From the September 2010 issue of Treasury & Risk magazine

Sorting Out Sales


Last September, regulators issued new revenue recognition rules that allow companies to book product and service sales separately--a boost for the balance sheet, but a big accounting hassle. Prior to the new rules, effective 1Q of fiscal 2011, if a company sold a product bundled with a service contract, the revenue was allocated over the length of the service contract. In fact, even companies that offered services for free still had to book revenue from the sale as if it came in over the course of the contract.

For example, because Apple provides free upgrades for its iPhone and Apple TV, it had to recognize the revenue over each product's estimated lifespan, Apple said in a January 10-K/A filing, resulting in up to $17.3 billion in deferred revenue. As an early adopter of the new rules, Apple filed amended returns that hiked its net sales for the years 2007 through 2009 by a total of $11.9 billion.

Apple's accounting is relatively straightforward. What happens when a company's prices vary greatly depending on product and customer, or are negotiated on a case-by-case basis? To comply with the new rules, companies need to set standard policies for allocating revenue.

Many will probably pull out their Excel spreadsheets, says Ron Gill, CFO at accounting software vendor NetSuite, adding that 10 years ago, his company used spreadsheets for this purpose. "Our Excel was over 6 million cells, just to have the revenue-recognition schedule," Gill says.

Now, NetSuite is eating its own dog food, using its new NetSuite Advanced Revenue Recognition module, released in June. Companies that make just a few big sales a year can figure out a revenue recognition schedule for each sale manually, Gill says. "But if you do one or two thousand sales a month, you need software that can do the analysis on an order-by-order basis."

The NetSuite module does that analysis in real time by applying a pre-defined revenue recognition schedule to each transaction. Installation doesn't take long but setting up the revenue recognition schedule can take months, Gill says.

NetSuite isn't the only one moving into this space. In May, AFS Financial Solutions released a new edition of Softrax Enterprise, its billing and revenue recognition platform, that supports the new revenue recognition models.

Softrax is a stand-alone product focused on revenue recognition, says Ray Wang, an analyst at research firm Altimeter Group. "But you can use their software on top of something else."

NetSuite is the first full accounting suite to come out with a tool for this, Wang adds. "But other companies will probably deliver that over the course of the year, because the rules start in 2011."

Comments