Category: financial reporting

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Revenue Recognition and closing the reporting GAAP

Revenue Recognition and closing the reporting GAAP

chartOne company earns what the other company spends.  This is business, and it seems like it would be pretty straightforward, accounting for the money coming in and the money going out.  But it is really not that simple when it comes to business finances and accounting for revenue.  With investor pressure to improve share prices and market pressures forcing greater competition, businesses have always sought out ways to make the performance look as good as possible – on paper even if not in reality.  It is this requirement to make the business look better than it may actually be that drives “innovation” in financial reporting, and encourages some companies to use whatever rules are available to mislead investors or paint a rosy picture for stakeholders.  When the balance is lost and financial reporting standards become so oblique as to allow regular and gross misrepresentation, it is time to change the standards.

There are numerous instances of fraud and scandal reported from the finance departments of big businesses, but instances of improper or misleading revenue recognition can happen in even the smallest of companies, and not necessarily on purpose.  It is important to understand that properly and accurately reporting business revenue and earnings isn’t done just for investor satisfaction, it is an essential part of describing business performance that any owner or manager must be able to rely on.

Generally Accepted Accounting Principles (GAAP) provide investors and business owners with some consistency in the financial statements they use to analyze company performance, but only minimally.  This is partly due to the fact that GAAP is based not only on some standards established by policy boards (the authoritative standards) but also on “generally accepted” standards, which are often not really standards at all but simply past practice that was found to be accepted.  Especially in the global economy where fewer businesses operate solely within traditional territorial boundaries – and where accepted reporting methods vary widely – having a single financial reporting standard has become more important than ever.

Make it so, Number One.

Now there are new rules from FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) which provide clear and detailed guidance for how businesses recognize revenues.  These rules are based on a consistently applied set of principles, no matter what sort of business is involved and regardless of where the business is located.

A focus of the new rules of revenue recognition centers on customer contracts, delving into the details of how earnings from those agreements should be recorded. Consider that many businesses combine multiple products and services into a single agreement, even though there may be several deliverables or milestones included.  This method of booking customer contracts allowed companies to report revenues they were not yet due as part of a total agreement, often resulting with inflated earnings reports.   Stakeholders would perceive that the company had reached one earning threshold, but the reality was something quite different and performance expectations were unmet.

“FASB and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers. The new guidance is a major achievement in the Boards’ joint efforts to improve this important area of financial reporting.”  http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027207987

The new rules force an additional level of discussion, including a full set of disclosure requirements that will provide more information about contracts with customers.  Businesses must identify each promised deliverable and attached revenue or earning component, which helps to better understand how the revenue may be earned (and recognized) as the business performs on the various obligations to the customer.

Just take a look at some big ERP companies and the lawsuits generated from problems and failures in delivery – problems that might have been more clearly identified to investors and stakeholders if the tie between product sales and services to be performed were more clearly described.  In many cases, these situations exemplify the revenue recognition reporting problem, where large customer contracts and license sales were fully booked and recognized even though implementation services milestones attached to those license sales remained undelivered.

“2010 – JDA Software (i2) – Dillard’s, Inc.:  Dillard’s had alleged i2 failed to meet obligations regarding two software-license agreements for which the department-store operator had paid $8 million.” http://www.zdnet.com/blog/projectfailures/erp-train-wrecks-failures-and-lawsuits/12055

For private companies, reporting periods beginning after December 15, 2017 must follow the new guidance.  It may seem like a long period of time – from the decision to apply the new rules to the effective date – but the number of businesses the new rules will impact is large.  The FASB made a decision to delay the effective date because of the broad scope of organizations affected and “the potentially significant effect that a change in revenue recognition has on other financial statement line items.”

Business owners and their accounting professionals need to make sure that financial systems and processes are up to the task and can track and produce the detailed reporting these new rules require. For investors and analysts, the new reporting rules and detailed information they generate will go a long way towards minimizing the impact of innovative revenue reporting practices, and will hopefully bring a new level of believability and usefulness to business financial reports.

Make Sense?

