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Cloud Based Billing and Subscription Management Expert Series

Key Requirements of Recurring Revenue Recognition

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EXECUTIVE SUMMARYRevenue Recognition Management For Recurring Revenue Business Models

New technologies, business models and challenges

We live in interesting times, where the innovative application of new technologies to challenges can

enable entirely new business models, and any one of these enabling technologies would be suf-

ficient for driving substantial value to existing or completely new markets.

Cloud computing is one great example of this, as it has become a principle driver for a great deal

of innovative computing solutions. Web-based services over the internet are delivering on-demand

computing infrastructure, platforms, and applications, creating tremendous opportunities for small,

medium, and large business innovators. These new opportunities are often defined primarily by

new business models and depend on solutions that make the delivery of products and services as

seamless and transparent as possible, with a very high degree of reliability and utility, and the ability

to monetize virtually any future commercial model epiphany.

Many of these new models are intrinsically dependent on arrangements or agreements made by

providers with their customers that are based on recurring billing, which in turn is driving recurring

revenue. The recurring billings can be flat-rate time-based subscriptions, variable-rate usage-based

charges, or a mixed base of flat-rate and variable-rate usage charges. Recurring billing is a more

complex yet must-have business function for many of these new recurring revenue business models.

Recurring billing also brings another set of challenges that are associated with revenue recognition.

It is relatively easy to properly manage and execute revenue recognition when the products are

tangible goods that are physically delivered to the customer and billed on delivery. Properly dealing

with the creative array of possible recurring billing options for digitally-delivered offerings is much

more complicated, and requires a focused solution.

This paper examines what an effective and complete Revenue Recognition Management solution

should provide for Recurring Revenue Business Models.

Revenue Recognition Requirements

The best recurring billing management results are

realized by making all of the critical aspects of the

billing process function as smoothly as possible for

both the seller and their customers, ensuring their

relationship is enhanced by their combined billing

experiences. The associated revenue recognition

management solution must support the full range of

demands of various combinations of flat rate-based

and variable usage-based recurring revenue man-

agement scenarios and transactions. It should de-

liver a single solution paradigm that enables the seller

to extend its business offerings to include services,

and to initiate, expand, change, and monetize their

business model as they desire.

Revenue Recognition Key Needs:1. Full compliance with the revenue recogni-

tion accounting and reporting requirements of AICPA, EITF, FASB, SEC, GAAP, and SOX prin-ciples, standards, and regulations.

2. Comprehensive support for the full spectrum of transactions possible with extremely flexible and agile recurring revenue business models.

3. A single-source system of record for all recur-ring revenue recognition activities associated with accounting, reporting, and forecasting ap-plications.

4. Automated accounting processes, with con-trolled access to configurations and data.

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5. Seamless integration of the solution with the enterprise accounting general ledger, other financial systems, and all analytics applica-tions at the macro summary entry levels and at the detail transaction and audit control levels, throughout the company.

6. User interfaces that are task-focused, simple, and consistent, making the complexity asso-ciated with revenue recognition transparent to the seller’s internal operations as well as their customers.

Each of these deliverables is discussed below in

greater depth.

A General Basis for Revenue Recognition

The revenue recognition management solution must

meet the primary objectives of revenue recognition

practices, ensuring that Balance Sheet and P&L

(Profit and Loss) statements provide a consistent

and meaningful representation of the company’s

performance and health in each reporting period. It

accomplishes this by mapping the revenues gener-

ated by the business and the expenses incurred to

generate that revenue in the same accounting period.

In the case of recurring revenue business models,

services are rendered to a customer over a period of

time or the seller has provided the customer with the

rights to use the seller’s assets over a continuously

extending period of time.

The basis of compliant relevant revenue recognition

might best be summarized with the following state-

ments and criteria.

• Revenue must be realized or realizable and

earned before it can be recognized.

» Revenues are realizable when the related as-

sets received or held are readily convertible

to known amounts of cash or claims to cash.

» Revenues are considered to have been

earned when the entity has substantially ac-

complished what it must do to be entitled to

the benefits represented by the revenues.

Another way of expressing this is that revenue is real-

izable and earned when the following is true:

• There must be clear, objective

and persuasive evidence that

an arrangement exists between

the seller and the customer.

• Delivery has occurred or the ser-

vices have been rendered to the

customer.

• The seller’s price for the product delivered or

the service rendered is fixed or determinable.

• There is a reasonable assurance that the pay-

ment will be collected by the seller from the

customer.

Compliance with Governing Requirements

The values associated with effective revenue rec-

ognition are made possible only when the solution

complies with the various associated accounting

standards, principles, and regulations.

There are a number of key control organizations that

one should be aware of in this regard, and each of

them provides one or more key artifacts that define

the expected accounting and financial reporting re-

sults. The organizations are presented here, followed

by a brief introduction to the key artifacts that should

be considered in an effective and compliant revenue

recognition solution.

