When a contract gets signed, the data gets manually entered into an ERP. Yet challenges arise:
- What if the ERP can only ingest 5 data points, and there are 15 important data points in the contract?
- What if the contract is unique, and takes a while to read?
- What if the data gets manually entered incorrectly?
- What if an amendment is signed?
- What if I get audited?
Companies can spend $10K or $100K or $1m+ on a well integrated ERP ecosystem.
But what about when an investor does diligence? A bank?
They look at contracts! What about when you undergo your annual audit?
Auditors look at contracts (they usually sample a select few).
Reading Contracts Is Half The Battle
For ASC 606, the ongoing challenge is reading contracts and conforming them to the data points you need for revenue recognition. Many companies are even working with their lawyers to change the way they write contracts – just to improve revenue recognition!
With AI Accounting software, there is an opportunity to ingest contracts at a rapid pace and collect dozens of data points. This can be useful for revenue recognition, but also for broader opportunities across the business, such as managing risk and strategy. Above all, it can save up to 70% of our contract reading time and greatly improve accuracy.
Applying Revenue Recognition Rules Is The Other Half
The other half is rules. The rules of revenue recognition – ASC 606 and IFRS 15 – can be extremely daunting in contract-heavy industries.
Take software for example. A CFO will want to know annual and monthly revenue rates. An Auditor or Controller will want to understand the obligations within the contracts – everything from deliverables to cancellable terms – to know when to ‘release’ revenue.
Additionally, there are contract acquisition costs – such as a sales commission – that need to be amortized over the perceived lifetime of the contract.
These are just a few examples of nuances that can have a material impact on accounting for revenue.
To learn more, schedule a demo with one of our product experts today.