ASC606 defines a contract as an agreement with a customer. It is an enforceable contract that’s been approved and it’s probable that you’re going to collect the fees from the customer. There is specific accounting guidance on that, and you have to go through it when you’re thinking about defining the contract in Tensoft. Tensoft doesn’t look at these as criteria and creates it assuming you’ve gone through this exercise.
So, you define the contract with the customer. The contract theoretically can be multiple invoices. It can be one for one with a revenue agreement, but that’s not always the case. It could be the whole entire contract with the customer and all the invoices and deliverables on that entire contract.
It could be multiple contracts and that could mean a simple amendment after you’ve done the first contract. This might be considered as a modification to the contract. Alternatively, several contracts negotiated at the same time might be considered as one deliverable. So, it really takes more of an accounting lens to determine what the actual revenue agreement is in total. Once you’ve defined the contract, you look at the total for the entire contract, all deliverables, and you take that total and allocate it amongst the deliverables, called as a performance obligation in ASC606.
How to get the contract into Tensoft Revenue Lens
Once you define the contract, you have to get it into the system. There are a couple of ways to get it into the system. It can come in through an API or through an Excel upload or entered directly via the web page. Most customers do the Excel upload, but if you’ve got more volume, more users and more complexity, doing an API might be the best approach. If it’s very low volume and you’re adding one or two contracts a month, entering it in the screen is easier than uploading it in the spreadsheet. Once you have the contract in the system, then you have to turn it into a revenue agreement.
Stay tuned for our next blog post to learn how to turn a contract into a revenue agreement.