As the Global Controller at the NetSuite Global Business Unit and formerly the Senior Vice President of Finance, Global Controller & Accounting Officer before Oracle’s acquisition, Mike Forman has had a central role in preparing the company for ASC 606, Revenue from Contracts with Customers, the new rules that are set to go into effect next year. With the rules expected to have an impact on many industries, and software companies in particular, we sat down with him to discuss how the team at NetSuite prepared.
When you heard about the changes around 606 – how did you and the finance team proceed?
We started planning in 2015 after the pronouncement that came out in 2014, but we still knew that there could still be other changes. Like many companies that we work closely with, we started with our auditors and other people in our space to see what they were thinking. Our initial focus was on understanding the updates and getting a grasp on what the final rules were going to look like.
In 2016, we started really sitting down and beginning a gap analysis and putting together a project plan which would encompass a timeline, significant milestones, system considerations and other departments that would need to be consulted. What was different about 606 from EITF 08-01 was this wasn’t just about revenue recognition, it also had an impact on sales commissions, reserves, interest income/expense and other accounts. We also set periodic meetings with our outside auditors. Every two weeks or month, we picked a potential gap area and put together an argument on why we did or did not think it would impact us with some use cases and presented that to our outside auditors. And then, basically, we wrote out a short position paper on each gap, with some examples and use cases about how it impacted NetSuite or didn’t.
Who was part of the team? Is there a difference from EITF 08-01, the last update, since it impacts amortization of sales and marketing expenses? How did that affect the team?
It most definitely will be different but, we made a decision that we wouldn’t let that drive the business, in terms of how we did comps and how we devised the compensation plans.
Certainly, Ron [NetSuite’s CFO] has to be aware of that, because that impacts the financial model. When we started talking to the CFO, we knew we had to talk to our forecasting group about how the models may look different. The hope is the business doesn’t have to change dramatically because of accounting rules, but you have to start to educate people about how this may impact them. There’s probably not a group that you can leave out of the conversation.
Do you think people are going to be surprised by this?
This topic has received a significant amount of publicity in most financial circles. As a result, I don’t believe anybody is going to be surprised by the time the adoption date rolls around. I think the only surprise may be once people start getting into the details of it, they’re going to realize that it may be a much larger project than they had planned for and it’s going to be a challenge in meeting the adoption deadlines. There’s no choice anymore. It doesn’t appear FASB is going to provide another delay in the adoption date. The dates are set.