Reed Road, Suite 302 Broomall, PA Phone: Fax: Sales Toll Free: ARIA (2742) 14