THE BUSINESS

CASE FOR
ASC 606
COMPLIANCE
Why you should stop treating the
new revenue recognition standard
as an accounting burden—and
start recognizing ASC 606’s
transformative potential.
INTRODUCTION
For decades, revenue recognition has been
a back-end accounting function, a laborious
but necessary process that traditionally
didn’t begin until after business deals were
closed and contracts were signed. Under
this workflow, accounting teams relied
on orders and invoices to drive revenue
recognition. This process could be done in a
virtual silo, with little coordination and input
from other departments. Accounting teams
did not interface with their counterparts in
sales, and indeed, they had no reason to:
revenue recognition could be treated almost
as an afterthought. Moreover, organizations
lacked the motivation to modernize, update,
and streamline their revenue recognition
processes. Even as enterprise technology
advanced by leaps and bounds, businesses
could still default to antiquated and
inefficient manual methods.
The new revenue recognition standard
known as ASC 606—or IFRS 15 elsewhere
in the world—will put an end to these
practices once and for all. ASC 606 will
require businesses to modernize and
report their revenue in wholly different
ways. Businesses will need to put in place
important new administrative controls
that will have ripple effects on a variety
of accounting and auditing functions.
Fortunately, next-generation technology
solutions will enable you to come into ASC
606 compliance with minimal effort.
RANDY WEST
Managing Director, Quote-to-Cash Practice
Many businesses see this new accounting
standard as an administrative burden,
but that couldn’t be further from the
truth. Simply put, ASC 606 makes good
business sense. The processes that you’ll
be modernizing and the software systems
you’ll be upgrading will dramatically
improve productivity, lower costs, and
enhance relationships with customers. In
this book, I will walk you through how ASC
606 compliance will work, the key benefits
of compliance, and actionable insights and
recommendations for getting the most out
of the changes you’ll be implementing—all
based on my years of experience leading
a Salesforce CPQ consulting practice.
I am confident you’ll walk away feeling
energized and confident as you tackle this
necessary—and strategically important—
enterprise transformation.
When it comes to complex sales
agreements like subscriptions, multi-
year contracts, and recurring revenue
relationships, accounting and auditing
processes are never simple. To properly
recognize the revenue derived from these
sales agreements, you need clearly defined,
consistent accounting workflows.
Beginning in December 2018, the new
revenue recognition standards will make
manual accounting methods increasingly
laborious. But, with the right guidance, ASC
606 can have a positive impact on your
business. Here’s how.
WHAT TO EXPECT

4 What’s Changing
under ASC 606? 17 Configuring Your CPQ
Platform to Support
Your ASC 606
Transformation

9
Why ASC 606

21
Be Bold and
Compliance
Strategic
Sounds So Scary

13
How You Can
Use Your ASC
606 Compliance
Obligations to
Transform Your
Organization
CHAPTER 1
What’s Changing under ASC 606?
ASC 606, the new revenue recognition
standard, will require you to consider revenue
much earlier in the sales cycle when quotes
and agreements are generated. This change
will have significant ripple effects on how you
manage revenue recognition going forward,
including the approach you take to all of your
accounting and auditing obligations. Under
ASC 606, the relationship between quote lines
and performance obligations will become
more complicated.
That means you need to be able to identify
in your sales agreements precisely what your
performance obligations are so that you can
recognize its revenue consistently over the life
of the contract. These recognition processes,
of course, can get tricky very quickly. Revenue
recognition is never simple and linear, especially
when you need to account for agreements that
span multiple years and for which revenue is a
moving target.
ASC 606 doesn’t organize the data around
performance obligations in the same way as
the previous standard. What this means for
businesses is that the sales agreements you’re
accustomed to creating and entering into
with your customers may require additional
interpretation to determine when revenue could
be recognized. Indeed, many companies have
built their deals and structured their discounts
in ways that do not allow the accounting
department to interpret when products are
transferred to the customer, nor to quantify
the dollar value associated with the delivery of
these goods and services.
ASC 606 Compliance 4
SCENARIO 1

