Advanced Revenue Management redefines older terms and adds new functionality to support a variety of use cases and business models
- Revenue Commitments are now referred to as Revenue Arrangements
- Revenue Commitment Lines are now referred to as Revenue Elements
- Revenue Templates are now referred to as Revenue Rules
- Revenue Schedules are now referred to as Revenue Plans
New functionalities have been added
- Item Categories – Grouping of items with similar fair value attributes
- Fair Value Price List – Factors used in ascertaining prices for an item or item category
- Fair Value Formula – Allows for formulas to be used in calculating fair values
- Revenue Allocation Groups – Combines GROUPSUM* with Fair Value Formula
- Fair Value Dimensions – Additional criteria for fair values related to items or item categories.
FASB Accounting Standard
NetSuite’s development of Advanced Revenue Management was spurred by a new FASB accounting standard. ASC 606 was developed to streamline controls in revenue management across all industry types (transaction exclusions are covered in publication ASC 606-10). Previously, ASC 605/SAB 104 allowed for process protocols to be industry specific.
In ASC 606 there are a series of questions a business must ask in order to determine the appropriate course of action for a revenue arrangement related to a contract or obligation.
Under ASC 606 a company recognizes revenue to reflect the transfer of goods or services to it’s customers for an amount in direct correlation to the obligation of the expectations for the same goods or services.
These are the steps that follow this protocol:
- Identify the contract(s) with a customer
- Identify the performance obligations on the contract
- Determine the transaction price
- Allocate the transaction price to the performance of the contract
- Recognize revenue when (or as) the company satisfies the performance obligation
What does this mean and what does it do?
Well, namely, it removes ambiguity in revenue requirements and provides a systematic approach for handling a multitude of revenue issues. It also simplifies the number of requirements that companies must follow in preparing financial statements/disclosures.
NetSuite’s Advanced Revenue Management solutions meets the requirements set forth in the ASC 606 protocol. The solution was developed not only to meet the new protocol but to also provide a highly configurable and layered approach to how revenue contracts are managed with a focus on ease of use for accounting professionals. It provides multi-element arrangement functionality and allows revenue recognition based on specific/flexible criteria.
Improvements have also been made to revenue-based reports.
One key report is the Deferred Revenue Waterfall Report, which is used to reconcile deferred revenue account balances and display forecasted revenue. It’s incredibly useful. Additionally NetSuite has created tools within the module to assist in deferred revenue FX reclassifications and other reclassifications that were previously handled using manual processes or scripted enhancements.
*GROUPSUM is a function used to accommodate percentage-based fair value calculations. GROUP(n) refers to the revenue allocation group and the expression(expr) is another field or formula. GROUPSUM(n, expr) These tools coupled with a multitude of other features and settings allow for nearly unlimited flexibility, ensuring the correct revenue is recognized across a variety of tested uses cases. Use case example. Your company sells hardware and software but you also provide support against the hardware/software being sold. You may determine that the fair value of the support item is 10% of the sales price of the hardware and software being sold. Both your hardware and software items are part of the same revenue allocation group. Using new functionality available in Advanced Revenue Management you are able to do a few things not previously available; tie items to revenue allocation groups, establish fair value, create a fair value formula and also allocate the GROUPSUM function to the formula. Example infers that Calculated Fair Value is same as sales amounts for Hardware and Software. Revenue Plans are created for items in the following manner: Hardware (upon Fulfillment), Software (upon Fulfillment) and Support (Billing)
||Rev Allocation Group (RAG)
||Calculated Fair Value Amount
How is the Calculated Fair Value Amount RAG Allocation Group XX = 4000
Our use case determines the Support is 10% of the RAG total = 400
How is the Revenue Amount Determined for each item?
Total of all item Sales Amounts = 4300
Percent of item allocation (example Hardware) = 3000/4300 = .69767442
Revenue Amount (example Hardware) = .69767442*3000=2093.02
How is the Revenue Amount determined for Support?
Total Sales – Revenue amounts from Item Group XX = 1974.43
This complex example demonstrates Advanced Revenue Managements understanding of the nature in which revenue amounts are allocated to each element in a revenue arrangement.
The Advanced Revenue Management feature is available in new accounts that have purchased the module. Those accounts using Revenue Recognition (older version) should contact a NXTurn Consultant to discuss converting to the new version or for other revenue management related needs.