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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.