An electronics retailer offers a loyalty program
in which customers earn one point for every
$1 spent. Upon accumulating 1,000 points, the
customer earns a $50 voucher for a future
purchase. Under traditional revenue recognition
processes, the retailer would not account for
the performance obligation (i.e., the loyalty
points being accrued) until after the voucher is
redeemed or expires. That’s because the retailer
essentially would treat the loyalty program as
if the vouchers did not exist, despite the fact
that each sales transaction was bringing the
customer closer to receiving a $50 voucher.
Traditional Revenue Recognition
ASC 606 will no longer permit this practice.
Assuming the loyalty program is deemed a
material right where the discount is determined
to extend beyond the comparable entitlements
of a non–loyalty program customer, ASC 606
will require the electronics retailer to recognize
the performance obligation at the time that
the customer accrues individual loyalty points.
In other words, the retailer will need to defer
a portion of its sales revenue until after the
voucher is redeemed or expires. That means a
separate performance obligation will need to be
attached to every sales transaction equal to the
portion of the loyalty points that the customer
will earn toward the $50 voucher.

Customers Upon
earn a point for accumulating
every $1 spent. 1,000 points, the
customer earns a
$50 voucher for a
future purchase.

Retailer would
not account for
the performance ASC 606 will no longer
obligation.
permit this practice.

ASC 606 Compliance 5

SCENARIO 2

A software development company offers a This practice of ignoring the performance

toll-free support line to customers for one obligation will not be allowed to continue
year after purchasing any product or service. under ASC 606.
Because there is no way to anticipate if and
ASC 606 will necessitate that when a sales
when customers will utilize the support line,
agreement is signed, only a portion of the
revenue cannot be substantiated at the
revenue from the sale will be recognized at the
time the sales contract is issued; thus, VSOE
upfront. The remainder of the sales revenue will
(vendor-specific objective evidence) cannot
need to be prorated over the one-year period,
be assigned. Traditionally, companies in this
during which the support line is available to
situation did not recognize the performance
the customer. To perform this proration, the
obligation (i.e., the customer support line) in
company will first need to determine the value
relation to the original sale.
of the performance obligation. Significantly,
the value of the obligation cannot be arbitrarily
assigned, as the company must be able to
justify this value later to auditors and others.
Ultimately, each performance obligation will
. . . each performance need to be tracked individually, down to the
line-item level so that it can be recognized in a
obligation will need to
consistent, auditable manner.
be tracked individually,
down to the line-
item level, so that it
can be recognized
in a consistent, ASC
auditable manner. 606

ASC 606 Compliance 6

SCENARIO 3

A medical research firm is enrolling patients
for a phase III clinical trial and is receiving
phased payments in a milestone format. The
firm receives $5 million initially, then $25
million more upon successful enrollment of 100
patients. Although the firm is confident that it
will meet its enrollment obligation within two
years, the firm traditionally has not recognized
the revenue for its $25 million payment until the
payment is actually received.
This practice will no longer be permitted
under ASC 606.
Given that the firm anticipates reaching its
enrollment goal of 100 patients and receiving
the $25 million payment, ASC 606 will require
that a portion of the unsatisfied milestone
payment be recognized as revenue each time an
additional patient is enrolled. In other words, for
every patient enrolled, the firm might recognize
$250,000 in revenue, which is 1 percent of the
total $25 million payment, even though the firm
isn’t actually receiving this prorated payment at
the time of each enrollment.

Each patient
enrollment thus would
need to be treated as
its own performance
obligation, with its
own line item and on a
unique timeline.

ASC 606 Compliance 7

CHAPTER 1

Complex revenue recognition

processes are pervasive in
organizations across all industries. By
exploring real-life examples of how
complicated revenue recognition can
be, you will hopefully see your own
organization’s accounting obligations
reflected in the new ASC 606
accounting standard.