The revenue recognition management solution must

assure compliance with these governing bodies’

content or all applications of revenue data is severely

compromised if not corrupted.

The American Institute of Certified Public Accountants (AICPA)The AICPA is the national professional organiza-tion of certified public accountants (CPAs) in the United States that sets ethical standards for the profession, and provides U.S. auditing standards. It issues SOP’s (Statement of Position) periodi-cally to provide direction on new subjects or clari-fication on existing subjects regarding accounting and reporting. SOP’s 91-1, 97-2, and 98-9 are rel-evant to revenue recognition.

The Securities and Exchange

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Commission (SEC)The SEC protects investors, maintains fair, or-derly, and efficient markets, and facilitates capital formation by creating and enforcing regulations that set the standards for the public disclosure of financial information by public companies. It will periodically issue Staff Accounting Bulletins (SAB’s) affecting its topics “to make this interpre-tive guidance consistent with current authoritative accounting and auditing guidance, and SEC rules and regulations”.

SEC Topic 13 covers Revenue Recognition. The SAB’s relevant to revenue recognition account-ing and reporting are 101, 101A, 101B, and 104, bringing Topic 13 contents into alignment with current GAAP.

Generally Accepted Accounting Principles (GAAP)GAAP provide the combined set of authoritative accounting principles, standards and procedures that companies must apply in recording and re-porting accounting information used to compile their financial statements. Their application in this manner insures that investors have an ac-ceptable level of integrity and consistency in the financial statements they use when analyzing companies for investment purposes. GAAP cov-ers such things as revenue recognition, balance sheet item classification and outstanding share measurements.

The Financial Accounting Standards Board (FASB)FASB is a seven-member independent board consisting of accounting professionals that es-tablishes and communicates standards of finan-cial accounting and reporting in the United States. FASB standards are expressed as generally ac-cepted accounting principles (GAAP) that govern the preparation of corporate financial reports, and are recognized as authoritative by the SEC.

The Emerging Issues Task Force (EITF)The EITF assists the FASB in improving financial reporting through the timely identification, discus-sion, and resolution of financial accounting issues within the framework of the FASB Accounting Standards Codification process. This codification process is the source of authoritative standards of accounting and reporting to be applied by non-governmental entities in combination with those

issued by the SEC.

The EITF was created to reduce unacceptable di-versity in expected practice, and to address spe-cific implementation, application, or other emerg-ing issues that can be analyzed within existing GAAP, on behalf of FASB. The EITF abstracts that are relevant to revenue recognition are EITF 00-21, 08-01, and 09-03.

A key focus of these abstracts, and the SOP’s identified earlier, was dealing with “multiple-ele-ment arrangements”, e.g. contracts, agreements, or packaged bundles of products and services. A primary means to a solution was defining various acceptable methods of assuring optimal revenue recognition by distributing the value between the components of the bundle. These methods were established as VSOE (vendor specific objective evidence), TPE (third party evidence), or ESP (es-timated selling price).

These changes are critical to revenue recognition for recurring revenue applications that encom-pass bundles of software, hardware, and services.

Sarbanes-Oxley Act of 2002 (SOX)The rules and enforcement policies outlined by the SOX Act amend or supplement existing leg-islation dealing with security regulations, empha-sizing that the senior management of a company must assume responsibility and accountability for their company’s accounting and reporting integri-ty. Two key provisions of the Sarbanes-Oxley Act that revenue recognition management solutions will affect are Sections 302 and 404.

Support for Flexible and Agile Recurring Revenue Business Models

You might recall the Henry Ford axiom that “You

can have any color Ford, as long as it’s black”. That

won’t work today, especially in this area of billing ap-

plications. Recurring revenue business models are

quite diverse in the variety of billing elements, pric-

ing, billing schedules, performance characteristics,

products and services covered, etc. This degree of

flexibility and agility is required to meet one of the pri-

mary core objectives of these business models: The

recurring revenue solution must ensure that virtually

all possible monetized models can be supported, as

new business model opportunities are pursued and

new competitive demands are exposed.

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This objective applies as well to the revenue recogni-

tion management solution that will be driven by the

recurring billing activities. The following models and

transactions should be supported by the revenue

recognition management solution.

The recurring

revenue solution

must ensure that

virtually all possible

monetized models

can be supported,

as new business

model opportunities

are pursued and new

competitive demands

are exposed.

Recurring Revenue’s Typical Models

Revenue recognition management must support the expected business models. The following are examples of the revenue models that should be covered by an exceptional solution.