J

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Hosted QuickBooks and Office 365 a Complicated Technical and Licensing Model (until now)

When Intuit acknowledged the ability for companies to host QuickBooks desktop editions, service providers were presented with the opportunity to offer hosting for the QuickBooks desktop editions from their host servers and infrastructure.  The benefits of using QuickBooks desktop products in a hosted environment are many, including the introduction of mobility, disaster recovery, remote access and other things now associated with cloud computing models.  But the evolution of application delivery technologies and software as subscription service models is challenging the “traditional” approaches used to deliver hosted QuickBooks services.  One of the greatest challenges facing these QuickBooks hosts is the changing landscape of Microsoft Office licensing, because QuickBooks is just no fun without Microsoft Office.

While the QuickBooks application handles a variety of essential business functions, it relies upon other software to accomplish certain important tasks, such as reporting.  Most of the QuickBooks reports can be exported to Excel worksheets, allowing users to refine and manipulate the document outside of QB;   QuickBooks Enterprise Edition uses Excel to handle consolidated reporting.  QuickBooks uses Word for writing customer letters, and Outlook as a tool to email invoices.  There is a lot of functionality in QuickBooks that relies on the MS Office products, so it is pretty typical for a QuickBooks user to also be an Office apps user.  In order for the applications to work together properly, they need to be installed on the same computer.  If QuickBooks is hosted “in the cloud” with a hosting provider, and Office 365 applications are installed on the local PC, the two applications don’t “talk”, and the integration isn’t seamless or even functional.

image credit: Microsoft Corp | Microsoft.com

When a small business subscribes to Office 365 (or Microsoft 365 now), they are provided with rights to install their Office applications on their devices (depending on the subscription level).  While this enables users to have Office apps on multiple computers they use at different times, it does not provide authorization for the application to be installed on a hosted server where it is accessed by those users.

What this means is that customers who purchase Office 365/Microsoft 365 subscriptions to get their MS Office productivity applications can’t generally use those licenses in a hosted environment.

But there is an answer for small businesses who want remote and mobile access to their QuickBooks desktop editions and who also have Office 365 application licenses. The answer is to deploy QuickBooks desktop on a Microsoft Azure cloud server. This solution allows users to run their QuickBooks software as well as their qualifying Microsoft Office (M365 Apps for Enterprise) licenses on the Azure cloud server. The cloud platform enables the anytime/anywhere access desired and keeps all the applications and data secure and available for those who need access.

There is almost never just one way to solve a problem, and the cloud is introducing new options – and challenges – at all levels.  As application licensing and delivery models continue to change, solution providers will come to recognize the value they provide in bringing the right selection of services and technology models together to benefit not just their customers, but their own revenue streams and profit potential.

Joanie Mann Bunny FeetMake Sense?

J

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Being Proactive, Not Reactive – Accountants Need to Increase the Speed of Service Delivery

Being Proactive, Not Reactive – Accountants Need to Increase the Speed of Service Delivery

infoTechnology models are changing dramatically, with cloud services and mobile computing being the focus of the IT community and the customers they serve, and those technology changes are driving equally dramatic changes in how businesses and the accounting professionals who support them work together.

As the cloud enables an “anytime, anywhere” model for access to business applications and information, it is also driving accounting professionals to embrace those solutions in order to meet the demands of the business client  who wants their information anytime, anywhere… accurate and up-to-date.  For most accounting professionals, this means being more proactive in working with the client rather than taking the traditionally reactive, after-the-fact approach to providing service.  More frequently, accounting professionals will be judged by their prospective (and current) clients as to their ability to meet the demands of these savvy clients who know that having accurate real time information is critical to managing a business.

Cash management is one of the biggest challenges for a business owner, and this is an area where the accountant or bookkeeper is an essential player, making sure that bank accounts are reconciled frequently and reporting accurately on outstanding receivables and payables.  Business owners need to know where they stand financially, yet many accounting professionals only provide reconciliation and reporting at period ends.  The result is often a client who watches the bank balance and works from that, not realizing that there were outstanding checks or undeposited funds waiting to clear.  Clearly, this owner is not working from current and accurate information, and they will eventually realize it if they haven’t already.

The cloud is increasing the speed of business at all levels, and accounting professionals must also increase their speed of service delivery in order to retain relevance in the changing market.  While there will be hold-outs and businesses that elect to take the more traditional approaches, those clients will start to become fewer and the opportunities they represent more limited in scope.

For a little while, accounting professionals may rely upon traditional approaches to client service delivery, and continue with their position as the last person to know what’s going on in the client business.  But only for a little while.

