Revenue Recognition Policies

Revenue is recognized based on rules applied through accrual accounting and the matching principle. Accrual accounting states that revenue is recognized when it’s realized and earned, independent of when cash is received. Realized means the good or service has been received, and earned means the good has been provided or a service has been delivered. Finally, the matching principle states that revenue and associated costs, such as costs of goods or commission, should be accounted for in the same period.

The method for recognizing revenue depends on the type of business transaction and the stipulations laid out in the contract. For example, revenue can be recognized daily, monthly, or all at once. Revenue could also be recognized beginning on service start or end dates, or based on the date of invoice.

ASC 606 aims to create a transparent revenue recognition framework for use across all business sectors. While the core concepts for when and how to recognize revenue remain the same, the ASC606 principle standardizes the practice to provide a more concise recognition process.

Let’s review a few basic recognition examples.

Full Recognition Based on Invoice Date

A painting compnay has a contract to repaint a customer’s home. The contract states that the price is $3000. Painting starts June 1 and ends July 31.

The customer received an invoice with an invoice date of Jun 1 and net 15 payment terms. They have until June 15 to pay the invoice. Once payment has been processed, the painting company recognizes the full amount of revenue with a June 1 date.

Monthly Recognition Based on Service Activation Date

A company sells 12-month MDM subscriptions at $10 per month. Customers can pay for their subscription monthly or upfront.

If a customer wants to be billed monthly, they would be billed $10 a month for 12 months on the service activation date of their subscription. In this case, revenue is recognized immediately.

If a customer wants to be billed upfront, they would be billed $120 on the service activation date of their subscription. However, in this case, revenue would be deferred at 1/12 per month for the 12-month life of the subscription.

Monthly Recognition Based on Service Activation Date

An online security company sells annual subscriptions of security software They sell a $12,000 subscription in October for the following calendar year.

The company bills the customer in October. Even though the customer paid the full amount in October, revenue recognition doesn’t start until January 1, when the services are activated. Starting in January, revenue is recognized on a monthly basis at $1000 per month for each of the 12 months of service.

• Set Up a Revenue Recognition Rule for Daily Proration
  Create a revenue recognition rule that proportionately distributes the amount paid for a product or service on a daily recurring basis over the course of the billing term. (Salesforce Billing Managed Package)
• Set Up a Revenue Recognition Rule for Daily Proration
  Create a revenue recognition rule that proportionately distributes the amount paid for a product or service on a monthly recurring basis over the course of the billing term. (Salesforce Billing Managed Package)
• Set Up a Revenue Recognition Rule for Full Recognition on a Specific Day
  Create a revenue recognition rule that recognizes on a specific day the full amount paid for a product or service. (Salesforce Billing Managed Package)
• Set Up a Manual Revenue Recognition Rule
  Create a revenue recognition rule you can use to manually create revenue schedules and revenue transactions for each invoice line. (Salesforce Billing Managed Package)