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Revenue Management

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Challenges of Revenue Recognition

The revenue cycle for companies that sells through distribution channels is especially risky because the revenue is not considered earned as long as the distributor retains the right to return the goods, or the sale price is not “fixed and determinable”. The rules of sell-through revenue recognition come into play when there are rights of return (SFAS 48),1 stock rotation rights or when back-end rebates or Co-op/MDF payments reduce revenue (EITF 01-09).2 Another complexity arises when products and services are bundled together under a single SKU or invoice. In this situation multiple-element revenue recognition (EITF 00-21)3 and Vendor Specific Objective Evidence (VSOE) rules come into play.

Other revenue-recognition rules and guidelines dictated by the AICPA, FASB, PCAOB and SEC, such as SOP 81-1,4 SOP 97-2, SOP 98-9, SAB 101,5 all demand increasing diligence on the part of accounting staff to ensure compliance and to clear audits.

Unfortunately, the majority of existing ERP and accounting software packages don’t accommodate the complex revenue management and compliance needs of these companies. This forces companies to manage revenue outside their financial systems by using complicated spreadsheets and manual processes. Because such methodologies are error prone and not scaleable, setting up effective controls for risk mitigation end up being an even bigger challenge.

Automated and Timely Revenue Management with cCRM

Entomo’s cCRM solution addresses the problems of revenue recognition by eliminating complex spreadsheets and ad hoc databases, and replacing them with a single integrated system. With Entomo’s solution, customers can easily manage complex channel revenue models that are challenging for spreadsheet-based manual processes, and even for traditional accounting systems; especially when it comes to managing deferred revenue.

Because all revenue-related information is aggregated, interlinked and stored in a single system, with built-in audit trails and automatically enforced controls, the audit and analytics processes are quick, easy and always based on automatically processed high-quality data. It is equally important that Entomo’s solution includes automated functionality to meet stringent SEC and FASB guidelines on revenue. This substantially simplifies a companies’ ability to meet Sarbanes-Oxley (SOX) and mitigate compliance risks.

The various processing modules of the Entomo SmartHub® combine to create an end-to-end revenue management pipeline as follows:

  • Multi-Source Transaction Collection, Cleansing and Normalization

    Sales-in, POS, inventory, claims, returns, etc. are automatically collected, cleansed and normalized by the channel data management module.

  • Channel Data Reconciliation and Adjustments

    Automated reconciliation, by part and by partner, and analysis of reported channel data including sales-in, sales-out (POS), returns, inventory, in-transit and uncredited RMAs is performed by the inventory management module. The system can also automatically keep track of inventory as it transitions from sell-in to sell-through. Discrepancies, if any, can be adjusted by authorized sales operations or via Entomo’s managed services. Any overrides can be annotated with comments, while maintaining an audit trail.

  • Net Revenue Valuation

    How to value sell-through revenues is a key issue for revenue accounting departments. The Entomo SmartHub supports numerous valuation methods. However, based on industry best practices, Entomo recommends using the FIFO method, net of any back-end credits.

  • Automated Generation of Journal (G/L) Entries

    Based on configured rules, the SmartHub automatically generates Journal (G/L) Entries for recognized and deferred revenue. The journal entries reflect the company’s chart of accounts and address any number of relevant accounts such as Revenue, COGS, Deferred Revenue, Deferred COGS, Deferred Margin, Inventory, A/R, etc. The generated entries can be fed directly back to the company’s accounting system, to complete the revenue cycle.

  • Revenue Analytics and Forecasting

    The SmartHub includes the ability to extrapolate revenue trends and build “what-if” scenarios to support strategic planning. For example, journal entries for sell-through can be generated on both a “reported sell-through” and “adjusted sell-through” basis.  (Adjusted sell-through is the recommended basis to use for actual revenue recognition). Similarly, on the expense side of the ledger, commissions can be forecasted. This allows companies to evaluate the impact of changes in future revenue streams on the P&L and gain a better understanding of how today’s decisions will impact the future.

  • Audit and Contract Compliance

    Automating revenue management using the SmartHub ensures compliance with revenue recognition rules such as SOP 97-2, 98-9, 81-1, SAB 101, 104, and other regulatory mandates. Furthermore, the SmartHub controls user access, based on roles and privileges, and provides automated audit trails. Thus internal compliance groups and external auditors can rest assured that there is a solid foundation for enforcing robust internal controls over revenue processes, as required by SOX 404.

As part of implementing the revenue management module, Entomo’s professional services team can provide best practice guidance for executing a sell-through revenue recognition strategy. This includes timing and methodology for conversion from sell-in to sell-through revenue recognition.

  1. SFAS 48: Now specifically covered by FASB Accounting Standards Codification™ (ASC) Topic 605-15-25. Topic 605-15 can be referred to for general guidance. [↩]
  2. EITF 0109: ASC Topic 605-50. [↩]
  3. EITF 00-21: ASC Topic 605-25. [↩]
  4. SPO 81-1: ASC Topic 605-35. [↩]
  5. SOP 97-2, SOP 98-9 and SAB 101 are covered by ASC Topic 985-605 [↩]