Make Sense?

J

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The Cloud Makes Time Travel Possible: Hosted applications can deliver immediate business benefits

The Cloud Makes Time Travel Possible: Hosted applications can deliver immediate business benefits

In an article published on CIO.com, author Kevin Fogarty describes how moving to a cloud IT approach proved to be a highly beneficial and strategic decision for an on-site diesel fuel distributor.  The focus of the article was on how existing software and processes were enabled by centralizing them in a cloud hosting environment, and not by replacing them with new subscription-based applications.

For many businesses, this is the secret that nobody’s talking about: you can have the benefits of “the cloud” without having to radically change everything you have and everything you do.  Retention of knowledge assets is critical to business continuity, and moving existing systems and process to platforms where they can be leveraged to greater business advantage is a way to do that.  With centralization of systems and services, information can be processed far more efficiently than before, eliminating delays and improving cash flows dramatically.  Time is money, and the cloud helps businesses spend less of both.

“A lot of the invoices have to go out every day by certain times, so third-party accounting companies can do their thing for the fleet owners.” The setup sounds like a classic for any overhyped business-process-automation system, but Daniel Abrams and other Diesel Direct managers weren’t interested in managing their business using sophisticated business systems that require more motivation, money and technical staff than Abrams was willing to use or pay for.”

The initial benefit is being able to use the products already in place, just from a more secure and redundant location, but when you begin to consider the positive ramifications of reducing the time between delivery and invoicing, billing and payment receipt, or customer demand and product supply, you rapidly realize that the cloud means much more to the business than just another way to run software.

“Those changes save Diesel Direct both money and time. Rather than running reports and invoices all night Tuesdays, for example, the additional capacity lets the company run those resource-intensive processes during the day rather than overnight. That gets critical work done faster and more accurately than a process left to complete itself unattended.”

In short, the cloud makes time travel possible, because the result is available almost immediately upon completion of the task.  It’s kind of like getting your expense check as you walk off the plane in your home town, because you reported all your expenses in real time as they were incurred (snap a picture of the receipt at the bar, and like that).

Yet most business owners and IT managers for small and mid-sized businesses are being told that the cloud is best applied when innovation is required, and should be reserved for NEW things, and not thought of as a way to improve the status quo with existing or legacy architecture.

“It’s not unusual for mid-sized companies to come to depend on cloud services, according to James Staten, vice president and principal analyst for Forrester’s Infrastructure and Operations practice.

It is unusual for them to be more concerned with infrastructure than with applications, he says.”

With affordable and secure application hosting services being widely available for small and medium businesses, owners and managers no longer have to look to new solutions just to enable mobility, remote access, and a fundamentally stronger and better-managed system.  Legacy applications can be hosted and delivered, extending their useful life as well as the value of the development and intellectual property, and giving customers capabilities not readily available with local implementations.

“Diesel Direct can’t accomplish anything if its minimal IT infrastructure is offline for any length of time.

Abrams, worried about storms taking out his business as well as the power, didn’t know what technical solution he wanted until Callow “described for him what an enterprise infrastructure looked like,” Callow says.

“They didn’t need one, didn’t want one, but they did want the security, the reliability of a redundant IT infrastructure,” he says. “The most effective way to get that at the lowest possible cost is the cloud.”

Among the greatest benefits of outsourcing application delivery to a cloud hosting provider are the increased monitoring and security, application of best practices, and high levels of system fault tolerance and recovery capabilities offered.  While business subscribers focus on features and functionality of the application, the real focus for hosting providers is the platform – and the management and security of it.  This behind the scenes work offers tremendous business benefit to subscribing customers, but is often not the focus when discussing overall benefits of a cloud computing approach in the context of Software-as-a-Service, which is where many smbs focus their investigations.  As an alternative, businesses who may seek to adopt hosted solutions for their existing applications and software frequently do so for reasons of security and redundancy, not recognizing that their business processes may likely experience significant improvement, as well.

“Enterprises might have the luxury of making strategic decisions about cloud or other technology,” Golden says. “In mid-sized companies things are very tactical. No cloud evangelist is going around the refueling industry saying ‘there are ways to solve this problem.’ “Companies make tactical decisions to solve their own problems and, five or 10 years later, we’ll all wake up and realize we’ve changed the way we do everything,” Golden says.”

Make Sense?