In the next chapter, we’re

going to delve deeper into
all of the major changes
that will take place under
ASC 606 compliance—and
why these changes may
(understandably) sound
downright scary.

ASC 606 Compliance 8

 ASC 606
CHAPTER 2
Why ASC 606 Compliance
Sounds So Scary
Changes to established workflows never
come easily to organizations. And there’s
no getting around the fact that ASC 606
compliance may demand some changes to
your accounting processes. That’s why it’s
understandable that ASC 606 compliance
can seem downright scary.
But as the saying goes, knowledge is power.
Let’s explore the five most significant aspects
of your business processes that will be
altered as you transition to the ASC 606
accounting standard. Understanding these
elements will help you understand why, even
as ASC 606 is implemented, many people in
your organization are likely to perceive it as
a burden and a liability. Thus, these are the
changes you’ll be up against as you transition
your accounting practices.
ASC 606 Compliance 9
1
Under traditional revenue
recognition processes, the
relationship between a quote line
and a performance obligation is
relatively straightforward. As a result,
organizations did not give a lot of
thought to how variability in the sales
process drove varying performance
obligations, even for complex sales

2
agreements involving subscriptions,
multi-year contracts, and recurring
revenue relationships. ASC 606
makes that relationship more
complicated. Thus, you will need to
make sure these written contracts
The contracts you are accustomed to creating
clearly explain what constitutes a
and entering into with your customers
transfer of goods and services to
are probably not structured to be readily
your customers, and you will need
compatible with ASC 606 revenue recognition
to carefully consider what types of
standards, as current agreements make it hard
variation will be allowed.
to identify ASC 606 performance obligations.
Indeed, many companies have inserted deals
and discounts into their sales agreements that
are ambiguous and unclear for the accounting
department to interpret. In other words, the
contract language is often constructed in
ways that make it difficult for the accounting
department to perform its revenue recognition
responsibilities. Under ASC 606, you cannot
get away with these ambiguities in your sales
agreements. Your accounting department
must be able to appropriately identify
the moment that goods and services are
transferred to the customer and the amount
that is equivalent to the actual consideration to
which the company is entitled. Compounding
this challenge is that with subscriptions,
recurring revenue relationships, and other
complex sales contracts, you must be able to
dynamically reallocate and modify valuation
as these contractual agreements change. You
need a system that can automate the process
of managing these constant changes.

ASC 606 Compliance 10

3
As your customer relationship management (CRM) needs have evolved, you may have
developed ad hoc solutions built on the base systems you’ve used for years. In many cases,
your base systems were originally designed for simple, one-time sales transactions. Over
time, as your sales agreements became more complex, you adapted and customized these
systems with workarounds, plug-ins, and patches. These incremental solutions may have
served you well, but they are unlikely to continue to be useful as you transition to ASC 606
adoption. You may continue to customize existing solutions, but you may also want to take
advantage of the opportunity to use a CPQ (configure price quote) system like Salesforce
CPQ that can be seamlessly configured to properly manage the treatment of revenue
in compliance with ASC 606. Modern CPQ systems are designed expressly to automate
and control your selling processes in a way that provides consistency, transparency,
and a comprehensive audit trail. Indeed, automation is your only viable path forward for
performing your ASC 606 revenue recognition processes in a reliable and cost-efficient way.

4
In the future, one deal will likely lead
to more performance obligations
than it does today. This means
that changes to deal structures or

sales contracts will lead to more
exceptions than they do today. For
that reason, it is more important to
track and control this and also to
integrate it with your downstream
systems. Fortunately, modern CPQ
systems do more than just provide
automation for the early stages of
revenue relationships; by managing
the contracting stage, they also
drive invoicing and billing. That
means a modern CPQ system can
become your authoritative, single-
truth source for recognizing revenue
as you meet your performance-
based contract obligations.
5
Under ASC 606, you will be obligated to align
employee commissions to the moment that
revenue is actually earned. Sales commission
is currently expensed; in the future, it will need
to be recognized as negative revenue over the
life of the contract—an additional performance
obligation. Fortunately, a modern CPQ system
can take care of all of these accounting steps
for you, automatically and in real time, even as
your contracts and corresponding commission
structure undergo midcycle changes.

