Ensure Proper Valuation of Assets
How Technology Companies Can Survive the Financial Crisis
Fallout from the current financial crisis has made its way from Wall Street to Silicon Valley, where technology companies are battling a myriad of problems, including frozen IT budgets, layoffs, stagnant R&D spending and a lack of capital. Negotiating the stormy seas of these recessionary times, while maintaining profitability, is a challenge for even the most seasoned managers.
To help weather the storm during this economic downturn, technology companies in the United States should consider the following eight tools and approaches to help guide them through.
1. Properly recognize revenue
Many companies use their history of successful collections from existing customers as primary evidence that revenue recognition standards are met. Technology companies may need to revisit their policies for assessing probability of collection to ensure they have recent, sufficient evidence that the collection criterion is met prior to recognition of revenue. Policies and procedures may include credit and background checks, confirmation of payment terms with customers, and even letters of credit on large or international orders.
2. Access capital using debt
In order to fund growth, an acquisition, or form partnerships and joint ventures in these turbulent times (without accepting a lower stock price or burning cash), technology companies are turning to convertible debt deals. Businesses are also considering switching their debt from the London Interbank Offered Rate (LIBOR) interest rate to prime rate, and are attaching warrants to the various debt instruments. However, they should be aware of complex, accounting-related implications to any of these options-many of which could result in significant charges to income.
Be Aware of Fraud
3. Be aware of fraud
As technology companies delay or cut back on spending, they may open themselves up to far costlier problems, such as intellectual property (IP) infringement and identity theft. According to the 2008 BDO Seidman RiskFactor Report for Technology Businesses, IP infringement ranked sixth as the most common technology risk factor, reported by 84 percent of the top 100 public United States technology companies.
To combat intellectual property infringement:
United States technology companies should be aware that intellectual property can be stolen or misappropriated in many different ways including: making and selling an unauthorized copy of computer software, trademark infringement by selling goods identified with a counterfeit mark, or a trade secret being stolen from its owner and used to benefit a competitor.
To mitigate the risk of infringement, businesses must assess the magnitude and likelihood of the threats. Then they need to implement prevention and detection measures specific to IP fraud, especially as they look to expand their global reach and leverage operational processes with resellers and international business partners.
To address identity and other types of IT-related theft:
Technology companies should familiarize themselves with the Identity Theft Enforcement and Restitution Act, which expands the ability of the United States government to prosecute identity theft and allows victims to obtain restitution. In addition, companies should become acquainted with the Identity Theft Red Flag Regulations related to the Fair and Accurate Credit Transaction Act (FACT) from 2003 which address the prevention and reporting of identity theft.
In October 2008, the Federal Trade Commission (FTC) announced the extended deadline for compliance with the Identity Theft Red Flag Regulations until May 1, 2009. The delay was granted given the confusion and uncertainty about the applicability of the rule, and to allow companies to take the appropriate care and consideration in developing and implementing their programs.
Many technology companies are still in need of guidance, as they are not aware that they engage in activities that bring them under the scope of the new rules. Other entities that are generally not regulated by the FTC were also unaware of the rules. All financial institutions and creditors (such as telecommunications firms, technology retailers and service providers) will all be required to comply with the Red Flag regulations.
4. Strengthen risk management controls
Companies should ensure that risk management controls and monitoring controls are robust, including segregation of duties. Particular focus should be placed on risk identification, and the development of comprehensive fraud prevention programs across all business lines and operations. IT controls should also be reviewed to ensure a direct link to the financial applications supporting the financial reporting process. Many companies are instituting controls of this nature using independent resources, reporting directly to the audit committee or board of directors.
Ensure Proper Valuation of Assets
5. Ensure proper valuation of assets
Business plans may change in an uncertain economy. Therefore, the fair value or estimated lives of intangible assets may change as well. Stock options and other compensation strategies may also need to be adjusted in order to retain key employees. If a company is looking to make a strategic acquisition in the downward market, the target's lower valuations should be capitalized upon. Be aware, as well, for potentially-impaired assets caused by lower valuations related to the overall market, as well as acquisition opportunities created by these same market forces.
6. Evaluate all functional areas for efficiency
Sometimes it is essential to step back from the day-to-day tasks and duties to assess what adjustments are needed to correspond to the changing business environment. This is an excellent time to reevaluate the amount of administrative and production labor required to adequately maintain a healthy level of operations. Strategic "rightsizing" can be a very valuable tool in this type of economic environment.
7. Monitor outsourcing contracts
In an economic downturn, technology companies often turn to outsourcing in hopes of delivering cost savings. However, in order to be successful, outsourced activities should be well-monitored. They should have clearly-defined objectives, preliminary due diligence, defined measurement, defined measurement matrixes and contingency plans. In addition, the current downturn in the economy will require a periodic assessment of the financial health of the company's key suppliers and vendors.
8. Assess current technology and product line
Now, more than ever, technology companies must monitor their inventory levels to ensure that a newer, better technology has not been released that renders their current inventory obsolete. Controls should be instituted that call for constant calculations of inventory movement so that management can adequately respond to changes in market conditions and technology.
Bob Pearlman and Bob Strasser are Partners in the Technology Practice of BDO Seidman, LLP. A national accounting firm, BDO Seidman provides assurance, tax, financial advisory and consulting services. Based in Los Angeles, Bob Pearlman can be reached at firstname.lastname@example.org. Based in San Jose, Bob Strasser can be reached at email@example.com.
Disclosure: Material discussed in this byline article is meant to provide general information and should not be acted on without obtaining professional advice appropriately tailored to your individual needs.