J

The company in the article could be just like yours.  You don’t have to adopt new software and systems to benefit from the cloud.  How could your business change, if you could remove the problems of time and distance?

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One-Write System Revolutionizes Accounting

One-Write System Revolutionizes Accounting

These guys had the right idea, they just didn’t have the cloud.

It’s amazing how much time and energy continues to be spent on duplicate data entry and re-keying information generated by one system into another.  Human-based data entry is prone to errors, takes time, and carries with it the burdens of employee costs and resources.  It is a problem that businesses of all types have battled for years, but new solutions are available, and many of them are enabled via great software, the Internet and the cloud.  You see, the cloud – which is the term popularly applied to all of the interconnected “things” on the Internet – creates the path of communication which allows data to be passed to a variety of applications or systems, allowing for seamless collection, integration, and aggregation of business data.

EDI (electronic data interchange) standards have existed for quite some time, and in recent years these methods have expanded to include a variety of platforms and more open “standards-based” approaches.  Even in the small business world, business owners using traditionally limited software products are now able to enjoy sophisticated extension and integration of their applications, largely enabled and facilitated by cloud technologies and software-as-a-service offerings.

To provide a really simple example of the problem: when an individual writes a check, that check must be recorded in a variety of places and for several purposes – to record the expense and to record the reduction of funds in the account, etc.  When a product is sold to a customer, inventory is relieved, sales are increased, accounts receivable or cash is increased, costs of goods sold are experienced, and customer activity is captured.  All of this information must be recorded and the activity accounted for throughout the financial and operational systems, and can represent a tremendous burden if not automated.

One of my clients, to provide an example, sells computer parts through an ecommerce website.  Orders from this fancy website are emailed to their order operators, who then turn around and re-key the orders into the ERP system.  Because of the number of orders to enter on a regular basis, there are two different operators working in the department – both of them responsible for making sure website orders make it into the “real” operational system.

By implementing a single software solution which could take automatic transaction file exports from the ecommerce system, format them and import them into the ERP system, the company was able to reduce personnel costs, improve accuracy and timeliness of data entry, and increase customer satisfaction. If we look closely at the need to use different pieces of business information in different ways, we begin to recognize the size and complexity of the problem and the true value of these integration solutions and automation tools.

Automation takes technology, but technology doesn’t have to be complicated.  A better pencil is technology, and we figured that one out pretty well.

OK, maybe our concept of what is complicated has changed a little bit.  Remember the One-Write checkbook systems?  It was pretty cool, and truly innovative.  You put the check on a little pegboard thingy, and when you wrote the check, the check register was “automagically” filled out for you.  Amazing.  Sounds pretty simple, but take a look at the description of this innovative, highly technical device, and tell me that it wasn’t at least a little intimidating at the time. But we got used to it, didn’t we?  Maybe even liked it?

Make Sense?

J

Accountant’s Apparatus 

RECORD KEEPING SYSTEM AND METHOD EMPLOYING PLURAL FORMS AND CO-OPERATING REUSABLE ADHESIVE STRIP

United States Patent 3661407

Two different, but related form sheets are provided for use in sequence by different departments. Each form sheet has two separate pluralities of headings thereon, one for each department. Each form sheet has also one or more strip receiving spaces extending transversely across both pluralities of headings thereon. A plurality of strips of re-usable, adhesive backed writing material are provided, each strip being of a size to fit onto, and to extend the entire length of, one of said spaces. With one of the strips adhesively applied to its space on a first form sheet, data entries are made on the strip by the originating department in register with each of the headings of the first plurality thereof. The strip is then peeled off and forwarded to a follow-up department, where the strip is adhesively applied to one of the spaces provided on a second form sheet and entries are made on the strip by the follow-up department in register with each of the headings of the second plurality thereof. The completed strip is then peeled off of the second form sheet and returned to the originating department, where it is adhesively reapplied to its previous space on the first form sheet for billing and filing as a permanent record of the complete procedure.”

 And then came the portable edition for all you mobile business executives, because portability and mobility was (is) essential.

