Under ASC606, collaboration revenue is recognized as a company incurs costs to deliver the performance obligation. Companies need to determine the total costs to deliver a performance obligation at the start of the collaboration agreement and make updates as new information becomes available. Because the budget and long-range plan are critical for recognizing revenue, companies will need to ensure that the appropriate processes are in place around these assumptions. Here are four budget considerations in the revenue recognition process:
- Start with a template using your long-range plan: accurately predicting detailed costs beyond two years is nearly impossible. Instead, leverage your long-range plan assumptions for a template. See our blog post on long-range planning assumptions from 3rd party evidence, historical financials or your team's experience at prior companies.
- Document the budget process: the auditors will need to get comfortable with the company's budget process - who was involved, what program timeline assumptions were used, who reviewed the budget and who approved the final budget. Supporting documentation can include a kickoff agenda, meeting invites, management slide decks with the proposed budget and evidence of management/board approval of the final budget.
- Track material budget changes: budgets become outdated quickly as program timelines change. Companies should track material budget changes and document why the change was included or excluded from the revenue model. Companies should include what the item's impact on the current period revenue would be and the rationale for including or excluding from the model. The company should also assess the cumulative impact of all adjustments to revenue.
- Keep the full year spend constant: unless a company knows otherwise, companies should maintain the budgeted full year spend by increasing or decreasing the remaining period spend by the budget-to-actual difference. By Q3, the company can consider updating the following year's expected spend to the draft budget for the following year. This will capture timing changes between years.
The budget is critical for correct revenue recognition. If your company would like to see how intheBlk's revenue recognition tool can help with ASC606 revenue compliance, please reach out and schedule a demo today.