ASC 606 Compliance 11

CHAPTER 2

All of the organizational changes

stemming from ASC 606 inevitably
trigger a mix of consternation,
uncertainty, and fear. These feelings
are natural and unavoidable; the
important thing is to learn as much
as you can to help your colleagues
get past these hurdles and ultimately
achieve the success you desire.
This process starts by remembering
that the performance obligations
surrounding revenue recognition will
require you to rethink and restructure
your deals and contracts, integrate
contracting with invoicing and billing,
and realign sales commissions to be
compatible with ASC 606.

In the next chapter, we

will examine how to take
full advantage of the
mandatory changes you’ll
be making under ASC 606
to transform your business
and achieve new bottom-
line efficiencies. This is the
heart of the business case
for ASC 606 compliance.

ASC 606 Compliance 12

CHAPTER 3

How You Can Use Your

ASC 606 Compliance
Obligations to Transform
Your Organization
ASC 606 compliance will affect every organization with complex
revenue recognition processes. While most organizations are likely to
perceive compliance as an obligation and an administrative burden,
you don’t have to (and indeed, you shouldn’t) think of it as a thorn in
your side. You can be one of the few who see ASC 606 for its bottom-
line potential, and we’re going to show you how.

ASC 606 will prime your organization to take advantage of a number

of upgrade and modernization opportunities. These changes are
going to dramatically improve productivity, lower costs, and enhance
your relationships with customers. In this chapter, we’re going to
discuss the key opportunities you have to transform your organization
as you come into ASC 606 compliance. The more you understand
at the upfront, the more success you’ll find as you dive into this
enterprise transformation.

Eliminate the disconnect between sales and accounting.

Get everyone on a shared collaboration platform.

Boost customer satisfaction.

Improve visibility and governance.

Write better sales contracts.

ASC 606 Compliance 13

 1
ELIMINATE THE DISCONNECT BETWEEN
SALES AND ACCOUNTING
When your accounting and finance teams work at the tail end of the sales
cycle, after sales contracts have already been generated, they lose their
ability to be engaged with the contracting process and to fully understand
a contract’s nuances and intents. Instead, they spend copious time working
in a silo to properly invoice customers and recognize revenue from
contracts. This process of rectifying and clarifying ambiguities after the fact
is labor intensive and inefficient. As you redo your workflows to come into
ASC 606 compliance, you will want to proactively bring your accounting
and finance teams into the conversation so they can articulate pain points
and help shape more streamlined workflows. ASC 606 compliance has
the potential to drive important new synergies between your sales and
accounting teams; you will want to fully capitalize on these opportunities.

2
GET EVERYONE ON A SHARED
COLLABORATION PLATFORM
A thoughtful, collaborative analysis of data-driven analytics is essential
to the efficient operation of any business. A CPQ platform can help you
make sure that deals are done in a way that leads to sensible performance
obligations. It then helps you transmit that data downstream so it’s easy
to know not only what the performance obligations are but also when
they are met. A modern CPQ platform like Salesforce CPQ will be able
to account for revenue in compliance with ASC 606; this is the type of
system you’ll need to automatically reallocate and modify valuation of your
contracts as your contractual agreements change over time.

ASC 606 Compliance 14

 3
BOOST CUSTOMER SATISFACTION
Your customers expect accuracy and speed when they enter into a sales
agreement with you. Even when these agreements span extended time
periods and are dynamically altered, your customers still count on you
to hold up your end of the bargain. Thus, as your sales and accounting
teams begin collaborating on revenue recognition processes using a
shared platform, they are able to work together to reduce bottlenecks and
errors and ensure customer requests don’t slip through the cracks. These
changes will have a ripple effect across the organization. When customers
are happier, employees are happier. And when employees are happier,
productivity goes up. It’s a win-win for everyone.