Free Trials

Free trials are a basic way of providing an op-portunity for the customers to recognize and want the values they would obtain if they be-came a paying customer. These trials may be limited in functionality and/or limited to a num-ber of user seats or access. There is no exter-nally reported revenue recognition for this ac-tivity, but the provider may wish to use internal memo accounting or inter-company billing to chargeback to its internal sales or marketing departments at a “market rate” for sponsoring these free offerings, etc. These charge entries would be eliminated from external reporting, but they could be useful for the purpose of recognizing the “cost” of the free program and potentially affecting the prices to the paying customers that the program actually gener-ates.

Freemium Model

A very limited set of services and functions provided by the client to customers for free might be established as the “Bronze” or Free-mium service level. The sellers’s rationale here is that the incremental costs to support a very limited set of functions for these customers will be negligible, while this offering provides an opportunity for the customers to recog-nize and want the values they would obtain if they became a paying customer. Again, there is no externally reported revenue recognition accounting for this, but once again the client may wish to use internal memo accounting or inter-company billing to chargeback to its internal sales or marketing departments at a

“market rate” for sponsoring these free offer-ings, etc. These charge entries would be elimi-nated from external reporting, but they could be useful for the purpose of recognizing the

“cost” of the free program and potentially af-fecting the prices to the paying customers that the program actually generates.

Subscription Revenue ModelSubscriptions can be flat-rate, usage-based, or a combination of these.

Flat-rate subscriptions are often also referred to as “membership” subscriptions. This is a recurring revenue model that encompasses fixed-rate charges where the amount of the charges will not vary across a specified pe-riod of time. There is typically a service provi-sion or coverage start date and end date. The services, products, or content that is provided during this period can vary depending on the expected level of services and performance. There could be several levels of services and performance that a seller has chosen to pro-vide.

One example could be a “Silver” or base ser-vice level that would be charged to the seller’s customer. This service level typically provides a set of services and functions delivering in-cremental value (over the Bronze offering) to the seller’s customer. There is external report-ing of the revenue generated by these services because the customer is an external customer that will be billed for these services. There will be traditional accounts receivable, earned revenue, deferred revenue, and unbilled re-ceivables entries.

Usage Revenue ModelUsage-based recurring revenue occurs when the client has offered to charge a customer for

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actual units used over a period of time at an agreed rate per unit. Unlike the subscription flat-rate revenue model, the recurring revenue from usage-based services varies. Usage units could be: hours, minutes, messages, miles, seats, I/O volume, storage, memory, CPU compute time, network packets, etc.

Subscription Plus Usage Combined Revenue ModelAn example of this model would be a “Gold” advanced service level package that would also be charged to the seller’s customer. This service level typically provides a set of servic-es and functions delivering incremental value (over the Silver offering) to the client’s custom-er. The package would basically provide flat-rate service subscriptions plus usage-based charges. There is external reporting of the revenue generated by these services because the customer is an external customer that will be billed for these services. There will be tra-ditional accounts receivable, earned revenue, deferred revenue, and unbilled receivables types of entries.

Continuing this example of service level of-ferings, a “Platinum” or premium service level package would offer all possible services with unlimited usage for a very high “all in” sub-scription rate. In every other way, it could be similar to the Silver and Gold packages de-scribed above.

Flexible Billing Schedule OptionsRecurring revenue models typically cover several schedule options, and the revenue recognition solution must accommodate each option.

There is the old stand-by of invoicing the cus-tomer as the product is delivered or the service is deemed to have been rendered to the customer. This is still a basic requirement of any billing solu-tion, including a recurring revenue billing solution.

Then there is another high-frequency recurring billing arrangement where the customer is billed in advance of the service term. Advance billing or prepaid billing options become more preva-lent when the seller has leverage as the market leader, or perhaps offers a reduced price to the customer for advance payments. The seller ben-efits because it has greater predictability in future revenue streams and it has the funds before it ac-tually delivers or renders anything to the custom-er. The revenue recognition solution will produce a trade receivables amount billed to the customer offset by the recognition that the associated rev-

enue is not yet earned, and is therefore a liability for the seller to its customer.

Arrears billing or postpaid billing options are also a significant option when the market ex-pects to pay only for the services it has actually already consumed. The buyer benefits because it only gets invoiced after it has consumed the resources. The seller has less predictability and perhaps greater exposure to bad debts, but it may have the opportunity charge higher rates. As the products are delivered and the services ren-dered, the revenue recognition solution will pro-duce an unbilled trade receivables amount offset by the recognition that the associated revenue is earned, and is therefore a reported in its P&L and its various reports.

It is also possible that a billing schedule for a cus-tomer’s term might be advance billing at the front-end of a quarter on the second month of that quarter, while the last three quarters of an annual subscription will be billed in arrears in the second to last month. The revenue recognition manage-ment system should be able to handle this or even more complicated scenarios.

