NetSuite Advanced Revenue Management (ARM) was built to streamline month-end processes so companies can close their books faster and be more confident with their revenue numbers. ARM provides point-and click configuration for customers to handle the complexities of ASC 605, 606 and IFRS 15 standards. Users will know that all of their transactions are compliant. This includes managing the lifecycle of multiple elements, and allowing for event-based rules, flexible fair value pricing and real-time analytics.
Shown below is the new five-step model for revenue recognition under ASC 606.
In designing the data model for revenue management, NetSuite considered the ASC 606 model to ensure the solutions would be consistent and intuitive.
A high-level view of NetSuite Revenue Accounting is shown below.
The revenue arrangement is the transaction that represents revenue contracts. Elements under that arrangement represent performance obligations, and the sources of those elements could be the sales transaction lines, projects or subscriptions. The transaction price is determined based on the discounted sales amount of the element.
Revenue is allocated as appropriate between the elements, if the arrangement is identified as a multi-element arrangement. Each element is associated to a revenue plan based on revenue rules, which dictate when the amortization of revenue can commence and the time frame over which it is amortized.
The main components of ARM are shown below.
These components are:
ARM’s overall setup is powerful in that it allows companies to accommodate complex, fair value pricing, including dual allocations for companies with hardware plus software deals. NetSuite provides flexibility in rule creation in determining what should drive the revenue plan start and end date, and when the plan should be created. Items have a many-to-many relationship with fair value prices. A single item can have multiple fair value prices broken out by user-defined dimensions. A single fair value price can be associated to multiple items to allow for easier maintenance.
All the while, the company is able to gain real-time insights at the arrangement level, see how revenue amounts for each element are calculated, and see an audit trail of arrangements, elements and plans if things change over time.
From a managerial reporting perspective, there are forecast reports that adapt as actual revenues are recognized compared with planned revenue. All reports have the ability to drill down into detailed reports and ultimately to the transactions themselves.
Revenue management works with NetSuite’s ARM Multi-Book feature to allow users to record the same transaction in separate books, according to separate rules. This can be useful for companies where a subsidiary might be recording in a primary book according to US GAAP, and a secondary book according to local country standards. It will also be useful for companies that want to start looking at their transactions under ASC 606, while continuing to record and report in their primary books under 605. This Multi-Book feature increases flexibility and value.
When using ARM, the key from a revenue recognition perspective is to set up three key elements: revenue rules, item or product configurations and fair value prices:
1 – Revenue recognition rules – these are generic rules that eventually become revenue schedules or plans. A small number of rules can be used over time for many contracts and elements. An example of a rule is “percent complete”. If this rule is used, revenue is going to be recognized based on project completion. There are also event-driven rules, which can be based on event amount and event quantity. Other rules may be based on the amount billed, or a forecast rule, where a forecast Rev Rec schedule is created based on a rule.
“These revenue recognition rules are very powerful and there are a lot of options. They are extremely flexible and we can do a lot of things with them.”
- Joe Friedman, Director, Finance Center of Excellence, NetSuite
2 – Basic item or product configuration – the item configuration in ARM is default behavior, and for every item there are multiple fields to be configured (shown above). The idea is to configure, automate and manage by exception; the rules can easily be changed if necessary.
An important area where configuration has great value is pricing. Show is the list price, the pricing type (such as annual or perpetual licenses), the mean discount, revenue account and contract liability information, the default revenue recognition rule, when to create the Rev Rec schedule (which differs by product/service) and the item revenue category.
3 – Fair value prices – NetSuite has an extremely powerful fair value engine and can create fair value prices in a number of ways. NetSuite can set fair value prices in a one-to-one relationship between a fair value price and a product, or can have multiple fair value prices for one product.
To summarize: Getting starting with NetSuite’s Advanced Revenue Management requires setting up revenue recognition rules, basic item or product configuration and fair value prices. Once the setup of ARM has been completed, everything is automated and revenue recognition happens automatically.
This is the revenue contract, which is the key piece of the whole ARM Rev Rec engine. It is created automatically based on the setup.
ARM enables companies to fully meet the five steps of the new revenue recognition standards:
Once the appropriate steps are taken to set up ARM for revenue recognition and the transactions begin to occur and flow through the system, the standards set forth by ASC 606 will be fully satisfied by NetSuite’s ARM in a simple, easy and automated way. This ensures compliance while providing managers with full visibility.
With this setup of Rev. Rec, three things are posted by ARM to the GL: invoices, Rev Rec Journal entries and deferred reclass entries. The revenue arrangement is a container for this information.
The ARM Billing and Revenue Summary Report is a great report that keeps track of everything as it relates to a specific order, including the:
Also helpful is ARM’s Manage Rev Rec page, which is a holistic view of all Rev Rec across all customers, and provides the ability to manage by exception. Within this report, it is possible to put something on hold or take something off hold and catch it up, or change the start or end date on a rule or a plan that hasn’t been done yet.
Using the Manage Rev Rec page, it is possible to filter information in the revenue arrangement and see the rules for a particular order.
These are the key elements and benefits of Advanced Revenue Management:
Managers have the information they need at their fingertips to manage the business.
Will the ever changing accounting standards, companies are concerned about preparing for revenue recognition related to ASC 606 while also managing their books according to GAAP. NetSuite has the tools that companies need. The Advanced Revenue Management solution is flexible, scalable, dynamically linked and provides all of the capabilities and real-time information needed to effectively manage the revenue recognition process. By using NetSuite’s Advanced Revenue Management, managers will be equipped with data, reports with audits and manage the business more effectively.
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