Is revenue recognition the next Y2K?

Is the upcoming change in global regulations on how revenue is recognised in sets of accounts set to become the equivalent of the Year 2000 panic to face business managers?

The answer, according to Netsuite CEO, Zach Nelson, is a very probable `yes’. Indeed, he adds the rider to his answer that `this time, it is a Y2K that actually does something.”

This is a strong, and clear, position to adopt and begs the question as to why it is important. The answer can be found in the growing complexity of doing business these days. As Nelson highlighted in his keynote presentation to the SuiteWorld conference last week, the rise of the internet and cloud has prompted – and often pushed – businesses into becoming more than just a product producer.

No longer are businesses just makers of `things’, now they have to add consultancy services, online support, direct-access maintenance and whole range of other, valuable, chargeable services. They all have the potential to be good contributors to the bottom line, but they are not manufactured `things’.

The problem here is that, when it comes to current accounting practices, it is not always easy to differentiate between the `thing’ itself and the `services’ surrounding it. If these items cannot be clearly identified and delineated, then anything can be slipped into the accounts and passed of a legitimate.

As Nelson observed at a post keynote press conference, “it becomes easy for fraudulent companies to send each other spurious invoices that can be used for money laundering and other purposes.”   

In short, the inability to recognise and define different types of revenue in business accounts opens the door to a whole range of nefarious financial deceits, from money laundering to hiding the bribes that some business, in some markets, consider to be a normal, or essential, part of the `business process’.

It is these possibilities that has prompted the coming of the new regulations. And according to Craig Sullivan, Netsuite’s International Senior VP, this is not an issue peculiar to just regulatory zeal in the USA. This is going global and its impact could be felt around the world.

The key change in the regulations, at least in terms of its impact on businesses, is that they will be obliged to keep two sets of accounts. One will continue with current accounting practices and conventions used by the business. The other set will be to the new standards and are expected to be significantly different from the current accounting model.

This issue for businesses then becomes one of cost and logistics. The underlying problem, according to Nelson, is that there is no way in which a business can take one set of accounts – for example the `old’ model – and, by the application of derived mathematical constants and formulae, take the results that have been produced and use them to generate the `new’ model set of accounts.

Each will need to be derived from the ground up, from the rawest of raw ledger inputs, and the ledgers will no doubt require at least some modification to allow for more granular identification of types of revenue.

For businesses, this means doing the accounts twice, from the ground up, all the time. This may prove to be a costly and time-consuming exercise for many business if they are not ready for it, with some of that cost coming from the need for extra staff to operate and manage the process and, for many businesses, added investment in additional hardware and software resources with which to run the databases needed for each set of books.

With ancient memories of the impact on businesses of the appearance of Lotus 123 and then Microsoft Office I asked Nelson what seemed to me to be an obvious question: “could this be your `killer app’ for Netsuite?” Maybe he saw the inevitable grandiloquent headline that would follow an easy answer such as “yes,” but for whatever reason he ducked the question, at least directly.

He did, however, give an answer as to why his answer probably should have been “yes.”

“Because it has a single, core dataset which is the one version of the truth for all of a business, including overseas operations working in different currencies and to different tax laws, Netsuite is the only system that can provide business managements with multiple sets of books, automatically, at the same time, from the same set of data.”

The next two years, on the run up to the change in regulations, are a time when Netsuite really should start ringing this bell rather hard. Yes, it runs the risk of falling into the trap of scare-mongering – and many will still remember the sense of frightened excitement at the approach of Y2K, and the sense of deflation when the end of all things didn’t actually happen.

But this regulation change is one where companies can examine their current accounting practices, and the sources of data that drive them. They can determine what will be involved in setting up and operating the new set of accounts, and they can do the sums on what it is likely to cost them.

The one thing that can be said with a fair degree of certainty is that the cost is unlikely to be `minimal’, especially when existing accounting services vendors realise the potential a change in regulation can mean.