Going back to the revenue recognition manage-ment goal of assuring that revenue is recognized as earned and mapped to related expenses in the same accounting period, these various billing options will require that the revenue recognition management solution must be able to discern a liability for amounts that are billing in advance of revenues earned, from an asset for amounts where delivery or rendering has been earned without a corresponding invoice having been is-sued to the customer. These assets and liabilities in the Balance Sheet of the seller allow the billing schedule options while still assuring the integrity of the P&L and Balance Sheet statements during the overall term of the agreement with the cus-tomer.

The revenue recognition management solution should permit the assignment of default account codes and location codes for Trade Accounts Receivable, Unbilled Receivables, Deferred Rev-enue, and Accrued Tax Liability entries, with override configuration possible at the individual charge type level.

Charge Classes and Types There are many different classes of charges that a recurring revenue model might process. A rev-enue recognition management system should support each of these classes of charges, and recognize that there are an unlimited number of

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charge types that the seller might create within each of these classes.

Revenue-centric Charge Classes and TypesThese charge classes and types are the pri-mary sources of revenue, and the revenue rec-ognition management solution should provide preconfiguration of a default earned revenue account code and location code elements to be set for each charge class with an override opportunity at the individual charge type.

Flat-rate subscriptions are typically time-based, covering periods of service defined in time-based units of measure – e.g. a day, a week, a month, or a year – at fixed rates that will not vary over time. An example of types here might be the monthly subscription for telephone service, text service, internet ser-vice, etc.

• Usage-based subscriptions are typi-cally driven by the reported usage of resources by the customer. There are several types of usage units of measure that are possible here, and the solution must be able to deal with them all. The subscription amount varies as usage var-ies over time. An example of types here might be the usage subscription for tele-phone minutes, storage used for IT infra-structure provided as a service, etc.

• The combination of flat-rate and us-age-based subscriptions, where a spe-cific resource is made available to the customer up to a maximum flat-rate cov-ered level, and usage that exceeds this threshold is charged separately. Call min-utes, text messages, etc. are examples of charge types that might apply here.

• State of completion is a recurring rev-enue model that relies on a project’s rec-ognition of progress to generate revenue recognition, with or without the benefit of aligned progress invoices.

• “Use-it-or-lose-it” charges that provide a limited number resources available to the customer for a period of time, where any unused resources under the limit will be earned at the end of the term.

• Prepaid charge discounts might be provided to incent customers to pay in advance of the service coverage period.

• Tiered-usage pricing reflects volume-driven decreasing price rates that pro-mote increased usage by the customer. Content-based services for media might be a good example here, where the more you use the lower that rate that is charged.

• Tiered-usage discount fees reflect volume-driven increasing discount rates that promote increased usage by the customer. The example above would also apply here.

• Tiered usage penalty fees reflect charges made to customers that are con-suming resources at a higher rate than the flat-rate or base usage rates have as-sumed. It is a progression of increasing penalty rates associated with increasing usage volumes. Where the resource has limited flexibility or capacity, there might be charge types for peak electricity de-mand or summer water usage limits, etc.

• One-time charges represent fees or charges that occur as unique events during a subscription term. They can represent revenue to the seller that oc-curs in the course of using subscription or usage-based recurring revenue mod-els. They can include fees such as those listed below:

» Setup fees may be an initial charge to set up the customer’s devices, appli-cation software, infrastructure, etc. to initiate service.

» Admin charges may be levied when the customer requires excessive changes or support.

» Shipping and handling fees may be charged when the devices or other tan-gible goods are shipped to or received from the customer.

» Early termination is a charge for can-celing service before the agreement period has expired.

Taxes on sales and usageThe revenue recognition management solu-tion should provide tax accounting as asso-ciated with the tax jurisdictions’ regulations and codes for the recurring billing items. Tax liability to a tax entity may exist for the seller performing the role of a collector of taxes. This liability may be created and recognized based on billing and/or usage.

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Transaction Class and TypesThere are several business scenarios which a recurring revenue business model might apply and require revenue recognition management in a standard and consistent manner. The solution should use these transaction classes and types to produce the desired accounting and report-ing treatment. The default accounts of the class should be allowed to be overridden at the charge type / transaction type combination level.

The Billing Transaction ClassThis class of transactions is defined around the basic recurring billing events that occur in the course of initiating and maintaining the normal basic business activities. It does not include all billing activity transactions, as there are several special case transactions that should be covered in a separate class.

7. Standard billing as delivered or ren-dered: This transaction type should typically produce a direct entry to trade accounts receivable offset by earned rev-enue in the same day’s entries. The off-set to the billing should depend on the sequence of earned revenue recognition activity relative to the billing account-ing activity. The default should be that earned revenue is a daily process that occurs prior to the invoicing activity. Giv-en this default, the trade accounts receiv-able entry would be offset by a contra entry to the unbilled receivables account.

