While some of these deal modifications may be harmless, others have the potential to disrupt your team’s ASC 606 revenue recognition if not properly identified and accounted for. They may also fall outside of your organization’s standard deal desk policy, and require additional review from your billing, legal and accounting departments. These factors can conspire together to create significant audit issues, even the need to restate key financials, if the proper controls are not in place.

Non-standard terms for customers - what do they look like?  

When times are good, customer budgets tend to follow suit. When economic downturns occur, priorities shift. Customers are required to be more stringent with their budgets, forcing purchasing departments to request more favorable terms for their teams. This can impact not only negotiations with new customers, but with current ones as well. 

Favorable terms can be both monetary and non-monetary. Monetary incentives given to customers may include reduced pricing, options to purchase additional goods, free periods of services, renewal caps or extended payment terms. Non-monetary incentives include items like termination for convenience clauses, refund rights and more stringent SLAs.

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‍Putting the right controls in place 

To ensure accurate financial reporting, most companies create standard revenue operation procedures to avoid inclusion of the potentially unfavorable terms discussed in the previous section. These procedures, however, can be circumvented by sales in the face of downward trends and the potential of missed quotas. While the procedures companies have in place may have worked in a healthy economic environment, these increased circumventions make it critical to reevaluate current processes and procedures so that revenue continues to be properly recognized. 

One process that many revenue operation teams have in place is Configure, Price, Quote (CPQ). CPQ helps create sales orders with pre-defined terms that can be subbed in and out of customer contracts. Even during good economic times, this process is already prone to flaws and redlining outside of the system. The likelihood of additional terms that are outside of the standard being included in a recessionary period is greatly increased. This is particularly true of terms that might impact revenue recognition. 

Another process many accounting teams employ is setting a materiality threshold, or a set deal size at which a contract is reviewed for non-standard terms. In a non-recessionary period, contracts under this threshold are unlikely to be given preferential terms. But during times of downturn, when pressure builds on companies to meet revenue expectations, these smaller deals are more likely to include terms that otherwise would not have been granted. Failing to account for favorable terms included in deals below the materiality threshold can have a significant impact on revenue recognition. 

‍Compliance and reporting ‍

Revenue is always a key component of the audit cycle and tends to be more closely scrutinized during recessionary periods. Per a recent Ernst & Young SEC Reporting Update, revenue recognition rated as the area with the third most SEC comment letters, accounting for approximately 20 percent of the total. This emphasis on accurate revenue reporting increases as companies face pressure to show improved financial metrics in the face of an uncertain economic outlook. 

Beyond the financial statements it’s also critical for organizations to properly transmit terms and data points between platform systems — ERPs, CRMs, billing and revenue models.  For instance, billing teams must match all payment schedules between POs, order forms and MSAs to ensure accuracy. Failing to account for discounts, billing frequency or other terms that impact billing can lead to incorrect invoices and disputed payments from customers. These disputes can take weeks, even months to correct, leading to cash management or forecasting issues and leaving the rest of the organization in a financial bind.

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Klarity is here to help 

The only way to combat financial uncertainty is through preparation. Klarity can help ensure that as your sales operations change, your revenue recognition processes stay compliant. Klarity leverages natural language processing to automatically review revenue documents while populating a custom ASC 606 checklist and ensuring all non-standard terms are identified and accounted for regardless of the size of the deal.  

Klarity can also strengthen your billing processes by comparing purchase orders to order forms to ensure data accuracy while creating checklists that can both detail your standard and non-standard billing terms. Our software then connects with your ERP, CRM, billing and revenue modules to push this clean data to all of your connected systems. 

Interested in learning more about how Klarity can help your organization stay on track no matter the economic environment? Book a demo today.