“Pocket-size one-write checkbook

United States Patent 4332400

A wallet-sized checkbook particularly suited for use in conjunction with a one-write check record keeping system wherein an entry is made on a journal page simultaneously with the writing of a check. The checkbook enables records of checks written in the field to be subsequently transferred directly on to a one-write journal page. The book comprises a cover having an interior pocket and a writing surface fastened at one end to the inside of the cover. A data sheet of coated release paper overlies the writing surface and releasably carries a series of ink-receptive strips adapted to receive ink from a carbon strip extending along the reverse side of a one-write check. A check is positioned on top of a selected strip on the data sheet by a series of pins which project through pre-punched holes in a widthwise margin of the check. Indicia on the opposite margin of the release paper cooperate with the pins to assist in the check-positioning function. Thus, data written on the front of the check is transferred via the carbon to the underlying strip which can be subsequently peeled from the release sheet and applied at the appropriate line of a journal page to provide an accurate record of the field-written check.”

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The Cloud is Not the End of ERP

With the emergence and general acceptance of “cloud” technologies and services, many in the information technology industry have begun to wonder if the traditional approach to enterprise software – the ERP solution – is nearing its useful life.  Is this the end of ERP?  Well, the hype sometimes becomes the reality, and businesses are moving in droves to software-as-a-service to find the cost and efficiency benefits promoted in the sales materials, and they’re finding them.  Look at Sage’s acquisition of Intacct as an expression of increased focus on cloud-based solutions. This activity around the cloud and cloud-based software-as-a-service represents a major change in how people access and consume information technology and business services, a change that’s being driven by the huge momentum of the overall growth of “cloud”.  The market is moving to a customer-centric subscription model, where the legacy approach was more in tune with the “purchase it once and use it forever” mentality, and customer relationships were largely centered on upgrade cycles.

“As an economy and a culture, we are rapidly moving away from owning tangible goods and, instead, gravitating towards becoming members of services that provide us with experiences  – such as listening to a song, using a car, watching a movie or collaborating with our colleagues.

Of course, this cultural transformation has profound implications for business models. Why? Success is no longer gauged by counting how many units of your product you have sold. Rather, success is measuring how many customers are using your service on a recurring basis and how successful you are monetizing those recurring relationships.”

Forbes.com guest post written by Tien Tzuo http://www.forbes.com/sites/ciocentral/2012/02/09/the-end-of-erp/

While it sounds like the cloud is the right approach for everyone, looking at the variety of real business situations in the market suggests that, as always, one size does not fit all, and more “traditional” ERP solutions may well continue to be the right foundation for many enterprise operations.  Particularly when considering that many businesses already significant investments in platforms and infrastructure, software and data integrations, and operational process support, cloud software solutions may not provide the necessary functionality to support existing business.  Further, integrations that may be available and supported with legacy systems are often not available with cloud-based counterparts, while different integrations based on cloud standards may be present.

For smaller businesses and those in emerging markets, subscription-based IT models may make more sense, especially as popular traditional software makers have introduced their cloud-based counterparts which will likely incorporate the features or functionality of their legacy systems, while taking advantage of the capabilities introduced through cloud integration and interoperability standards.  Strong consideration should still be given to “traditional” ERP solutions, however, as there may be a level of stability, usability, or process support desirable by the business.

Utilizing these traditional ERP systems does not mean eliminating the potential for the business to benefit from cloud solutions.  Rather, cloud platforms and hosting solutions, as well as cloud-based integrations and extensions, are enabling mobility and collaboration around legacy systems, delivering cost and efficiency benefits just as significantly as those who have adopted a full-on “cloud” approach.

“It also makes sense to explore “edge” investments. […] there are significant innovation opportunities outside of core operations. Look to take advantage of the ERP platform’s capabilities in these spaces. Or implement low-cost, smaller-footprint solutions – even if on an exploratory basis. If they are fully adopted later, you can integrate them into the ERP backbone and expose standardized data and processes to the edge.”

from Deloitte’s Tech Trends 2011 report titled “the end of the “Death of ERP” 

So, what does this mean for your business?  It means you need to consider all the possibilities.

First, evaluate cloud-based options, and balance features with cost, time-to-value, and operational requirements.

Then, selectively innovate.  Figure out which areas of the business give you a competitive differentiation and innovate in those areas.

The traditional thinking, which is in line with the traditional ERP approach, is that all of the business functionality has to be incorporated into a single platform solution.  This is certainly no longer the case, and businesses are finding that they now have an ability to take advantage of the benefits of their existing systems while extending and innovating through the use of cloud services.