Even for accountants, revenue recognition isn’t always as simple as we’d like it to be, and most industries don’t handle it in the same way. Retailers might count revenue as soon as a product is sold and paid for, while a construction company might recognize revenue in different phases as a project progresses. To make the process easier for your business, we’ve put together a guide of revenue recognition best practices for the enterprise.
Enterprise resource planning (ERP) software can be a big help when it comes to revenue recognition. To find the right tools for your company, use our Product Selection Tool and get a customized list of software that will meet your needs.
Table of contents
- Examine industry standards
- Pay attention to exchange rates
- “Buying” product from yourself
- Use ERP software
- Improving revenue recognition processes for your business
Follow industry standards
Most industries use the accrual method of accounting, meaning they recognize revenue when it’s earned, rather than when it’s received. Back in 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) worked together to issue the Accounting Standards Codification (ASC) 606, which provides uniform guidelines for how revenue should be recognized when it comes from contracts with customers.
ASC 606 went into effect in late 2020, but it applies to most public, private, and non-profit organizations, with a few exceptions like insurance agencies. While the standards outlined in ASC 606 vary slightly by industry, FASB and IASB put the frameworks in place in an attempt to standardize revenue recognition across the board. The standard is a requirement for companies it applies to.
Pay attention to exchange rates
Many enterprises enjoy the benefits of global transactions, but that also means they need to pay attention to exchange rates when recognizing revenue. Use the exchange rates that are available on the open market, ignoring any contractual agreements to exchange currency for a higher or lower rate.
To make revenue recognition easier for foreign transactions, you first need to decide on a functional currency for your organization. For most US-based businesses, this is the US dollar. Exchange rates vary, unfortunately, and occasionally, you’ll have a gain or loss when you recognize the revenue and actually get the money into your account. For each transaction, the gain or loss will be determined between the company’s functional currency and the currency used for the transaction. For example, if your US-based company completes a transaction with a company in France, you’d look at the difference between the US dollar and the Euro.
“Buying” product from yourself
Small businesses might have external suppliers, but enterprises are generally large enough to have most of their supply chain in-house. When a product passes from one plant to another that your company owns, you still have to attribute revenue somewhere to account for the change in inventory, even though no actual money is changing hands.
To make this work, you’ll need to track the asset changes in your general ledger as if they were transactions with outside companies. However, when you go to produce consolidated financial statements, these transactions should automatically cancel out in both the parent and subsidiary ledgers to only show transactions with external entities. You’ll need to double-check to ensure this happens.
Use ERP software
Enterprise resource planning (ERP) software combines accounting tools, CRM, supply chain, and more into a single software solution to improve company-wide processes. ERP software is perfect for improving your revenue recognition processes because it records transactions and revenue, tracks order status, and even supports e-commerce.
Consolidating these functions into a single software keeps data organized and provides a complete picture of your company’s revenue. Additionally, you can input custom revenue recognition rules to ensure your company is recognizing its revenue exactly when it’s supposed to.
ERP software also supports intercompany transactions. You can search for them in the database and remove them from reports when it comes time to produce consolidated financial statements.
Top ERP software for enterprises
Improving revenue recognition processes for your business
Revenue recognition can be a difficult concept because it doesn’t always line up with when you actually have the money in hand. In fact, it rarely does. However, by following best practices and staying compliant with industry regulations, you can standardize your revenue recognition practices and better organize your company’s accounts.
To find the perfect ERP system for your enterprise business, use our Product Selection Tool. After answering a short survey, you’ll get a personalized list of software tailored to your company’s needs.