8. Advance billing: Any time the billing is prepaid or in advance of the related prod-uct delivery or service rendering, the so-lution should typically recognize a direct entry to trade accounts receivable offset by a contra entry to deferred revenue.

9. Arrears billing: Any time the billing is postpaid or arrears after the related prod-uct delivery or service rendering, the so-lution should typically recognize a direct entry to trade accounts receivable offset by a contra entry to unbilled receivables.

The Earned Revenue ClassThis class of transactions is defined around the basic recurring revenue recognition events that occur in the course of initiating and main-taining the normal basic business activities. It does not include all revenue recognition activ-ity transactions, as there are several special case transactions that should be covered in a separate class.

1. Standard revenue recognition as de-livered or rendered: This transaction type should typically recognize earned revenue, where the default sequence of processing earned revenue before in-voicing activity should make the offset-ting contra entry to unbilled receivables in the same day’s entries.

2. Earned revenue offsetting deferred revenue: Any time the billing is prepaid or in advance of the related product de-livery or service rendering, the solution should typically recognize a direct entry to earned revenue offset by a contra en-try to deferred revenue (reducing the de-ferred revenue credit balance).

3. Earned revenue prior to billing: Any time the billing is postpaid or arrears af-ter the related product delivery or service rendering, the solution should typically recognize a direct entry to earned rev-enue offset by a contra entry to unbilled receivables (increasing the unbilled re-ceivables debit balance).

4. Subscription renewals require the rev-enue recognition solution to accurately manage the end of one term’s balances and earned revenues while effectively setting up the next term.

Special Case Transaction ClassAll of the remaining transaction types will fall under this transaction class. Despite the fact that every one of these transactions may affect one or more of the earned revenue, trade ac-counts receivable, deferred revenue, unbilled receivables, or tax accounts, these transac-tion types are isolated in a separate class because they are the special cases that the recurring revenue business model encounters.

Some of the key special case themes in deal-ing with revenue recognition management are:

• Treating earned revenue as represent-ing the company’s performance-to-date against the customer’s expectations. The product has been delivered to the cus-tomer or the service has been rendered to the customer.

• The selling company is entitled to invoice the customer and receive payments from the customer for performances.

• Bad debts write-offs are made against outstanding unpaid trade accounts re-

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ceivable balances up to the value of earned revenues, not necessarily the to-tal amount that has been billed.

• Voiding transactions are only to be made when no revenue has been earned, be-cause this transaction should be intend-ed to correct a mistake in the transaction. When the customer has received the val-ue of the product or service that earned revenue represents, the billing processes should write-off the value of the earned revenue to a bad debt or other internal expense.

• The default sequence of processing for the revenue recognition should place special case class transactions first in the queue to deal with any effects on advanced billing balances, followed by earned revenue transaction class pro-cessing, followed in turn by billing trans-action class processing. The solution should use the adjustments made dur-ing the special case transaction class processing to enable the normal earned revenue and billing transaction class pro-cessing.

Special Case Transaction TypesThe special case transaction processing should adjust any advanced billing values down to the end date of the revised service term (should be equal to the expected earned revenue performance end date), and the sub-sequent earned revenue and billing transac-tion class processing will make the necessary adjustments to their affected balances.

There are several special case transaction types listed below:

1. Credits: Credits can only be given when there has been an associated invoiced value that requires adjustment. The origi-nal billing contra account should be used in this entry. There may or may not be a corresponding earned revenue impact, but this adjustment should be left to the earned revenue transaction class pro-cessing to adjust the affected earned rev-enue, unbilled receivables, and deferred revenue balances. Any subsequent billing transaction class processing should only be executing a standard billing account-ing process, determining the offsetting contra accounts to the trade accounts receivable based on the current balance

(after special case and earned revenue processing) in unbilled receivables.

2. Returns / Service Performance Adjust-ments: When the customer has returned a product or has shown that the expected service was in fact not rendered to the customer, the recurring billing solution should be generating an adjustment that corrects the existing agreement. The rev-enue recognition management solution should keep things simple and auditable. It should employ the billing adjustments to reverse the associated earned revenue entries with the offsetting contra entry being made to the unbilled receivables account (this the result of the default process sequence). When/if the billing adjustment transaction is recorded, the trade accounts receivable entry will have the offsetting contra entry made to the unbilled receivables account.

3. Upgrades and downgrades: Changes in the service level may occur during the service term. The special case transac-tion class processing will create any ap-propriate advance billing-related adjust-ment entries. The subsequent earned revenue and billing transaction class pro-cessing will make the normal adjusting entries in earned revenue, deferred rev-enue, and unbilled receivables accounts.

