Recent revenue-recognition guidance from the Financial Accounting Standards Board could lead to accounting software glitches unless affected companies make adjustments, experts warn.
The potential problem relates to how enterprise resource planning (ERP) systems allocate revenue for bundled products and services. Bundled products, also called multiple-element arrangements, deliver the full value of a contract over time. For example, an Apple iPhone, which includes automatic software upgrades for one year, is considered a bundled product. So is an industrial turbine that is sold under a contract covering equipment-installation services and a year-long maintenance contract.
According to Kelley Wall, a senior consultant with consulting firm RoseRyan, most installed ERP systems are programmed to handle the residual allocation method, which assigns a straight dollar amount of revenue to each element of a bundled product. Companies have been permitted to use the residual method instead of the preferred “relative selling price,” or fair value, method if they cannot estimate the fair value of an element that isn’t sold separately, says Wall. And in fact most companies do so, she adds, since estimating the fair value of something that doesn’t have a market price is a complicated task.
But guidance issued last September by FASB’s Emerging Issues Task Force (EITF) makes it easier for companies to estimate the fair value of elements not sold separately, notes Ed Hackert, a partner at accounting firm Marcum. Starting in January for those on calendar fiscal years, companies will be pushed to use the relative selling price method, which allocates revenue for bundled products based on a percentage.
To deal with the potential inability of ERP systems to handle this method, Wall suggests that companies evaluate their systems and work with their vendors to upgrade software, institute
work-arounds, or find alternative software that can be layered on top of the existing system. As for companies that use spreadsheets to manage revenue recognition for bundled products, Wall says they will also have to manipulate some of the formulas to comply with the relative selling price method.
SAP, for one, is confident that its ERP systems will be able to handle any accounting changes, either through “standard functionality or customization,” says James Fisher, senior director of solution marketing for the company. His colleague Pete Graham points out that SAP is currently working with FASB to sort out issues related to technology and the final revenue-recognition rule that is due out during the second quarter of 2011.
Oracle has also been working with FASB, business partners, and customers to develop “responses that will enable our customers to file their accounts as needed,” says Seamus Moran, director of application development for Oracle’s financial products. As for Microsoft, a spokesperson declined to respond to queries from CFO about whether its installed ERP systems can handle the relative selling price method, saying the company does not comment on rumors or speculation.
Not surprisingly, those who offer solutions for the allocation snag are dubious about the ability of ERP systems to handle the rule change. Jim McGeever, chief operating officer of NetSuite, asserts that “there are no ERP systems out there today that are capable of doing this reallocation.” He thinks upgrading the various ERP systems that multinational companies run in subsidiaries or newly acquired businesses will be a daunting task. (NetSuite offers a service-based solution, using proprietary software to crunch customers’ raw order data and return journal-entry-level answers to them.)