NetSuite says it's first to market with an on-demand revenue recognition application that implements new accounting rules that will enable IT companies to book billions in product sales revenue sooner than was possible under earlier rules that have been in force for years.
NetSuite on June 10 introduced a new application that will
help companies implement the complex new accounting rules covering revenue
recognition for product sales that involve a combination of hardware and
software.
The product, called NetSuite Advanced Revenue Recognition,
will automate the process of accurately recognizing and implementing sales
involving a combination of hardware and software under the FASB (Financial
Accounting Standards Board) rules for what are called "multielement sales."
Companies whose new fiscal years start after June 30, 2010,
have to begin applying the rules in July 2010 and all companies will have to
implement them no later than July 2011.
NetSuite claims it has the first on-demand product on the
market that lets companies immediately start complying with the new accounting
rules. Furthermore, it claims that neither of its main competitors in the
on-premise and on-demand Enterprise Resource Planning software markets, Oracle
and SAP, have an application in place to serve this need.
The product is specifically designed to serve companies of
all sizes that run ERP software suites from Oracle, SAP and
Microsoft Dynamics GP, which is based on the earlier Great Plains accounting
software suite.
Besides being early to the market with NetSuite Advanced
Revenue Recognition, another key advantage is that NetSuite doesn't care what type or
what version of ERP system their corporate customers are using, said NetSuite
CFO Jim McGeever, who worked with the company's developers to create the
product.
"We're only going to take the data out of those [competing
ERP] systems, bring them into NetSuite, do all the revenue recognition
calculations and give you back" the completed calculations, McGeever said.
The new rules reflect an important change in the way
companies account for revenue received from the sales of products that are a
combination of hardware and software. The old rules required companies to
realize software sales revenue over two years; -half one year and half the
second year, McGeever explained. Under this rule, if the sale involved a
product such as a server, router, mobile phone or any device with software
installed on it, companies had to split the revenue over two years as if it was
all a software sale, McGeever said.
With the new rules, companies can realize all the hardware
portion of the sale in the first year while continuing to record the software
portion of the sale over two years, he said. However, this requires a lot of
very complex accounting and that is where the new NetSuite product comes in.
That is why these rules and the NetSuite software will be
very important to all the major IT technology companies in California and
around the world, said McGeever.
Computer technology hardware companies "will have by far the
biggest financial impact" from the accounting rule change, he said. The most significant example, said McGeever,
are recent financial results reported by Apple. "Apple
implemented these new rules in 2010 and
they restated their 2009 revenue on these new rules and their revenue went up
by $6.4 billion," he said.
Apple was also at the
forefront of the effort to convince
the FASB to change the accounting rules to allow IT hardware companies to book
hardware-related revenue sooner.
This is how Apple was able to report $6.4 billon. "Apple
sells the iPhone for $200. In the old rules they would have to take that $200
and spread it over a two-year period because of the software on the phone,"
McGeever explained.
The new rules allow Apple to recognize the revenue from the
iPhone hardware when the device ships. The value of the software installed on
the iPhone still has to be spread across two years.
"Instead of spreading $200 over two years, Apple is
recognizing $175 when it ships and then $25 [in software revenue] over the next
two years," said McGeever.
As a result, anybody in the IT hardware business has a huge incentive
to rapidly implement these new accounting rules. NetSuite's effort to introduce
this new revenue recognition application early in the cycle should help the
company win a lot of this business, said McGeever.
Revenue recognition hasn't been a major presence in the
major ERP packages from Oracle, SAP and others, McGeever said. Most companies
either use spreadsheets to track revenue recognition or they use niche products
from relatively small players.
NetSuite has long had revenue recognition features in its financials
vertical application, but this new application is the first on the market to
automate revenue recognition under the new accounting rules, said McGeever.
Eventually the big players may introduce their own up-to-date
revenue
recognition applications, McGeever said. "But they are behind the curve
and the
timing is important," said McGeever. "They aren't going to have
anything ready
in time." By the time they respond with their own products, many
companies will have already filled this need one way or another and
moved on to other issues, he said.
NetSuite Advanced Revenue Recognition will deliver full compliance
with FASB, American Institute of Certified Public Accountants and Securities
and Exchange Commission regulations.
The package is built into NetSuite Financials as part of the
company cloud ERP system. It can be integrated with third-party ERP systems
including Oracle Financials or SAP R/3.
The package supports revenue recognition schedules on all
sales transactions regardless of sales channel. It was designed to provide
clear visibility and continual monitoring of the revenue recognition process, including
the tracking of Estimated Selling Prices. The application provides immediate notification when a
specific set of revenue is due to be recognized. Netsuite Advanced Revenue Recognition will be
officially released into production as part of the company's on-demand ERP service on July 1.
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