24
NEW ACCOUNTING STANDARDS REQUIRE SUBSCRIPTION BUSINESSES TO ACT NOW By Jagan Reddy, Senior Vice President of RevPro at Zuora
With the new accounting standards weighing on
guidelines, which require recognizing an amount
companies in media and entertainment, consumer
companies that offer subscriptions as at least a
of revenue proportionate to the goods and
services, telecom and utilities, financial services,
portion of their businesses models, the first step
services actually transferred to customers during
health care, education, manufacturing, and
is to admit there’s a problem.
the reporting period. That isn’t easy.
even farming are all adding subscription-based
The Financial Accounting Standards Board and
The new accounting rules are considered by
the International Accounting Standards Board
many to be the biggest change to accounting
issued new standards—ASC 606 and IFRS 15
standards in the last 100 years. More than half the
respectively—in 2014 for recognizing revenue from
companies impacted, especially those bundling
contracts with customers. The goal was to simplify
subscription and non-subscription services—
and harmonize revenue recognition practices,
that is, those with a “mixed business model”—are
which currently result in inconsistent accounting
unprepared for it, according to PwC.
outputs for similar types of transactions. Beginning in fiscal 2018-2019, public and private companies of all sizes must adopt the new
Yet the number of companies with a mixed business model is growing every day. Established
services, which are already increasing complexity for these companies, even without considering the new standards. The new standards serve only to increase the burden on corporate finance departments, especially those managing these complex calculations with spreadsheets. Why are the new standards a challenge for subscription businesses? First, subscriptions tend to change frequently.
