impact value – Cooper Mann Consulting

September 30, 2014

Revenue Recognition and closing the reporting GAAP

One 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.

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January 7, 2013August 9, 2013

Dashboard Reporting Tools: Gauging Accounting Relevance

Dashboard reporting tools can be of great assistance when accounting professionals want to help their clients understand how the business is performing. In most cases, these tools do a good job of showing owners the details of the profit and loss or cash flow reports, presenting the information in a way that non-accountants can understand. Many accounting professionals have turned to these reporting solutions to increase the value of the accounting work performed. After all, if the client can’t really understand the P&L and the Balance Sheet, then the reports won’t do them much good.

While simplified graphical reporting solutions are beneficial to the business, providing more insight into historical business performance, they don’t do much for the client on a daily basis if the accounting data isn’t up to date. Accounting professionals should recognize that these dynamic reporting solutions, tools which can provide business owners with real-time information on business activities and performance, can go a long way towards increasing the relevance of the accountant’s involvement in the client business.

Accounting professionals today are fighting battles on several fronts, and remaining relevant to the client is one of them. This isn’t too surprising, given that many accounting professionals see their clients only at year-end when the tax return needs to be prepared. In some cases, the business owner doesn’t even remember the name of their accountant – they just know they went there last year at tax time. This arm’s length relationship between the accounting professional and the business clients leaves a lot of opportunity on the table for both parties.

When accounting professionals aren’t closely involved with their clients, they risk losing the client to a more attentive, consultative professional. Many firms believe that the low profitability of bookkeeping and processing daily work for clients means that they should focus only on “higher level” opportunities, yet business owners will tend to seek advice from those who work with them on a regular basis, and who understand the issues that challenge growth and profitability.

Accounting professionals who recognize the value of providing regular bookkeeping services to their clients also recognize the value of working closer with the client, providing useful and actionable information rather than historic data long after-the-fact. These professionals are more likely to reap the rewards of “higher level” engagement opportunities from the client, because they help to identify the need and are able to support it with real data and insight earned through regular involvement with the business.

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Read more about how accountants need business intelligence, too
Read more about how there’s no fear and loathing in accounting
Read more about Data Warriors: accounting in the cloud

November 5, 2012

Knowing More: CFO and Accountant Value in Understanding Business Operations

Accounting professionals are being pressured to deliver more value and intelligence to their business clients every day. The pressure comes from a variety of areas, not the least of which is the fact that a lot of do-it-yourself tools are now available which lead business owners and managers to believe that they know what’s going on in the business. Lots of charts, graphs, and dashboard presentations make the numbers more readable, but they don’t say whether or not the numbers are even right. Even more important, they don’t deliver insight based on experience and understanding. This is where the accounting professional’s value really comes from – providing insight based on good data and quality data analysis backed by experience and understanding of the business.

You can’t be a good CFO or a strategic business partner to your CEO until you thoroughly understand operations and how they drive performance,
CFO.com (http://s.tt/1rtoZ)

Knowing what makes a business valuable is important, but what many business owners don’t fully understand is how to best increase that value. Generalized reports which summarize financial information, distilling it into a standard set of metrics, often don’t tell the business owner what they really need to know – how to go about increasing the overall value of their business, whether it is through improved profitability or through growth.

The business owner understands the operations, but not necessarily how operational activities actually impact value and profitability. Helping owners know more about their enterprises requires that the accounting professional also know more, where gaining a deep understanding of operations and learning what business functions are addressed and how becomes the key to bridging the gap between operational knowledge and business valuation. This is where the accounting professional or CFO can really make a difference, and can help to apply their knowledge in building business value directly towards those areas which fundamentally impact it.

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