4. Cancellation: Service or agreement cancellation applies the downgrade solu-tion, except that, after setting the current term end-date to the cancellation date, there is no new term to be initiated.

5. Voided agreement transaction: Voided transactions are valid when a subscrip-tion must be completely reversed, result-ing in the complete reversal of all revenue recognition entries affecting trade ac-counts receivable and deferred revenue, taxes, etc. There should be no earned revenue or unbilled receivables possible with this type of transaction.

6. “Bad Debt” write-off: These write-offs occurs when, after dunning and other collection efforts have failed, a custom-er’s unpaid trade accounts receivable balances are to be written off to either an “out-for-collection” balance or a “bad debts” expense. The prevailing revenue recognition assumption here is that there was a highly reasonable expectation that the customer was going to pay the debt

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before the services were provided and revenue was recognized as earned. The revenue recognition solution should re-verse only the amount associated with the unearned portion of the agreement services against the trade receivables. The invoice should be corrected to reflect the remaining “earned” receivables, the agreement cancelled, and the remaining receivables can then be written off.

The revenue

recognition

management solution

must be the single

source or system

of record for the

company regarding

all recurring revenues

and the associated

trade receivables,

unbilled receivables,

and deferred revenue.

A Single System of Record

One of the greatest challenges to companies is us-

ing the same information for a number of different

applications. A company’s revenue data is one ex-

ample of very critical information that can be used

many different applications. The revenue recognition

management solution must be the single source or

system of record for the company regarding all recur-

ring revenues and the associated trade receivables,

unbilled receivables, and deferred revenue.

• The financial statements must reflect the rev-

enue recognized according to the standards,

principles, and regulation requirements for ac-

counting and reporting. The P&L that is created

by the company for its corporate filing state-

ments is a critical element for revenue data ap-

plication. But recognize that every other profit

center within a company must also use P&L’s

that consolidate into the company P&L. These

P&L’s revenue data should be driven by the data

from the revenue recognition management so-

lution.

• Performance metrics may be focused on bill-

ings, revenues, subscriptions, etc. But the rev-

enue data in these reports should be reconcil-

able with the pertinent related data employed

and managed by the revenue recognition man-

agement solution.

• Planning, forecasting, business case, and opti-

mization analyses should employ the account-

ing and future revenue streams data from the

revenue recognition management solution as

the source of their foundational data.

Seamless IntegrationThe revenue recognition management solution should provide a library of predefined and exten-sible API’s (application programming interfaces) for data exchange and interoperability with ex-ternal general ledger and other financial systems, and other analytics applications, using revenue recognition data in their creation of accounting and analytics reports. The integration should be seamless to the affected users of the data in both the solution and the other systems.

Integration can be unidirectional or bidirectional, so the API’s should be able to support either model.

The optimal solution should be platform-agnos-tic and would be best delivered as a complete SaaS (software-as-a-service) solution, with the appropriate API’s to provide revenue recognition management solutions for any recurring billing applications, whether an on-premise system, a web-enabled legacy system, or another SaaS system.

Automated Accounting Processes with Controlled AccessThe revenue recognition management solution should provide a fully automated solution with ac-cess control and support for its accounting users across three major roles. The following three roles reflect the related major accounting activities and functions:

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• Modeler for design-time configurations;

• Accounting Manager for runtime execution, encompassing accounting reports, balance reconciliations, data access management, and audit controls; and,

• Accounting Systems Manager for integra-tion setup, supporting all external interfaces where the revenue recognition accounting data is made available to other applications.

The Modeler Performs Design-time ActivitiesThe revenue recognition management solu-tion should permit preconfiguration of related control objects to accomplish the automation of the runtime accounting activities in the de-sired manner. The solution should support the design-time user’s ability to perform the fol-lowing activities.

1. Setup users’ access and permissions for the three accounting roles: The so-lution should support user profiles that assign access control and authorization covering all of the design-time, runtime and integration setup activities.

2. Activate revenue recognition charge classes and types: The solution should support the configuration and activation of valid charge classes and types in pro-cess controls, and the definition of ac-counting keys for account code and loca-tion code assignments.

3. Activate transaction class and types: The solution should support the configu-ration and activation of valid transaction classes and types in defining process controls and accounting keys for account code and location code assignments.

4. Report activations: The solution should support the configuration and activation of default report settings for all reports.

5. Report personalization: The solution should support the configuration for per-sonalization of:

• Reporting screen masks, regarding colors, branding, etc.

• Titles and labels, sort preferences, rendering preferences (online versus print), scheduling, distribution, ar-chiving, etc.

• Standard report derivatives, and ad hoc reporting capabilities, etc.

6. Setup Account Location Transforma-tion Table: The solution should allow for the configuration of the GL accounting code structure to fit the specific needs of the targeted interface general ledger requirements, and that overall view of the account and location code assignments made through the charge and transaction configurations.

