The primary challenges with revenue recognition are timing (when revenue is recorded) and measurement (how much revenue is recognized). Revenue should be recognized when a company transfers control of an asset (either a good or a service) to a customer. Specific challenges include managing changes during the course of the contract, such as bonuses or refunds, and adjusting for miscalculations as accounting standards and interpretations change.
With all of these critical aspects, revenue recognition impacts both reporting and valuation. For example, Uber's first-quarter revenue in 2017 was $3.4 billion under traditional GAAP accounting, but under the new regulations, it would have been $1.5 billion. Therefore, management must be aware of revenue timing variations and their impact on the valuation process.

Data Aggregation

: Collecting data from multiple systems such as ERP, CRM, GL, CPQ, A/R, and Billing to identify qualified contracts and calculate sales commissions is complex. Many firms rely on spreadsheets to combine data from these sources, leading to siloed data that hinders information flow and collaboration across departments.

Contract Modifications

: Contract modifications can be a challenge for accountants when calculating transaction price and standalone selling price (SSP). Adjustments such as upgrades, downgrades, extensions, or cancellations affect revenue accounting. The amount should be recognized as an increase or decrease in revenue in the period of the adjustment. Contract modifications require significant judgment and understanding of revenue recognition guidance. They are critical because they can alter the timing of previously recognized revenue, raising the question of whether to treat the change as a separate contract or to terminate the existing contract and create a new one.

Delivery-Based Revenue Recognition

: Since revenue is earned when actions such as acceptance, consumption, or distribution occur, timing is crucial. While costs and revenues are recognized as they occur, allowing for real-time reporting, most firms lack a systematic method for tracking these delivery-based events, preventing timely income distribution. These revenue events are tough to manage, and systems like spreadsheets, emails, CRM, and ERP often struggle to keep up.

Determining Standalone Selling Price (SSP)

: Estimating the standalone selling prices of performance obligations is an area of increasing complexity for software firms under ASC 606, particularly for term-based licenses and post-contract customer support (PCS). Revenue accountants can use methodologies like the Adjusted Market Approach, Expected Cost Plus a Margin Approach, and Residual Approach to identify SSP values. When contracts are modified, it becomes more complicated, requiring revenue reallocations and adding levels of effort for revenue accountants.

Cost to Obtain Contracts

: Contract-related expenses must be appropriately accounted for, including selling and marketing costs, bid and proposal costs, sales commissions, legal fees, rebates, and referral fees. These expenses will be amortized over time. Based on the revenue recognition principle, action must be taken to determine which items should be classified as Variable Consideration (VC) and which should be classified as expenditure. The company can estimate its variable consideration using historical data, current data, or reasonable estimates, and must use either the expected value approach or recognize the most likely amount, which takes significant time to evaluate.