Dear Colleague,
We were thankful for the opportunity to present at the 2018 Sage Intacct Advantage conference. We compared order entry to contract management systems, showing the capability of the latter to manage continuous workflow, subscription billing, and meet ASC 606 compliance requirements. Creating business value through automation, simplification, and options for enterprise-wide visibility.
Available for your consideration, and one-on-one review with our team.
Sincerely,
Seth Pomeroy, Partner, NDH
312.461.0505
seth@ndhcpa.com
2. 2
Session Objectives
At the end of this session you will be able to:
►Identify the differences between Order Entry and Contracts
►Explain the three sets of requirements that Contracts meets
►Complete a contract transaction cycle, including reporting
►Create a migration plan to move from Order Entry to Contracts
3. 3
Order Entry vs. Contracts
Not “bad” vs. “good.” That is, the following criteria doesn’t apply:
►Old vs. new
►Unsupported vs. supported
►Non-compliant vs. compliant
Potential migration to Contracts must be considered in the context
of business practices, ASC 606 compliance, and cost/value factors.
4. 4
Order Entry
Order Entry supports businesses with tools for rev management:
►Transaction workflows
►Revenue recognition
►Recurring transactions
►Automated renewals
Module successfully manages revenue, billing, invoicing, renewals,
actual and forecast reporting for each of these functions.
5. 5
Order Entry
For 606 purposes, OE will likely support businesses who manage:
►Ship & Bill Contracts – Standardized goods shipment, where
performance is coincident with benefit.
►Time & Materials Arrangements – Time of performance is
coincident with benefit of service.
►Simple Subscription Agreements – Delivery of independent
performance obligations.
Caveat: For 606, auditability is per contract, not invoice or customer!
Thus, contract dimension and reporting segmentation is absent.
6. 6
The World is Changing
While the benefits of Order Entry have carried Co.’s along way,
the world is changing; this is particularly the case for Co.’s with:
►Long-term contracts
►Multiple performance obligations
►Variable pricing and billing
►Licensing of IP, including software
These needs are heightened by 606, which forces a match between
performance and benefit (vs. historic receipt of assets and delivery).
7. 7
The World is Changing
To highlight the differences
between Order Entry and
Contracts, consider a
scenario for a business who
has the following line item
contract management needs:
Transaction Requirements
From Contracts with Customers
✓ Revenue Management
✓ Modifications
✓ Variable Billing Schedules
✓ Variable Pricing Models
✓ Renewal Management
External Requirement
✓ ASC 606 Compliance
8. 8
Limitations of OE in Meeting Scenario
To meet these needs, OE workflow must be managed through a
series of downstream transactions with the following limitations:
►Billing Sch. – Linear, with no capability to set line items to recur
►Pricing Sch. – Only accommodates tiered (quantity) thresholds
►Concurrent Exp. Amort. – Must be done in separate transaction
►Contract Metrics – No reporting for contract backlog, cashflow
►606 Compliance – Absent contract dimension for disclosures
9. 9
Limitations of OE in Meeting Scenario
To create a contract proxy in Order Entry, a chain of downstream
transactions outside an initiating document must be managed.
Sample Order Entry Workflow
Separate downstream
documents
Each doc. may have own rev., billing, and renewal template
Contract Proxy
Modification1:
Credit Memo
Initiating
Credit Memo
Initiating
Invoice
Modification1:
Invoice
Initiating
Order
Modification1:
Order
10. 10
Limitations of OE in Meeting Scenario
Results of contract proxy in Order Entry:
►More Workflow – Additional documents and conversion needs
to be managed for changes to contract scope or price.
►Necessity for Unit Tracking – Report must be maintained to
foot quantity on contract proxy to downstream cohorts.
►Separate Recurring Transactions – Separate documents must
be created for differentiated line item recurring billing schedules.
►Audit Complications – Tracing and sourcing of multiple down-
stream documents, without related contract identification.
11. 11
Enter Contracts
Alternatively, Contracts manages each line item for unique revenue,
billing, renewals, and allows modifications, inside a single document.
Sample Contract Transaction
…It also manages related expenses within the same Contract transaction:
Adventist Health System Contract
Item
Description
Billing
Method
Billing
Template
Billing
Start
Billing
End
Flat/Fixed
Amount
Revenue
Template
Revenue
Start
Revenue
End
Renewal
Notify
Data Manager Fixed Price Monthly 05/01/18 04/01/19 $86,000.00 ASC 606 05/01/18 04/30/19 ✓ (yes)
Data Mgr Full User Quantity Based 05/31/18 04/30/19 $20,500.00 ASC 606 05/01/18 04/30/19 ✓ (yes)
Data Mgr Implement Fixed Price One-Third 05/01/18 07/01/18 $25,500.00 ASC 606 07/01/18 07/31/18 None
Data Mgr EE User Quantity Based 07/31/18 04/30/19 $5,050.00 ASC 606 07/31/18 04/30/19 ✓ (yes)
Expense Item G/L Posting Date Amount Expense Template Expense Start Expense End
Sales Commissions 04/30/18 $39,900.00 ASC 606 05/01/18 04/30/19
12. 12
Enter Contracts
For differences between Order Entry and Contracts think outside vs.
inside the initiating transaction.
