Monthly Archives: December 2014

Are you Ready for the New Revenue Recognition Rules?

The deadline may seem far away but in reality it’s right around the corner

A popular and hot topic these days is the newly issued revenue recognition rules, a result of a decade long effort by a collaboration of FASB and IASB.  These rules are being phased in in the near future and will affect a variety of business enterprises, primarily those who have contracts and special delivery arrangements with their customers.

Revenue recognition is an accounting topic familiar to many companies who are engaged in providing goods and services to their customers.  It deals with the rules on when to recognize revenue for various products shipped or delivered, or services provided, and in what amounts in each accounting period.  It requires deferring revenues when applicable and then recognizing them in future periods, following specific rules issued by FASB.

The new rules, issued in May of 2014, require companies to examine their customer contracts and determine for each sales invoice what amounts can be recognized in the period of delivery and what must be deferred to future periods.  These new rules will become effective for reporting as early as 2017 with tracking of revenue transactions as early as 2015 with an adoption method either full retrospective or modified retrospective.  Generally, it makes recognizing revenues, both for products and services under more conservative guidelines.

What this implies is that accounting for revenue must be done according to the revised rules, which makes companies affected by these rule changes dependent on their ERP or accounting software to help them manage these revenue recognition transactions.  In addition to the accounting and finance functions, the new revenue recognition rules will affect the legal department, tasked with creating, reviewing and interpreting customer contracts, sales, and IT.

As of this writing many ERP and accounting software vendors are working on implementing these new rules into their existing software.  Other, vertical market software vendors, will be offering revenue recognition software that will be interfaced with existing ERP software to provide the needed functionality and allow for both internal and external audit of revenue recognition.

Similar to actual accounting software, companies who implemented a dedicated planning, budgeting and Analysis solution are going to have to re-think the revenue recognition planning and budgeting process in a similar fashion to actual accounting in order to make their analysis meaningful.

This is particularly true for companies who use their planning, budgeting and analysis software as an extension of their actual accounting software.  A software application like Budget Maestro with Analytics Maestro by Centage Corporation, which is an extension of the actual accounting system into future periods allows its users to adapt any accounting change rules and match its core structure to the General Ledger of its linked accounting software.

Although it appears that there is plenty of time left to make the switch to the newly adopted revenue recognition rules, prudent accounting and finance managements realize that now is the time to start working towards implementing the changes, including acquiring additional IT tools and modifying existing systems in order to comply with these new rules.

Is Planning, Budgeting and Business Intelligence Software Right for Me?

Why every company can and should use these applications

I’ve run into many companies over the years who have invested considerable amounts and effort into implementing sophisticated ERP or accounting software, some with integrated CRM and other functions that are designed to increase automation, productivity, accuracy and everything else associated with relegating mundane tasks and complex data processing to an automated system.

In fact, you’d be hard-pressed to find a business that doesn’t employ information technology products, both hardware and software, in their daily operations.  Even the smallest of the smallest companies rely on computer and software applications.  Gone are the days of typewriters, inventory card files, post binder ledgers and other tools so common in the workplace prior to the computer revolution.

Of all the many business software categories, Planning, Budgeting and Business Intelligence software deserves special attention.

I can’t imagine a business owner, corporate manager, board of directors member or anyone who directly influences business decisions agreeing that planning, budgeting and then analysis of data from both actual operations and plan is a bad idea and therefore does not belong in their organization.

What I do see is that the majority of organizations, including many small businesses do have some kind of a planning process where a budget is formed, usually once a year, then maintained by some companies throughout the year with or without analysis of actual results as time goes by.

What differentiates a great planning, budgeting and BI process from one that is mediocre or worse is both the attitude toward this process while understanding the clear benefits, and the level of sophistication of the tools used in the process and its associated tasks.

Those who employ a common, but clearly deficient method of using spreadsheets or even purpose designed applications mimicking spreadsheets with all their shortcomings, are simply unable to fully achieve what the process was intended for, which is:

1)    Create a comprehensive plan, custom tailored to the organization with pre-defined business rules and drivers, and the ability to easily maintain and update this plan.
2)    Obtain accurate and complete forecasted financial statements, including a balance sheet and statement of cash flows, as well as a meaningful set of KPIs and Financial Ratios.
3)    Allow management to completely and accurately see and understand the forecasted future financial health of the organization, which will lead to making reasonable and error-free decisions.

Companies using a deficient process and set of tools may be able to forecast their income statement and especially the revenue and expense components of the income statement, but nothing else with any degree of accuracy or completeness.

On the other hand, organizations who implement more progressive methods and tools to perform the planning, budgeting and gathering and analysis of business intelligence, and who continually monitor their actual results against their plan data, continually reap the many benefits associated with using these tools and methods.

Even if you are a small or medium size company there are affordable technology tools to assist you with this important process.  The answer to the question whether planning, budgeting and business intelligence is right for you is a resounding yes.

Applications such as Budget Maestro with Analytics Maestro from Centage Corporation, which I have mentioned many times in this blog, were designed exactly to answer the question used in the title of this article, to be practically adopted by a large variety of organizations and industries and to go to work for them within days or weeks, not months or years.

As for the attitude component I mentioned above, it is my hope that more company managements will be willing to make the commitment to such technology and especially its continual use throughout the budget year.  Those who do will never regret it.