4
IMPROVE VISIBILITY AND GOVERNANCE
A modern CPQ platform will provide more than just automation; it will
create a centralized platform providing greater visibility into sales cycles.
With this enhanced visibility will come improved oversight and governance
as managers and even the C-suite gain access to real-time dashboards
that summarize performance and resource availability. You’ll be able to use
these big-data analytics to ensure resources are allocated optimally and
demand can be accurately projected.

5
WRITE BETTER SALES CONTRACTS
In most businesses, the hard work of contracting is left up to legal counsel.
An attorney is tasked with reviewing and drafting sales contracts, often with
no consideration as to how the accounting department is going to recognize
this revenue from these contracts. Consequently, contracts become filled
with vague and ambiguous language that is difficult for your accounting
department to interpret for revenue recognition purposes. Under ASC 606,
a single revenue recognition model will replace the existing framework,
eliminating the process of having to decipher cryptic contracts.

ASC 606 Compliance 15

CHAPTER 3

As much as you might dread the

changes required under ASC 606, this
new accounting standard can actually
be a blessing in disguise.

It’s up to you to take advantage

of your compliance obligations by
eliminating the disconnect between
your sales and accounting teams,
getting every department working
together on a shared collaboration
platform, making a conscious effort
to boost customer satisfaction,
improving visibility and governance,
and writing more streamlined,
customer-friendly sales contracts.
CHAPTER 4

Configuring Your CPQ Platform to

Support Your ASC 606 Transformation

A modern system like Salesforce CPQ is no
longer just a luxury as you transition to the
ASC 606 accounting standard; it’s a necessity.
You will rely on the dynamic automation and
data analytics capabilities of your CPQ system
to weed out inefficiencies, eliminate backlogs
and bottlenecks, and prioritize resources
and tasks. As you start thinking about how
you’re going to configure your CPQ platform
to support the changes you seek, you will
want to make yourself aware of best-practice
recommendations and guidance from those
who have come before you. That’s the purpose
of this chapter.
The beauty—and the terror—of upgrading to
a modern CPQ system is that you’re opening
up a world of possibilities to customize your
platform. Some of these customizations are
essential; others can lead to a world of hurt.
Furthermore, while modern CPQ platforms are
designed to be simple and intuitive to use, you
must keep in mind that all of the customizations
you add will still need to be accessible and
engaging for your primary user base of your
front-line sales representatives.

Let’s explore five essential strategies

for configuring your CPQ platform
to get the most out of the system—
and ultimately transform your
organization.

