Revenue recognition rules can be daunting, especially for companies with complex product offerings that include add-ons, such as software upgrades or technical support delivered over time. Now, some companies are looking to accounting technology for help.
While accounting standards setters have tried to simplify revenue recognition rules in such situations recently, they've left more room for judgment, and that means more manual effort to back up estimates. The added work is inspiring systems experts to look for ways to automate.
Until last year, in order to recognize revenue on the upfront deliverable, like an initial product that is sold, a company had to meet strict criteria related to the selling price for all the other deliverables that were to follow, like technical support or software updates. If it couldn't meet that criteria, revenue recognition had to be delayed until the company fulfilled all of its obligations related to that particular sale.
The accounting rules changed in early 2011 when Accounting Standards Update No. 2009-13: Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements took effect, relaxing the criteria to allow companies to include more estimates on the price of after-sale deliverables that it doesn't ordinarily price separately. That gave companies the ability to recognize revenue earlier on elements of a sale that previously had to be deferred. “The end result, everyone realized, was that it gave you a better answer as to the timing of revenue recognition in certain instances, but it led to a lot of manual effort being expended,” says Brian O'Donnell, senior director of finance for technology company Sonus Networks.
By manual effort, of course, he means spreadsheets. To document each multiple-deliverable arrangement, the pricing associated with the various elements of each arrangement, and the recognition of revenue as each element is delivered, spreadsheets became a necessary evil—despite the inherent difficulty of establishing internal control over spreadsheets for Sarbanes-Oxley purposes. “There's a lot of spreadsheet use in this area, and it can be prone to error,” says Brian Marshall, a partner in the accounting standards group at McGladrey & Pullen. “I've seen some giant spreadsheets used in determining each sale.”
O'Donnell knows well the pitfalls of relying on spreadsheets for such heavy data management, prompting him to search for a software tool that would automate more of the process. He investigated a few enterprise resource systems that showed potential, but ultimately, they weren't fully geared to the new accounting guidance. He considered customizing the company's existing Oracle system, but saw some limitations on the core functionality that would make it impracticable.
“I think auditors should be pleased with this challenge, but ... auditors really need to know that management has proper controls to assure it works.”
—Doug Reynolds,
Partner,
Grant Thornton
Eventually, O'Donnell connected with an entrepreneurial start-up, Leeyo Software, which formed because its founders had an idea specifically to address this accounting conundrum. Patrick Glenn, vice president at Leeyo, says the company was formed when an IT expert who understood ERP systems and a former Big 4 accountant with a focus on revenue recognition came up with a plan. “We realized if we break it down to what's required in the revenue recognition rules, we can automate the steps,” he says.
Improved Efficiency
The software solution performs the calculations and analysis necessary to arrive at selling prices for each of the elements of multiple-deliverables, or works with historical data companies have already produced, says Glenn. The tool analyzes and links purchase orders in a way that flags multiple-element arrangements, applies the relevant pricing model to the elements of the arrangement, and identifies release events that enable revenue to be recognized on each element. The tool also enables a certain amount of manual manipulation and a review and approval process, he says, to facilitate the one-off circumstances that aren't reflected in the automated process. “The powerful thing here is it integrates to the ERP system so accountants don't have to use something outside the designated financial system to do the calculations, which is where you have the risk of mistakes that can cause restatements,” he says.
ABOUT REVPRO
Below is some detailed information on RevPro, offered by Leeyo Software:
Leeyo Software, a provider of software for revenue recognition automation and management, today announced that A10 Networks, a global leader in Application Networking, recently implemented RevPro, Leeyo's industry-leading revenue automation solution. A10's flagship AX Series platforms deliver solutions for Application Delivery/Server Load Balancing, IPv6 Migration and Cloud Computing & Virtualization. A10 was recently named both one of the fastest growing private companies in North America and Silicon Valley, and one of the “Top Work Places” in the San Francisco Bay Area.
Companies who, like A10 Networks, employ multiple element sales arrangements face particular challenges managing their revenue recognition processes. New and changing financial guidance has increased demands on revenue recognition teams, making processes more complex and increasing potential penalties for errors in revenue recognition, allocation and reporting. And, since the major ERP systems in use around the world do not include the kind of robust revenue cycle management capabilities needed to meet these accounting and regulatory requirements, many companies find they are forced to create and continually update very large, customized, stand-alone spreadsheets to help track and allocate revenue.
In early 2012, Stuart Mar, A10 Networks' Corporate Controller, led the search that resulted in the selection of RevPro. A10's choice was made based on a number of factors, including the need to reduce the time needed to close the financial period, ensure compliance with the latest guidance, achieve greater accuracy in revenue management, and provide executives even better tools for revenue forecasting and reporting.
“Holding our revenue data within a single system and calculating revenue consistently outside of a spreadsheet were extremely important to us,” Stuart Mar said recently. “Housing our revenue information in one place will assist us to forecast and slice-and-dice our data more thoroughly than we ever could before RevPro …”
RevPro automates and manages every process facing a revenue team – seamlessly integrating with the quote-to-cash processes of any ERP system to deliver unparalleled visibility, functionality and configurability to the revenue recognition and reporting process. With RevPro, users:
Automate all key revenue recognition requirements
Simplify all aspects of revenue and COGS management
Monitor revenue and all related activities on a real-time basis
Improve accuracy of revenue forecasting
Accelerate financial period-end close and revenue reporting cycles
Stay current and in compliance with the latest revenue guidance
Eliminate time-consuming and error-prone manual systems
Deploy on premise or in the cloud
Source: LeeyoSoftware.
O'Donnell said Sonus is in the process of ramping up the tool, but not without validating that the output is reliable. After significant time developing it to meet the company's needs, Sonus began using the tool in the third quarter of this year while also continuing with its manual calculations to compare the results. “We'll run it parallel for a quarter so we can [ensure] that it's exactly like it would have been under the other method,” he says. “Eventually we will get more comfortable with it and wean it down to just the material transactions. If the auditors are comfortable with it, we will go with it in the first quarter.”
So far, O'Donnell says the company can already see the efficiency. Under the manual method, Sonus spends two to three days performing the exercise, producing seven to eight pivot tables inside spreadsheets to capture and analyze the data it wants to see. “With this new system that will take a couple of hours,” he says.
Doug Reynolds, a partner in the national professional standards group at Grant Thornton, says he's interested to see how a software tool can automate such a judgment-driven accounting requirement. “The judgment of how to apply accounting rules is never going to be fully automated or black-boxed,” he says. “Maybe the data gathering and the sorting can be [automated]—the parameters, fences, and boundaries. If they're appropriately defined in the software application, it creates benefits for management and auditors.” Where accounting rules require human decisions, however, Reynolds is circumspect. “I'm not sure how a computer can know that,” he says.
As companies explore such software tools to automate complicated areas of accounting, they should expect auditors to roll up their sleeves, Reynolds says. “I think auditors should be pleased with this challenge, but they really do have the challenge and the responsibility to properly dig into that system and understand how it works and how it produces its reports,” he says. “Auditors really need to know that management has proper controls to assure it works.”
The rules for revenue recognition are still changing too, giving companies more reason for caution, says Bob Scarborough, CEO of solutions provider Tensoft. The Financial Accounting Standards Board is working with the International Accounting Standards Board to rewrite the entire rule book on revenue recognition, but the timing for a new standard is still uncertain. “Companies might debate what to do until a new system is in place,” he says. “It's hard to commit development time to something that's still evolving.
No comments yet