Order Entry Contracts
Initiating
Transaction
Initiating
Transaction
13. 13
Enter Contracts
For differences between Order Entry and Contracts think staged vs.
continuous workflow.
Order Entry Contracts Salesforce
Multiple Transactions Single Transaction Single Transaction
The Contract object is both dynamic for the parameters of the
original contract, and dynamic for modifications to the contract.
14. 14
Enter Contracts
Contracts meets three sets of broad requirements:
Requirements Met by Contracts Module
Contract Management Subscription-Based Billing ASC 606 Compliance
•Continuous workflow
•Practical accounting
•Sales force integration
•Non-linear pricing
•Non-linear billing
•Usage metering
•Recurring invoicing
•Renewal management
•Contract identification*
•Interdependent items**
•Allocation/reallocation
•Transition from ASC 605
•Concurrent exp. mgm.’t
*Using Contract dimension
**Using multi-element arrangements (MEA), or bundling
15. 15
Tipping Point for Contracts
Disclosures
Invoices
Reports
OutputsInputs Processing
What factors contribute to a tipping point in favor of Contracts?
Consider the complexity of managing each in your contract cycle.
Contract Management Cycle
16. 16
Tipping Point for Contracts – Inputs
For contracts that require pricing, billing, or other updates.
►Modifications – Changes in scope or price (or both), require
updates to contract, termination, or combining contracts.
►Pricing – Variable according to tier, range, or flat fee, and
recurring, non-recurring, cumulative, non-cumulative count.
►Billing – Dynamic according to interval, or percentage. Thus,
Contracts allows for building non-linear billing schedules.
►Discounting – Allowances for price that affect the MEA (bundle)
calculation; distributing a line item discount across an MEA.
17. 17
Tipping Point for Contracts – Processing
For contracts that require allocation, posting, or renewal complexity.
►Allocations & Reallocations for MEA – Meeting 606 standards
for interdependent items, and rev rec based on actual to FV.
►Line Item Posting in Advance & Arrears – Flexibility to separate
the contract line start date (billing), and the G/L posting date.
►Cancel, Hold, Resume & Deliver – Ability to alter the automatic
line item posting sch. of contract revenue, expense, and billing.
►Contract & Line Item Renewals – Delivery of separate customer
renewal notices, with specific days in advance of a renewal.
18. 18
Tipping Point for Contracts – Invoices
For contracts that require unified or line item invoicing.
►Aggregated Billing
►Detailed Billing
Incorporate all
customer facing
transactions into a
single unified invoice
…or, bill select line
items on the basis of
differentiated non-
linear bill templates
19. 19
Tipping Point for Contracts – Reports
For contracts that require detailed analysis and visibility.
►Segments Financial and Ad Hoc reports per Contract dimension
►Tracks differences in legacy vs. 606 methods for disclosure
►Automates process of tracking assets, liabilities, revenue, CF
▪ Capture posting flow between: Unbilled Billed Paid*
►Supports CFO visibility
▪ Assess financial position, performance based on contract metrics
▪ Understand, track, and analyze contract backlog
▪ Redefine def rev away from contract value – revenue rec.
*In both domestic and foreign currency units (FCUs)
20. 20
Tipping Point for Contracts – Reports
Spotlight on contract analysis for backlog and efficiency metrics.
Contract Metrics, Definitions & Attributes
Contract Metric Definition Where Normal Balance
Unbilled Accounts Receivable Contracted Backlog Not Billed Face of BS* Debit
Unbilled Deferred Revenue Contracted Backlog Not Earned Face of BS* Credit
Unbilled Sales Revenue Amounts Earned Not Billed Face of P&L* Credit
Billed Accounts Receivable Amounts Billed Not Paid Face of BS Debit
Billed Deferred Revenue Amounts Billed Not Earned Face of BS Credit
Billed Sales Revenue Revenue Earned Not Paid Face of P&L Credit
Paid Deferred Revenue Amounts Billed and Paid, Not Earned Face of BS Credit
Paid Sales Revenue Revenue Earned and Paid Face of P&L Credit
*Either all three are presented on face of financial statements or posted to non-GAAP GL accounts
21. 21
Tipping Point for Contracts – Disclosures
For contracts that require disclosures per ASC 606.
►How do I architect SI to provide for disclosure requirements?
Capture data related to contracts according to…
specified financial (GL)
account balances
Account No Account Description
20000 A/R: Trade
50900 Deferred Rev - Billed
50900-01 Deferred Rev - Unbilled
99999-01 Unbilled AR
separate books
(605 vs. 606)*
segments like product line,
service type, geo., etc.
*Aids in transition to 606, and comparative requirements of 606 vs. 605
22. 22
Tipping Point for Contracts – Disclosures
For contracts that require disclosures per ASC 606.
