We're firmly over the halfway mark for 2010 – and if you're in the revenue accounting department of a company affected by the new revenue recognition rules, then you know it's definitely getting down to the wire for EITF 08-01 or EITF 09-03 adoption. Maybe you've already adopted the new rules or are in the process - and are juggling spreadsheets to try and handle the new rules right now.
But the fact is, for your first fiscal year that starts or started after June 15 this year it's time to adopt.
Spreadsheets have always been the best friend of the revenue recognition team (one survey from a few years back estimated that 90%+ of public companies use spreadsheets for key revenue recognition tasks). But these new rules require more than spreadsheets on steroids, or black belt spreadsheet jockeys. They really aren't the answer this time around, for a number of very good reasons. The first is that it really is very tough to handle these new rules in spreadsheets if you have a high order volume, and you have a lot of variability into your order amounts (e.g. sales discounting, different configurations of orders etc.). And the second reason is due to one of my favorite quotes about spreadsheets:
"More than 90% of spreadsheets contain serious errors, while more than 90% of spreadsheet users are convinced that their models are error-free"
In a nutshell, these new rules mean that you're going to have to allocate each sales order down to the line item level using Estimated Sales Prices as the allocation driver, and then spread it over the revenue recognition schedule. If you're using spreadsheets it's probably going to mean a separate spreadsheet for each order to manage the allocation. And what are these Estimated Selling Prices you ask? They're the best estimate of the average selling price for an item, broken out by the key dimensions of their pricing variability – whether it's by geo, channel, new or existing customer - and they're the amounts used to drive the allocation. It's going to mean managing a lot of ESP's, looking them up for the allocation, and continually monitoring them to make sure they are right.
Sound complicated? Well, a good place to start to wrap your head around this topic is an article by NetSuite's COO, Jim McGeever. We've been through the processes of scoping and adopting the rules, and Jim pulled together some pretty sage advice on key considerations around adopting them.
In fact, over the past few months we've been talking to revenue accounting teams around the country about this topic. Back in June we conducted an educational event on the topic in Palo Alto, and we were overwhelmed with over 200 attendees from major Bay Area companies attending to hear from audit and advisory firms on how to best handle adoption. We also launched our new revenue recognition module that works with your existing ERP system at the event. In fact, it was so well attended we're also running the events in Denver on August 24, Boston on August 31, and Austin on September 16. If you're in the area on the dates, we'd love to see you there!
Paul Turner, NetSuite