Why is revenue recognition such a hot topic these days? Well, more and more companies are incorporating services and other such offerings where revenue recognition isn't so cut and dry. If you sell purely physical items in the time honored ship-it-then-bill-it model, then things might be pretty simple.
But you are likely interested in more complex offerings. As soon as you offer some sort of service, you probably need to deal with rev rec. And if you mix services with products, then you really worry about rev rec.
What's more, the world of revenue recognition is about to get a good shake-up via the introduction of the ASC 606 standard. The new standard changes the rules in regards to how and when revenue can be recognized. This recent blog does a great job at explaining the new standard.
To handle the new rules (and more), NetSuite has a new revenue recognition module. It's called Advanced Revenue Management (ARM).
First, let me tackle a few important points for everyone that is currently using the current NetSuite Rev Rec module:
- The new ARM module does not (currently) cost extra. If you have Rev Rec, you are entitled to having ARM. But, don’t go looking for it under Enable Features just yet – odds are, you won't find it. NetSuite needs to enable it for your account first, which you need to request.
- ARM is not an upgrade of the current Rev Rec engine. ARM is a completely and wholly different module. If you are using the current Rev Rec module, you will need to implement ARM from scratch. None of your current settings and ongoing recognitions will port to the new module. You must perform a complex migration process.
- The current Rev Rec engine will not be discontinued, at least not for the foreseeable future. That being said, it is very possible that the current module will not allow you to meet ASC 606 standards. NetSuite's answer to meeting ASC 606 is ARM. NetSuite's answer is not to modify the existing Rev Rec module to allow it to meet ASC 606.
The current Rev Rec module may or may not allow you to meet ASC 606 obligations. You will need to determine what you need to do accounting-wise, and determine which module is the correct one for you. It is up to you to make that choice. I strongly recommend the guidance of a top-tier NetSuite Partner in making that decision (*cough* Tribridge *cough*).
In the new ARM module, there are basically two concepts that work closely together. The first is the Revenue Recognition portion, and the second is the Fair Value pricing engine, sometimes referred to as VSOE handling.
In regards to the first topic, the ARM module brings many enhancements to smooth out the handling of Revenue Recognition:
- Revenue adjustments are supported. For example, if you are mid-way through recognition and the estimated value of the project changes, the system fully supports posting revenue adjustments into the first open period, or retroactively back in time.
- Most of the ARM records mentioned are exposed to SuiteScript. So if you want custom business rules on top of the workflow NetSuite already offers, you can do that.
- You can merge Revenue Arrangements. This one is AMAZING. If, for example, you issue a first contract, then issue a change and then a cancellation, you can wrap all those individual revenue elements into a single Arrangement. Gone are the days of layering multiple Sales Orders/Revenue Commitments and Return Authorizations and trying to make sense of it all. Also, merging Arrangements allows you to properly manage the Fair Value of returns, as opposed to the current module which really can't handle that.
- Project percent complete revenue recognition works perfectly well.
- Revenue Forecast reporting that actually ties to your general ledger (one of the biggest limitations of the current engine is that it cannot do this).
In regards to VSOE handling, this is where the ARM module is a bit more revolutionary.
The module is a complete overhaul of how NetSuite handles Fair Value pricing, now offering MUCH more functionality than the current engine ever could.
A good 60%+ of ARM is a very thorough system for handling Multi-Element Arrangements (MEAs), which are a big ASC 606 point of interest. The classic example of a MEA is when you sell a combination of hardware, software and services. The reality is that you are probably offering a packaged deal to the customer, or you're playing around with your pricing to meet the customer's terms. Maybe you're nearly giving the hardware away for free, because what really interests you is the software license or the professional services revenue.
ASC 606 changes the game. The old NetSuite VSOE handling functionality just wasn't that robust. If you have complex needs, it's likely the old VSOE engine is causing you a lot of grief – especially when you throw in additional concerns like handling Contracts and exception-handling like Returns. That's where NetSuite's current engine really showed its limits.
If you nodded your head at a few of these points, please stay tuned for my next blog where I will delve into the guts of the system and talk about how everything comes together.
In the meantime, contact us for additional guidance on determining which NetSuite module will best meet your specific needs. Or, leave me a comment below if you have a question you'd like me to answer.