7. Setup sandbox applications: The solu-tion should support the setup, configura-tion and maintenance of the sandbox or staging tenant for copying, working, test-ing, migrating, etc.

The Accounting Manager Performs Runtime Accounting ActivitiesThe revenue recognition management solution should permit runtime accounting processes and activities in the following key areas of ex-ecution:

Accounting ReportsThere are basically three types of account-ing reports that the revenue recognition management solution should provide to the runtime accounting users.

1. Standard subsidiary ledger reports

The solution should provide its runtime accounting users with a complete set of subsidiary ledger reports, in both online and print forms, in both on-demand and scheduled contexts. Default report sort-ing should be configurable, and the user should be able to create (and save for later runs) ad hoc sort overrides on scheduled or on-demand runs. The primary objec-tives of these reports is to provide suffi-cient critical assurance that the accounting results generated by the revenue recogni-tion management solution conform with GAAP and the configuration expectations, as well as providing a balanced accounting ledger. These reports should include:

• A summary trial balance report with the account class (assets, income, etc.) balances listed in total, then an initial default sorted by individual ac-count code totals, and then by unique location code, effective as of the specified point in time.

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• A detail trial balance report that con-tains all of the individual entry details, with appropriate transaction entry control ID’s for drill-down auditability and an initial default sort by the same hierarchy as the summary report.

• An audit control report that provides a complete picture of the detail account-ing entries and balances for an ac-count and its agreements. This should allow users to see both fiscal year-to-date and individual agreement-to-date details. Various sorts should also provide data by charge class and type, including special cases.

2. Subledger Balance Management Re-ports

The revenue recognition management so-lution will be making high volumes of trans-action entries into both real and nominal accounts. The real accounts will include trade accounts receivable, unbilled receiv-ables, and deferred revenue. The solution should provide subledger balance man-agement reports that allow the runtime ac-counting user to have a highly automated reconciliation solution for these real ac-count codes.

Each report should be constructed with beginning and ending balances for the ac-count code, based on the dates or period provided by the user, and separate col-umns for new charge entries, billing offsets, adjustments, etc. The user should be able to drill down to audit control details as de-sired.

3. Forecasts Based On Predictable Rev-enue Streams

The revenue recognition management so-lution should support the other analytical demands that are associated with its rev-enue data. One of the great positive values provided by recurring revenue business models is the highly predictable revenue streams that one can use to forecast future revenue levels with a relatively high degree of accuracy.

Most business models with non-recurring revenue streams typically end each fis-cal quarter and fiscal year with the typical hockey stick pattern of growth, where they make a very large portion of their sales and revenues by intense practices at the end of

the period. They begin each year fighting the same battle of starting from zero and building to meet their revenue plans. In di-rect contrast with this situation, companies that employ a recurring revenue business model begin each quarter and year with a substantial level of future revenue streams already defined and known, with a high de-gree of certainty.

This predictability and accuracy will ef-fectively serve the revenue performance reporting against plan and forecast. This is a key deliverable of the revenue recogni-tion management solution, and it ensures that there is only one source of recurring revenue data for all accounting, reporting, and analyses applications throughout the company.

Accounting Systems Manager for Integration Setup ActivitiesThe third role that is critical to the success of the revenue recognition management solu-tion is tasked with configuring, implementing, monitoring, and managing the ongoing inte-gration between the solution, as the system of record, with external general ledger, as well as all analytic systems employing revenue rec-ognition data. This encompasses the defini-tion and configuration of interoperability data maps, translation and transformation rules, scheduling of on-demand and batch process jobs, assuring appropriate security access and permission controls in the external appli-cations systems, etc.

The User Interface

User interfaces can be quite unique in the ways that

they work and communicate with their users to ac-

complish the desired tasks. The best user interfac-

es share a number of common key characteristics

that the revenue recognition management solutions

should embrace and include in its interface.

Task-focusedThe user interface should be task-focused, re-flecting an understanding of each task’s goals that the users want to achieve. The solution should ensure that at every point in an inter-action, the information users need is available, prominent, and maps clearly to revenue rec-ognition task goals that users will notice and use. Terminology should be familiar thereby reducing the time it takes for people to mas-

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ter the application, and allowing its use to be-come automatic. The solution should employ the standard lexicon typically applied to the task, and provide instructions and feedback to the user regarding the various task steps and where they are in terms of task comple-tion.

SimpleThe solution should make the use of its in-terface as simple as possible. The fewer the number of concepts that a model has for us-ers to master, the better, as long as it pro-vides the required functionality. Less is more, provided that the solution fits well with users’ goals and tasks.

Every extra unnecessary concept increases the complexity of the solution because it is one more thing that users will have to learn, each concept and application interacts with most of the other concepts, and those interac-tions result in even more complexity. As con-cepts are added to an application, the com-plexity seems to grow exponentially.

