Revenue Recognition Software Helps Tech Vendors Meet Accounting Rules
Software Vendors that are gradually shifting from on-premises to Cloud Deployment
Today, in the decade of cloud computing, it is significantly different. You have a subscription model and customers might move up and down in the subscription. You have an unpredictable fluctuation of your subscriptions and therefore of your business.
Revenue recognition issues also affect more traditional industries that have fluctuating revenues, such as utilities, especially private ones that provide energy from renewable sources, like solar and wind, and aren’t price-regulated monopolies. Given FASB’s stated intention to unify industry-specific rules into a single revenue recognition standard, and to merge that with the standards its global counterpart, the International Accounting Standards Board (IASB), promotes, most companies will soon fall under its purview, say software vendors and users familiar with the process.
While compliance issues are driving initial demand for revenue recognition software, companies can get additional benefits in the areas of financial planning and forecasting. Software vendors that are gradually shifting from on-premises to cloud deployment are a prime example. “They know that if they shift over 10% of their customers into cloud subscriptions, they have a dip in the balance sheet, because the revenue gets shifted into a deferred model”.Without the more nuanced view that revenue recognition software allows, financial analysts might believe something is wrong and undervalue future opportunities to increase market share, for example. Good revenue recognition software can therefore be a change-management tool to transform traditional independent software vendors (ISVs) from the perpetual license business to the cloud business.
Revenue recognition software could also boost companies’ profitability, according to reports published around the time of the FASB changes. Generally Accepted Accounting Principles guidelines overseen by FASB, companies had to estimate a fair value for each element — evidence of which could be hard to find. They would often wait for all the pieces to be delivered before counting any revenue on their books. Under the new rules that Apple and 33 other respondents argued for, companies can allocate the revenue based on certain percentages. In many cases, that means being able to report and use revenue much earlier than before.
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