ASC 606 Compliance 17

1 2
STANDARDIZE AND SIMPLIFY
HOW DATA IS ENTERED
ASC 606 compliance will require your
accounting team to identify from sales
contracts the moment that goods
and services are transferred to your
customers. To facilitate this process for
your accounting team, you’ll want to
create mandatory data-entry fields that
explain how this transaction will take
place. Furthermore, you can standardize
the language by creating drop-down lists;
not only will this be a big help to your
accounting team, but it also will increase
your opportunities to use your CPQ
system’s big-data analytical capabilities to
gain increased insights and visibility.
INCORPORATE GUIDED-SELLING
PRINCIPLES
If you ask your sales team how to cross-sell and
upsell effectively, you’ll get an earful about the
importance of listening to customer needs and
incrementally introducing customized solutions.
These practices are known as “guided selling,”
and they’re the opposite of the fixed catalog
that you otherwise might default to using.
Ultimately, you’ll want to configure your CPQ
system to enable your sales representatives
to put together a unique bundle of items that
fits each customer’s wants and needs. That
means you should be soliciting your sales
team’s feedback so you can design a system
that empowers and inspires them to guide
customers to optimal, customized solutions.
3
MAKE PRICING EASY TO
ADJUST AND CALCULATE
Because you will need to adjust your pricing
over time to remain competitive, you’ll want
to ensure pricing adjustments can be rolled
out easily and automatically from within your
CPQ system. Specifically, this means that you
should ensure that pricing rules don’t overlap
or overwrite one another. Your system also
needs to be able to automatically calculate
tiered and bundled discounts in a consistent,
uniform manner.
ASC 606 Compliance 18
4
TAKE FULL ADVANTAGE OF TRIGGERS
The last thing your customers want to hear is that their
orders or requests have been delayed because you’re still
waiting on a necessary sign-off or a response from another
department. Modern CPQ systems come preloaded with
rich support for workflows that can automatically notify
specific employees when certain events take place. Thus,
you’ll want to integrate intelligent workflow approvals
processes into your CPQ system that include automatic
notifications to individuals when they need to perform a
specific follow-up action; you can even design a rule that
automatically assigns a specific task to them.

5
DO YOUR HOMEWORK BEFORE
BUILDING CUSTOMIZATIONS

When you’re unfamiliar with your CPQ system’s

capabilities, you may not realize that some of the features
you’ll want to build are already available as out-of-the-
box solutions. Not only is it a waste of time and energy
to reinvent the wheel, but you’re unlikely to be able to
design your customizations with the same precision
and optimization as the out-of-the-box configurations.
In many cases, an out-of-the-box solution only requires
minimal customization to get it to do what you will
want. To ensure you’re not over-customizing, you should
consider consulting with a CPQ implementation expert.
An implementation consultant will pay for itself by
offering invaluable, personalized advice about how to get
your CPQ platform doing exactly what you need—all at
minimal cost and risk to your organization.

ASC 606 Compliance 19

CHAPTER 4

As you flesh out the configuration

of your CPQ system, remember that
development is only one piece of the
puzzle; you’ll also need to design a
robust training and outreach program
to maximize employee adoption
rates and to explain the strategy
behind your ASC 606–fueled business
transformation plans. The more buy-
in and enthusiasm you can garner, the
more momentum and confidence you’ll
feel as you embark on your ambitious
customizations. During your journey
to build the system that’s right for
you, remember the most essential
strategies for configuring your platform:
standardize and simplify how data is
entered, incorporate guided-selling
principles, ensure that pricing can be
seamlessly adjusted and calculated,
take advantage of automatic
notification triggers, and do thorough
research before embarking on any
major customizations.
FINAL THOUGHTS

BE BOLD &
STRATEGIC
Every organization with complex revenue
recognition processes will transition
to the ASC 606 accounting standard,
but not every organization will take
advantage of the opportunity to truly
win. ASC 606 is much more than just a
compliance obligation: it’s your excuse—
indeed, your secret weapon—to transform
your organization from the inside out.
To ensure you find success on your If the ideas and insights in this book
compliance journey, it’s critical that you are helpful to you, please consider
develop a solid baseline understanding reaching out to the highly experienced
of what ASC 606 means and the many Salesforce CPQ implementation experts
ways it potentially will impact your at Simplus. This book only touches the
sales life cycles. Then, to position your surface of what you need to know to
organization to optimally benefit from the find success on your journey to ASC
upcoming changes, it’s crucial that you 606 compliance. Simplus can work
understand what processes, workflows, with you to develop a deep array of
and mindsets you need to reconsider and optimized, minimal-risk solutions. We’ll
rethink. Finally, it’s paramount that you exceed your expectations and empower
develop a mastery of your CPQ system you to be bold and strategic in your
and everything it’s capable of doing for thinking. We have no doubt you’ll walk
you so that you can stay on the path to a away from the experience extolling the
transformed enterprise. incredibly strong business case behind
ASC 606 compliance.