ConsistentThe solution should emphasize consistency. Consistency assures that all functions have the same actions and attributes, and that the user’s physical movements required to ex-ecute them are always the same.

Consistency affects how quickly users prog-ress from a controlled, consciously-monitored, slow operation to automatic, unmonitored, faster operation. The screen components should always be in the same places and op-erate the same ways. The more predictable the operation of the system’s different func-tions the more consistent it is. The operation of a particular function is predictable from its type, so users quickly learn how everything in the solution works and actions quickly be-come habitual.

Terminology should be consistent and familiar to the user for the task, thereby reducing the time it takes for people to master the applica-tion, and allowing its use to become automatic. Users want to focus on their revenue recogni-tion goals and tasks, and an interactive solu-tion should ensure that each concept has one and only one name.

And where a user interface and other non-user interfaces exist to accomplish the same tasks, there should be no difference in scope, data, faults, messaging, etc., except where the dif-

ference has been carefully analyzed to de-termine that such a difference is appropriate, pre-approved and accepted by the solution’s users and management.

In short, the revenue recognition interface should make the user extremely productive, secure in their knowledge of the solution, and confident that their interests are being served by the solution.

Consistency assures

that all functions have

the same actions and

attributes, and that

the user’s physical

movements required

to execute them are

always the same.

Conclusion

We have discussed the various challenges that need

to be addressed by an effective revenue recognition

management solution for recurring revenue models,

as well as the many opportunities available.

We will summarize with six critical capabilities an

effective recurring revenue recognition solution will

include:

1. The solution should deliver full compliance with the revenue recognition accounting and report-ing requirements of AICPA, EITF, FASB, SEC, GAAP, and SOX principles, standards, and reg-ulations. This is critical to the solution’s value to a company at many levels, not the least being the avoidance of criminal prosecution for the company’s executive management.

2. For many companies, employing recurring reve-nue models represents their application of new technologies in the pursuit of new business op-portunities that will be the centerpiece of their business or will significantly expand their busi-ness through new channels, perhaps targeting new markets. The revenue recognition manage-ment solution should provide comprehensive support for the full spectrum of transactions that will be possible with extremely flexible and agile recurring revenue business models.

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About Aria Systems

Aria Systems is the subscription billing and management market leader serving Global 2000 com-

panies. The Aria Subscription Billing Platform is the industry’s only enterprise-class solution that

automates the entire subscriber life cycle for all recurring revenue models. Disney, Ingersoll Rand,

DreamWorks, EMC, Internap, Roku, VMware, Taleo, and Hootsuite all rely on Aria for fast time-to-

market, low operational costs, and monetization flexibility. www.ariasystems.com

Aria Systems, Inc.274 Brannan Street, Suite 602 San Francisco, CA 94107Phone: 415.852.7250 Fax: 415.852.7251 Sales — Toll Free: 1.877.755.2370

Aria Systems, Inc.600 Reed Road, Suite 302Broomall, PA 19008Phone: 484.427.8200 Fax: 484.427.8201 Sales — Toll Free: 1.866.933.ARIA (2742)

Contact Aria Systems Today!

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3. Most revenue recognition processes in com-panies today involve the use of one or multiple legacy solution methods, ranging from desktop spreadsheets to home-grown applications to on-premise ISV solutions that were expensive to implement and are increasingly costly to maintain. Assuring that all applications employ the same data for revenue-related analytics and reporting is difficult. The revenue recog-nition management solution should deliver a single-source system of record for all recurring revenue recognition activities associated with accounting, reporting, and forecasting applica-tions.

4. The solution must also serve to automate the affected accounting processes through flexible configuration available in a design-time context, delivering substantive subledger reporting for runtime accounting operations, and support accounting integration setup for interoperability with other applications. There should also be controlled access to accounting configurations and financial data.

5. Seamless integration of the solution with the enterprise accounting general ledger, other fi-nancial systems, and all analytics applications is a paramount requirement to support the company’s ability to have optimal accuracy and

timeliness in all of the revenue-related applica-tions, at macro summary levels and at detail transaction and audit control levels, throughout the company.

6. And all of this power and utility is best offered to its users through an interface that allows users to run virtually on auto-pilot. The user interface of the solution should be process-driven, task-focused, simple and consistent, making the complexity associated with revenue recognition transparent to the seller’s internal operations as well as their customers.

We know that recurring revenue business models

bring challenges associated with revenue recogni-

tion, because properly dealing with the creative ar-

ray of possible recurring billing options for digitally-

delivered offerings is more complex and requires a

focused solution. We hope our discussion here has

addressed many of the attributes that the most ef-

fective revenue recognition management solutions

should provide.

Thank you for your interest!