Revenue Recognition Methods

Say goodbye to error-prone and time-intensive spreadsheets with Certinia

When analyzing financial statements, revenue figures take center stage. Ensuring proper and accurate revenue recognition, measurement, and presentation is crucial for your organization to work with the right data for conducting business. While there are various methods of revenue recognition, not all of them suit every business model.

Revenue recognition continues to be a top company struggle.

Follow this revenue recognition checklist to make your compliance a fluid, turn-key process.

The Revenue Recognition Processes

In today’s increasingly complex business landscape, the traditional single revenue model is fading away. Businesses now must offer flexible and personalized pricing, billing, and monetization options. Revenue recognition, already a complex process, has become even more challenging due to changing accounting standards and regulations.

Centralize your revenue streams with a single revenue recognition solution. Achieve compliance with the new ASC 606 & IFRS 15 standards. Automate calculations, streamline your period-end close, and gain a comprehensive view of your organization’s revenue—both recognized and deferred.

Warning: Your ERP May Not Support All Revenue Models

Finance teams often resort to Excel because their ERP platforms lack essential features. For instance, many businesses adopt subscription-based and hybrid pricing models, but popular ERPs may not support them or require cumbersome bolt-on solutions. Building spreadsheets to accurately recognize revenues per ASC 606 guidelines becomes a time-consuming task, potentially leading to increased audit fees or hiring more staff. Maintaining these spreadsheets, data scrubbing, and report generation can overwhelm your finance team, diverting their focus from strategic planning.

Spreadsheets are inherently unsuitable for real-time synchronization with source data, resulting in outdated information. Additionally, collaboration is challenging, and sharing spreadsheets is cumbersome. Inefficient Order to Cash (O2C) processes, relying on spreadsheets, can impede business operations, as evidenced by a classic Genpact study indicating that 7–12 percent of combined revenue in working capital is trapped in inefficient O2C processes at top global organizations.1

1 Smarter Order to Cash Processes, Genpact

Different revenue recognition methods include:

  1. Sales-basis method: Recognizes revenue at the time of sale, defined as when title transfers to the buyer.
  2. Completed-contract method: Records revenues and expenses at the end of the contract.
  3. Cost-recoverability method: Delays profit recognition until all project expenses are recouped.
  4. Percentage-of-completion method: Recognizes revenues and expenses as a percentage of work completed, common in long-term contracts.
  5. Installment method: Records proportionate profit upon installment receipt, suitable for unreliable customer collections.
  6. Brokerage agreement: Adheres to proprietary rules for brokers following IRS and SEC guidelines.
  7. Accrual method: Initially records prepayments as assets, reclassifying them as expenses upon goods delivery or service completion and acceptance.
  8. Appreciation method: Allows real estate agents to reduce gains from selling properties at appreciated values.
  9. Proportional performance method: A modification of the percentage-of-completion method for profit recognition.
  10. Deposit method: Used for deposits subject to cancellation agreements.
  11. Transactions Under Bill & Hold: Applicable to prevent fraudulent transactions aimed at inflating a company’s assets.

Certinia Supports Your Revenue Recognition Methods

Irrespective of your business models or chosen revenue generation methods, solutions like Certinia Revenue Management equip your finance team with the tools needed to meet the entire business’s demands. Certinia automates recognition calculations, eliminates error-prone spreadsheets, and aligns with key revenue recognition standards. Built on the Salesforce platform, Certinia seamlessly integrates with Salesforce CRM and other Certinia ERP solutions, ensuring interconnected customer data.

We’re here to help.