Revenue recognition is a set of accounting principles that determine when a business can treat payments from its customers as revenue. This depends on several factors, among them when the goods or services have been provided. Revenue recognition is useful for finance teams to help them prepare monthly and annual income statements and balance sheets.
- Principles of revenue recognition
- Revenue recognition strategies
- Understanding your data
- Using revenue recognition
- Exporting your data
- Segmenting your revenue
- Known limitations
GAAP (Generally Accepted Accounting Principles) - Vary by country but most people refer to US GAAP.
FASB (Financial Accounting Standards Board) - A Standard setting body that issues guidelines.
ASC 606 - Accounting Standards Codification related to revenue recognition.
Balance sheet - Has two sides - one reflects assets, the other liabilities & equity.
Income statement - Reflects the results of a period by showing revenue and expenses a company incurred.
Recognized Revenue - this is commonly only referred to as revenue and reflected in the income statement. Payments that fulfil the five criteria below can be considered recognized revenue.
Deferred Revenue - relates to payments that have been received by the company, but for which goods or services have not yet been provided. It is reflected as a liability on the balance sheet because the company is still liable to provide these goods or services.
Principles of revenue recognition
According to the ASC 606 as defined by the FASB, revenue can be recognized from a payment if:
- Risks and rewards have been transferred from the seller to the buyer
- The seller has no control over the goods sold
- Collection of payment is reasonably assured
- The amount of revenue can be reasonably measured
- Costs of earning the revenue can be reasonably measured
ChartMogul helps with the first principle as revenue can be recognized under the assumption that services will be rendered over time once a payment has been made. However, limitations apply if no continuous service is provided.
Revenue recognition strategies
Revenue recognition strategies determine how you recognize revenue within the constraints of the ASC 606 guidelines. There are three different revenue recognition strategies that can be used in ChartMogul: spread evenly, recognize at the start of service period and recognize at the end of service period.
These can be found under Admin > Data settings.
Spread evenly - The share of a billing period that falls into a given calendar month defines the share of the billing amount, that is recognized in this calendar month. The precision of this share is defined by the billing system.
Recognize at the start of service period - Recognize full amount in the calendar month corresponding to the start of the service period.
Recognize at the end of service period - Recognize full amount in the calendar month that indicates the end of the period.
Understanding your data
Let us look at an example that illustrates how revenue would be recognized depending on the recognition rule selected. Let’s say that a customer pays for an annual contract on July 15th, 2016 (exact middle of the month) for $120.
Spread evenly - ChartMogul will recognize $5 in the first month and ~$10 in the next 11 months. (A little bit more in months with 31 days and a little bit less in the others.) In the 13th month, we will recognize $5 again as in the starting month.
Recognize at the start of service period - ChartMogul will recognize 120 USD in July of 2016.
Recognise at the end of a service period - ChartMogul will recognize 120 USD in July of 2017.
What do we generate data for?
Our revenue recognition feature only generates data for the following charge items originating from your billing system:
- Charges that have the status: open or successful
- Charge items with of the type: non-recurring, setup fee, subscription, prorate, add-on, discount, refund, usage-based, gift card and manual balance
How does balance affect revenue recognition?
There are different types of balance. Some originate from downgrades (money that the customer paid), the second comes from goodwill balance that is given to the customer (effectively a discount). The first type is considered revenue and the second type is not.
Charges that were paid using the first type of balance will eventually convert to recognized revenue as the corresponding subscription progresses. This is because the balance is based on a previous payment from the customer to you.
Charges that were paid using the second type of balance do not convert into recognized revenue because you never received any money from the customer.
- Balance from pro-ration credit is money that was actually received and will be recognized.
- Balance from manual credit is treated as a refund in that it reduces revenue.
Using revenue recognition
The revenue recognition feature in ChartMogul is visible in two places: on customers profiles and on two dedicated charts.
You can view the charts Revenue and Revenue waterfall by heading to the Finance section.
The first of the five principles of revenue recognition codified in ASC 606 states that revenue can only be recognized once the goods or services have been provided to the customer. This chart will display the amount of revenue that was or will be recognized in each period in accordance with this principle.
In the data table of the revenue chart, you can find the following rows:
Year-to-date revenue - All the revenue of the current year that has been recognized up to and including the corresponding period.
Total Deferred revenue -Money that will be recognized in a given period as soon as that period closes (as of the time of viewing this chart).
This figure shows as "Deferred Revenue" in your monthly balance sheet for the corresponding period.
Net cash flow - Cash received from paid invoices, offset by refunds. Revenues from subscriptions, one-time and metered charges are all included. Credit card/transaction fees are not deducted.
Recognized revenue - Recognized revenue for the corresponding period.
Percentage change - The growth in recognized revenue (or change) vs the previous interval on the graph.
Billings only translate into revenue over time, as detailed in ASC 606. Depending on your billing cycles, and other details like one-time payments, billings and revenue can be relatively disconnected. The revenue waterfall visualizes the billing volume top to bottom and recognized revenue by month from left to right. The two dimensions of the revenue waterfall table connect billing and revenue so that you can get a clear picture of how each months' billings are translated into recognized revenue over time.
Working with multiple currencies
If you have transactions in multiple currencies, you can view your revenue recognition schedule in ChartMogul in any one of them. Simply select the reporting currency from the drop-down on the Recognized revenue and Revenue waterfall charts. You can view and export only one currency at a time.
Timeline and interval
You can select a time span that you want to analyze from the date drop-down at the top right.
Further, you have the option to change the interval reported in the chart and data table. You can toggle between month, quarter and year.
On a customer’s profile page, you will see a section called _Revenue Recognition_ which reports the recognized revenue from the customer for each month by default. When you click on Show detail, you can see the invoices and line items that contributed to the calculation.
Exporting your data
You can export your data table from the revenue chart by clicking on Export (CSV). Once the data has been prepared by our application, a download will commence.
Segmenting your revenue
You can apply any of the filters available in ChartMogul to segment your data in the revenue recognition charts further.
What you need to know
- ChartMogul’s revenue recognition engine assumes that your fiscal year aligns with the calendar year.
- Some prorated items don't have a service period. They are accounted for from the time of the charge until the beginning of the next subscription period.
- The system doesn’t have a grasp of the probability of payments being made.
Currently, the revenue recognition strategy selected will be applied to 100% of the payments received. This means that there are no accruals for refunds. This is how refunds are currently treated:
1)If the refund amount is up to the amount of deferred revenue of the line item to which this refund belongs, then the refund is spread out according to your recognition strategy to the future only. The service period runs from the day of the refund to the end of the original service period to which the refund relates.
2) If the refund amount exceeds the remaining deferred revenue of the line item to which this refund belongs, then:
a) any deferred revenue will be offset by the refund of the same value
b) any remaining refund value will be recognized at the time of the refund
Refunds will never affect periods that are already closed.