Intacct, a San Jose, CA based financial accounting provider is making a number of announcements this week. The announcements include a number of market successes, timely Contract/Revenue Recognition (RevRec) functionality and more.
These new accounting rules, if I got this correct, go into effect in 2018 for public firms and 2019 for private companies. (Note: firms with multi-year contracts will need to implement the changes earlier).
The RevRec functionality is needed now by a number of businesses (think subscription economy firms) that offer one or more services (e.g., training, implementation, support) together.
New accounting rules will require a more precise or different mechanism for allocating revenue (and expenses) amongst different account types and dates. In situations where a customer changes a contract (e.g., adds users, adds new services/apps, etc.) then certain prior allocations of revenues and expenses may need to be recast. That recasting could impact current and prior accounting periods.
In short, it will make the accounting for such deals more complicated as accountants and sales people may have to apply the new accounting rules to new AND pre-existing contracts. Some of the changes will also change the way cash is booked as part of a contract.
Users will need tools to compare the pre- and post- effect of the accounting rules changes on these contracts. The effect of these revenue allocations will also need to be recorded in the appropriate sales management, commissions and financial software applications. Accountants may also need to book transactions to two different sets of books just to show management and auditors how the new regulations are being implemented and to show the pre- and post- change impact on financial results. In other words, it will be messy, costly and time-consuming.
This pre- and post- effect is especially important for executives to explain new (and possibly restated) financial results and metrics to third parties. I’d anticipate it will also trigger changes to sales professionals’ commission calculations and payouts for same. Here is an example:
Intacct has developed a significant amount of functionality to support new RevRec standards for ASC 606 and IFRS 15. The following slide by Intacct summarizes some of the key differences between existing RevRec rules and new ones scheduled to go into effect soon.
Coinciding with Intacct’s announcement, I saw that a financial analyst firm this week has decided to downgrade Workday as the financial analyst believes that these new RevRec rules will delay or slow down implementations of Workday’s financial software products. Hmmm …. I’m not totally sold on this opinion. Let’s examine this further.
First of all, not all firms have this RevRec issue (e.g., a candy manufacturer). For these firms, there is no reason to defer the purchase and implementation of a new financial accounting solution. So, there’s no reason to short the stocks of Workday, NetSuite, etc. for these customers.
Some firms will face RevRec issues in the near future because of lease accounting issues. However, that is a future issue that is not the subject of the enhancements that Intacct and other financial accounting software firms are addressing now. The leasing RevRec matter will doubtlessly be addressed in the future waves of RevRec accounting solutions. Just knowing this tells me that businesses will probably incur years of RevRec accounting changes.
The choice for businesses is then when they should take the leap and get more modern software to deal with the new requirements. Delays could be ugly and difficult as I’ll explain below.
For those firms that elect to defer a software upgrade, they might confront 1-2 ugly alternatives. The first would be to develop a custom application to support the new requirements. If I’ve learned anything, it’s rarely a good use of IT resources (budget and manpower) to develop custom ‘tactical’ applications (e.g., fixed asset accounting) that deliver little, if any, strategic or competitive advantage.
Instead, IT should be focused on developing new strategic applications. I must conclude that a custom RevRec application would definitely fall into the tactical application space. As such, a rational firm would seek a package solution for this capability now and not build it themselves.
The other solution is to create some makeshift functionality via a combination of CRM, Financial package software and spreadsheet tools (e.g., Microsoft Excel). While I find spreadsheets to be of great business use, I do not believe that creating potentially hundreds or thousands of spreadsheets to do this RevRec mapping is a sound business practice. Those firms that choose this path might find their RevRec ‘solution’ to be a jumble of potentially risky or temperamental spreadsheets. I agree with the depiction and conclusion that Intacct reached regarding this approach (see below).
Alternative action scenarios
For customers that do need to meet the latest RevRec requirements, they can choose to
- utilize specific functionality to satisfy these requirements (a la Intacct’s solution)
- design and build a custom solution with all of the appropriate interfaces to their CRM, sales and existing financial accounting software
- create lots of spreadsheets to do the revenue allocation
- create lots of spreadsheets to do the pre- and post- regulatory change impact
I’m sure there will be companies using all those options but let us understand what’s involved in these choices.
If customers adopt new software now, they’ll likely get:
- consistent adoption and application of the new regulations across all contracts/deals
- few errors
- a clean and transparent audit trail to share with external auditors, management and investors
If they go the custom software development approach, they may:
- not get the system built in time
- not get the functional requirements correct
- have to do it all over again when additional RevRec requirements are announced
- have an interesting time converting these data files, allocations, rules, etc. to a future financial accounting system
If they go the spreadsheet route, they may encounter:
- errors that are hard to find and correct
- inconsistent adoption of the new requirements
- challenges from auditors and others re: the calculations and data
- a serious data conversion challenge later on when the company does convert to a new financial system (it is tough enough to convert balances, etc. from one accounting system to another but to have to dig through hundreds of potentially different spreadsheets to grab data elements for conversion would be a truly thankless job).
A decision to defer a new financial accounting implementations because of the timing of implementing new RevRec requirements would be a bad one. The potential risk to the firm for getting the application of new RevRec rules wrong is great. The risk that the errors could trigger reputation harm to the company and its top officers is a real one, too. Longer-term, there’s risk in supporting a maze of spreadsheets or a custom application designed to handle the RevRec calculations. I could go on and on about this.
So, do I believe this issue will materially delay financial accounting implementations? No, not in a material way. While I can anticipate that some firms may defer a new software implementation, it will likely occur when the number of affected contracts is small and manageable and there are other more pressing initiatives that must be completed. However, that prioritization issue is always there in any firm. So, while I see the logic behind this analyst’s assessment, I don’t think it is as pronounced of an issue as he did.