FASB and IASB have issued a new joint accounting standard IFRS 15/ ASC 606 called Revenue Recognition from Contracts with Customers.

This standard requires an entity to recognize revenue in a manner that depicts the transfer of goods and services to the customers at an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods and services.

The objective of this standard is to establish principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

This standard brings a significant change to how entities recognize review and necessitate a thorough assessment and documentation of customer contracts.

So how to implement the standard without drowning in a collection of manually managed spreadsheets or Word documents?

Here is where a Contract Management Solution comes in.

An efficient Contract Management Solution can help with the 5 steps of the revenue recognition process by extracting the information of contracts into usable data.

5 Contract Revenue Recognition Process

Identify the contract with the customer.

The Zycus Contract Lifecycle Management (CLM) Software can run multi-parameter searches and build reports to determine if the agreement has been approved by both the parties and it has the payment terms for goods or services to be transferred.

  • Identify all the individual performance obligations within the contract.

Identifying the contracts affected is just the beginning. Firms must also be able to extract the important terms of the contract that relate to complying with IFRS. They cannot expect their employees to read each contract and note down the relevant points. The Zycus iContract helps connect contract components and product reference data with AI-based metadata extraction. Also, if/when obligations change post-sign off, the Zycus iContract keeps track of the new obligation efficiently.

  • Determine the transaction price.

Here, the Zycus iContract once again simplifies identifying the transaction price by the metadata extraction. If a supplier of a particular good and service has bundled the prices for both under a single price tag, one can quickly break down the components without spending hours on the document.

  • Allocate the price to performance obligations.

Firms will have to describe their performance obligations, provide a specific timeline for performing the obligation and allocate a price to the obligation.

Revamping of the contract with the allocation/reallocation of prices can be done easily with the Zycus Contract Management Software which has configurable templates and clauses. It allows one to configure new types of allocations based on the business and accounting regulations.

  • Recognize revenue as the performance obligations are fulfilled.

Revenues can be recognized only when the goods or services are delivered or transferred to the customer.

The Zycus iContract, when integrated with the payment/billing systems, can measure key performance indicators and contractual obligations. It enables performance obligation through configurable workflows, real-time tracking, reports, and alerts. In general, it efficiently executes post-signoff contract management.

With the new rules already enforced, enterprises need to review their approach towards managing their contracts to fulfill the requirements. And an automated contract management solution like the Zycus iContract with its special emphasis on post-signoff management enables enterprises to strengthen their IFRS/ASC compliance in their contracts while realizing the higher value in such engagements.

Author Stuti Mehrotra

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