As if it weren't difficult enough for companies to determine when and how to properly record revenue, comprehensive new accounting rules, set to go into effect in 2017, will probably make dealing with revenue recognition even trickier.
But even today, companies with complex revenue recognition needs often complain that their financial management systems aren't adequately equipped to handle their requirements, despite vendors' claims. And that likely means that these extensive changes will have organizations scrambling to ensure they have the right technology in place.
Part of the problem with accurately recognizing revenue is that the business models for some organizations, like software and media companies, are changing, according to Stefan Ried, principal analyst at Forrester Research, based in Cambridge, Mass.
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"Media companies are moving from physical newspapers to ... paid information on demand," he said. "So the business models got much more creative."
Jeremy Aber, a software attorney with Aber Law Firm PC, in Austin, Texas, agreed that revenue recognition isn't an easy proposition for companies in certain industries.
"Revenue recognition in the tech space is very complicated," he said. "If you're shipping chairs, it's pretty easy: The chairs go out the door, and you book the revenue. With technology it gets more complicated because there are a lot of intangibles."
With these new models, it's hard to do a balance sheet for revenues, digital subscriptions and digital real-time consumption if you own a traditional financial accounting system.
"That's why people are either looking for new systems or add-ons to their ERP systems to add that subscription-based revenue," Ried said. "In many cases, these revenue recognition products are collecting the right data and turning [it] into a number that you can then import into your traditional financial accounting system.
"So companies aren't replacing their financial accounting systems, they're just improving the data quality and making sure they survive the audits," he added.
But experts say selecting the revenue recognition software vendor that's right for a company's needs can be as complicated as the changing rules themselves.
Companies avoid complex revenue recognition software with homegrown patches
"Many companies don't implement creative business models because they have no idea how to get them in sync with their financial accounting systems," Ried said. "But I [think] they should create a business model [around] whatever their customers want, then look for those innovative revenue recognition software pieces that help them to implement [it in] a financially correct [manner]."
Ried said some vendors of revenue recognition software, like Leeyo, Softrax and Zuora, are nimbly keeping up with the new trends. He added that the specialty revenue recognition software should be treated as an add-on that extends the functionality of their financial accounting systems.
However, finding the vendor with just the right revenue recognition software to fit a company's needs is often easier said than done, according to Jeffrey Werner, revenue recognition consultant at Werner Consulting Group, located in the San Francisco Bay area.
"The revenue recognition rules are very complex, and there are different applications for different companies given their business models and given the information flows within [an organization]," Werner said. Therefore, because it's difficult to design software that caters to all situations, "the vendors haven't been very successful coming up with software that does it. And when they do, it's very complex."
So how are companies sidestepping this obstacle? By creating their own workarounds.
"Even though there are starting to be vendors that have revenue recognition software or modules for ERP systems, most companies use some sort of custom tool that they've built, or they do it in Excel," Werner said. "It's an extremely manual process. I often present at conferences and when I ask what they use, [around] 80% or 90% of people use Excel."
The problem with using Excel, however, is that users don't have good metrics or access to data, he pointed out.
Define requirements before engaging a revenue recognition software vendor
One reason more businesses haven't implemented revenue recognition software to date is that vendors weren't prepared when the last revenue recognition standard went into effect in 2009, Werner explained.
Because vendors had nothing available when that standard became mandatory, companies were forced to come up with their own solutions, he said. After the fact, initial revenue recognition offerings from vendors were often limited to a small number of business models that didn't always work for companies. Plus, many organizations were already using a system that was working for them -- sort of.
"So most of those products initially weren't very well received," Werner said. "I've looked at a few of them for companies and it was hard to find one that worked well for the various models a company had. Sometimes they would work for one, but not for all. And then they required a huge change management to implement and to get them right."
However, vendors are now working diligently to get revenue software modules or programs that will be compliant with the new revenue recognition standard, Werner said. But just because vendors are being proactive about the new standard doesn't mean businesses are.
"I don't know how well [the companies] will manage that because a lot of them aren't going to start soon enough to address those issues," Werner said. "They have to figure out how their business models are going to change, how their accounting is going to change, and try to get software that can address" those changes.
But without clear requirements in mind up front, buyers don't know exactly what they need from a vendor, Aber said.
"[Companies] have to get opinions from auditors about what their revenue recognition rules are because there are general rules, but there is a lot of subjectivity," he said. "The disconnect between vendors and buyers is [buyers] don't know what their needs are. Then they use the software for six months and say it doesn’t work for them."
Aber said buyers really have to have a deep understanding of the business' needs and requirements, and then map out how that works with vendors.
"The buyer should go to the vendor and say, 'These are the ways I have to recognize revenue and these are the unique things I have to do and can you help me,'" Aber said. "Then ask the vendor to show you. Proof of concept -- do a trial.
"I don't think anyone should just trust a vendor," he added. "Try it out."
About the author:
Linda Rosencrance has written about technology for more than 10 years and has been a reporter for more than 20 years. A former Computerworld reporter, she is a freelance writer in Massachusetts and an author of several true-crime books.
This was first published in December 2013