Select Disclosure Schedules and Practical Expedients
Disclosure
Schedule
Schedule
Requirement
Practical
Expedient*
Disaggregation of revenue
from contracts
Reconciliation of contract rev rec according to product
line, market vertical, geography, and timing.
Yes
Opening, closing balances
of contract assets, liabilities
Presentation of contract assets and liabilities with
opening, closing, and net changes over multi-year period.
None
Revenue recognized from
past performance
Reconciliation of “out of period” adjustments due to a
change in estimates of contract values.
Yes
Transaction price allocated
to remaining POs
Presentation of contract backlog with time schedule for
fulfillment and recognition of remaining POs.
Yes
*For non-public entities
23. 23
Business Value of Contracts
Contracts’ users realize business value from the following:
►Reduce Time & Errors – By administering contract changes to a
single source document, time, and potential errors, are reduced.
►Align Resources – From contract related forecasting, including
backlog reporting, Co.’s can better align resources for fulfillment.
►Expedite Billing – Through centralized management of perfor-
mance obligations, and fulfillment, Co.’s expedite their billing.
►Streamline Operations – All facets of operations from sales,
F&A, and management, share a single view of their contracts.
24. 24
Contracts Overview Process
Managing two contract arrangements using Contracts.
►Two scenarios: unrelated, and related performance obligations:
ScenarioA:AllPOsDistinct
Independent Items
PO1: Software License
Software functional without
updates or tech. support.
PO2: Installation Service
Routine; does not signifi-
cantly affect customer’s use.
PO3: Software Updates
Customers can benefit from
updates together w/license.
PO4: Technical Support
Software can be used
without technical support.
ScenarioB:TwoPOsCombined
Interdependent Items
PO1: Software License with
Customized Installation
A related set of POs bundled
and interdependent in
nature (high degree of
customization required).
PO2: Software Updates
Customers can benefit from
updates together w/license.
PO3: Technical Support
Software can be used
without technical support.
A multi-
element
arrangement
25. 25
How to Get There
A confluence of factors will contribute to the need to change. Once
prepared to move to Contracts, create a plan that considers:
►Setup
►Configuration
►Data
►Processing
►Reporting
26. Setup requires creating two sets of inherited/descendent records:
Contract Setup: Permanent & Temporary Inherited Records
Use Case General Ledger Order Entry Cash Management
Permanent – For
prospective con-
tracts invoicing,
metrics, reporting
G/L Accounts: Contracts
UD Books: 605, 606
UD Journals: Rev., Exp
AGD: New acc’t. summary
Transaction Definition: Pro-
spective contracts invoicing
Document Numbering: Pro-
spective contracts invoicing
N/A
Temporary – For
historic contracts
invoicing,
metrics, reporting
G/L Accounts: Cash ac-
counts for historic receipts
UD Journals: Journals for
reversal of historic 605, 606
Transaction Definition: His-
toric contracts invoicing
Document Numbering: His-
toric contracts invoicing
Bank Accounts: Bank
accounts for historic receipts
Initial – Base
records in the
system prior to
Contracts convert.
G/L Accounts
Books
Journals
Acc’t. Group Definitions
Transaction Definition
Document Numbering
Bank Accounts
26
How to Get There – Setup
27. 27
How to Get There – Configuration
Configuration must be administered for each of the following:
►Transaction Definitions – Need to configure both:
▪ Temporary Invoice TD – For historic contracts invoicing
▪ Permanent Invoice TD – For prospective contracts invoicing
►Contracts Module Configuration – Update for permanent in-
voice transaction definition after historic contracts are invoiced.
►Other SI Modules – Consider updates to following modules:
▪ Global Consolidations – Update to include new 605, 606 books
▪ Digital Board Book – Filter activity out for transition reporting
28. 28
How to Get There – Data
In order to correctly state initial Contract account balances, think
“active contracts” or all historic contracts, but not stub contracts.
Prior to Go Live After Go Live
Active Contracts
Contracts Go Live
Prior to Go Live After Go Live
All Historic Contracts
Contracts Go Live
After Go Live
Stub Contracts
Contracts Go Live
Migrate contracts that
“bookend” go live (start
before, end after)
Migrate all contracts,
regardless if ended
prior to go live
Not an option to
migrate remaining
portion of contracts!
29. 29
How to Get There – Processing
For active or all historic contracts a general outline of processing:
►Process – Each of the following processes are run:
▪ Invoicing
▪ Revenue Recognition
▪ Record Payments
►Reversal Entries – Entries to backout revenue and cash tran-
sactions for active or historic contract amounts must be posted.
►Additional G/L Posting – Final G/L transactions are posted:
▪ Unbilled Add-Back – Post entries to add-back unbilled revenue
▪ Paid Deferred Revenue Reclass – Reclassed from historic
30. 30
How to Get There – Reporting
Contracts report library can be uploaded or created; basics include:
►Billing Forecast – Time series report
►Revenue Forecast – Time series report
►Renewal Forecast – Time series report
►Recurring Forecast – Time series report
►Comparative Books Analysis – 605 vs. 606 results
►Contract Metrics Report – Unbilled, billed, and paid