Evolution of revenue recognition and its impact on modern business models

How can you reimagine revenue recognition to benefit your company, clients, and people? Viraj Patel, CFO at Signeasy, discusses how businesses are ensuring flexibility in revenue recognition.

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"The advent of subscription licenses changed how we recognize revenue.”

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The software industry, which used to operate on a perpetual license model, gradually shifted towards subscription and usage-based models, largely facilitated by cloud technology. This change made revenue recognition less about outright sales and more about managing customer relationships and service delivery over time.

The subscription model has certainly gone on to simplify financial management in the enterprise world. But it has also introduced newer complexities in tracking and recognizing revenues, based on usage. Some of them include — complex contract arrangements, regulatory and compliance issues, integration of business models.

The onus is now on having transparent and reliable systems to manage these transactions.

Here are a few things to think about while trying to navigate modern revenue recognition

Advanced accounting systems — Utilizing softwares that can handle multi-element contracts and complex billing scenarios is crucial. These systems should automate processes and ensure accuracy in the allocation and recognition of revenue.
Regular training and upskilling — Ensuring that finance and accounting teams are up-to-date with the latest regulatory changes and technological advancements. Continuous education helps in adapting to new standards and understanding complex contracts better.
Clear documentation and transparency — Maintaining detailed documentation of contracts and performance obligations, along with transparent financial reporting that clarifies revenue recognition practices to stakeholders.
Aligning revenue recognition with business strategy — By focusing on the economic rationale behind transactions, companies can better manage revenue recognition, ensuring it reflects true business activities and customer engagements.

These are only a few. We believe there is far more importance to integrating financial practices with business objectives to manage several of your different revenue recognition complexities.

We spoke with Viraj Patel, CFO at Signeasy, while he spoke extensively on the importance of understanding a business's economic model for successful revenue recognition. Our discussion with him not only clarified the complexities of revenue recognition but also highlighted its evolution and its ongoing adaptation in the face of technological advancement.