Giving Recognition its Due

The accounting and auditing field has changed enormously over the last ten years. Due to evolution in business and accelerating globalization, the number and complexity of accounting and disclosure rules have increased markedly. Generally, these rules, which were intended for the "public good" and to promote comparability of financial results, have become a thorn in the side of many finance and accounting professionals. Nowhere is this more obvious than in revenue recognition rules as they have evolved for U.S. GAAP accounting.

Principles-based accounting left much open to interpretation by creative accountants, so more, newer, complex rules were forced upon an already difficult field, which had little automation support. Ultimately, the finance department handles most rules manually, and these are more subjective than before.

With recent guidance from the Securities and Exchange Commission to align with IFRS requirements in the future, accountants and organization management are dealing with a level of uncertainty again in revenue recognition requirements.1 Unfortunately, from our experience it seems that company management has become so engrossed in trying to interpret and execute the rules that they seem to be missing the broader opportunity that has presented itself around revenue recognition and accounting.

Companies struggling with complex revenue recognition rules are not realizing what some industries understood many years ago: that they should modify sales techniques to deliver the appropriate financial results, in the right period, based upon the results and performance of the contracts that have been sold. While "managing" revenue has a bad sound and feel that harkens back to the late 1980s and even to the dot-com bubble, managing "deferred revenue" is well within every company's capabilities and rights. In fact, it is one of the most effective ways to make overall revenue growth more predictable, thereby boosting investor confidence in future performance and increasing value.

With business contracts, some contract clauses and business situations lead to the deferral of revenue. Revenue deferral should be part of the contracting, business planning, and forecasting cycle vs. its current status as a mere afterthought. Unfortunately, most companies focus on managing "sales," "revenue assurance," and the "pipeline," not on how a backlog in revenue -- deferred revenue -- can affect short-term earnings and longer-term returns for the company.

By understanding revenue accounting rules, organizations can better deliver on business results by:

• Stocking up for the long haul;
• Improving business performance;
• Enhancing product features; and
• Supporting strategic decisions with "fair value"