Software Executive Magazine

OCTOBER/NOVEMBER 2017

Software Executive magazine helps software executives grow their businesses by showcasing the business best practices of our readers, executives from established and innovative software companies.

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Hopefully you've heard you will need to address the new standards (also called ASC606 or ASU2014-09) when preparing your GAAP financials. As a nonpublic com- pany, you will need to follow the new GAAP standards starting January 1, 2019. This list of steps to take by 12/31/17 should help you put together a plan for how to do this. ASSEMBLE YOUR TEAM While your CFO or a consultant may lead the project, other parts of the organization will be needed, such as sales, finance, accounting, accounts receivable, legal, and management. 1 IDENTIFY HOW YOU WILL TREAT EACH OF YOUR TYPES OF REVENUE This means determining all of your performance obligations and how you will recognize the revenue for each – including how you will group them. Review all of your sources of revenue including software licenses, software subscriptions, setup fees, installation service fees, training fees, support fees, upgrade fees, and custom development fees. Note: If you sell software with annual agreements, the agreements you sign on January 1, 2018 will impact your 2019 financials. 2 IDENTIFY HOW YOU WILL TREAT CUSTOMER ACQUISITION COSTS This is most likely commissions but may also include materi- al customer setup costs. You must now capitalize either all of these expenses or just those that provide benefits over one year. These costs will be amortized over the expected period of bene- fit, which could be the length of the contract or another period determined by management. 3 DETERMINE HOW YOU WILL ALLOCATE THE PRICE IN DEALS WITH MULTIPLE PERFORMANCE OBLIGATIONS When multiple items are sold together but need to be treated differently for revenue recognition, the transaction amount needs to be allocated to the various items. This is NOT deter- mined based on how the customer was invoiced. The basic standard for this is to allocate using the stand-alone selling price or the estimated stand-alone selling price. 4 REVIEW YOUR STANDARD CONTRACTS AND TERMS OF SERVICE Make sure the contracts and other documents are consistent with how you want to treat the various types of revenue. 5 IMPLEMENT A PROCESS OF PREAPPROVAL OR REVIEW OF ANY CUSTOMER REQUESTED CONTRACT MODIFICATIONS FOR NEW AND EXISTING DEALS Since a single line agreement change can change the account- ing, the finance function should either be in a position to veto the change or note the change so that the accounting will match the final agreement. 6 CONTACT YOUR AUDITOR, DUE DILIGENCE REVIEWER, OR A CONSULTANT, AND CONFIRM YOUR DOCUMENTED CONCLUSIONS FOR THE STEPS ABOVE The new standards include more judgement than previous GAAP so you need your auditor to agree to your conclusions. This includes determining whether any of the required chang- es can be ignored due to materiality. Or, have your CFO make the determination and prepare their case for the auditors. 7 DETERMINE HOW YOU WILL TRANSITION TO THE NEW STANDARD You can select either the full retrospective or modified retro- spective method. Each has different issues regarding how to track transactions in 2018. 8 PREPARE A STATEMENT FOR INVESTORS, POTENTIAL INVESTORS, OR BANKERS Ideally this should be something such as, "We have reviewed the impact of the new revenue recognition rules for their impact on our financials. Based on our review, from January 1, 2019 our [type of revenue] revenue will be affected and the change will ac- celerate/delay the recognition of this revenue. Currently this rev- enue is only xx percent of our total revenue." These people will not want to hear "We don't know" when they ask this question. 9 Steps To Take ASAP For The New Revenue Recognition Standards S T E V E S E H Y C P A , M B A Fractional CFO 10 IDENTIFY WHETHER YOUR CURRENT ACCOUNTING SYSTEMS WILL SUPPORT YOUR CHANGES WHEN NEEDED Based on your answers to the questions above, you may find that your current systems for creating your GAAP financials will work fine. If not, you will need to find a system that has the needed ca- pabilities either by January 1, 2018 or January 1, 2019. S 10 THE LIST Index By S. Sehy 10 STEPS TO TAKE ASAP FOR THE NEW REVENUE RECOGNITION STANDARDS SOFTWAREEXECUTIVEMAG.COM OCTOBER/NOVEMBER 2017 9

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