Magazine article Strategic Finance

Rx for Revenue-Recognition Woes: Contract Management Software

Magazine article Strategic Finance

Rx for Revenue-Recognition Woes: Contract Management Software

Article excerpt


trip the alarms of your independent auditors and, potentially, the Securities & Exchange Commission (SEC) is to overstate revenue.

Improper revenuerecognition practices have long been the single largest source of financial reporting fraud and the main reason the SEC has forced companies to revise and restate their financial results, Financial accounting rules forbid practices such as recording revenue upfront for milestone payments that should be recognized over long periods, booking revenue before the ownership of sold goods has changed hands, booking revenue before refund amounts have been determined, or recording it before payment is reasonably assured.

Concerned about improprieties, the SEC issued a set of guidelines under Staff Accounting Bulletin 101 (SAB 101), "Revenue Recognition in Financial Statements," in December 1999, but revised it twice last year and extended the effective date one year to the quarter ending December 31, 2000. These aren't accounting rules per se but, rather, guidance on recognizing, presenting, and disclosing revenue in financial statements of public companies, SAB 101 spells out the criteria for revenue recognition based on existing accounting rules and is hinged on the principle that revenue should not be recognized until it is realized, or realizable, and earned. Specifically, SAB 101 says transactions must meet the following criteria before revenue can be recognized:

* There's persuasive evidence of an arrangement.

* Delivery has occurred or services have been rendered.

* The seller's price to the buyer must be fixed or determinable.

* Collectability should be reasonably assured.

Straightforward enough? Well, not exactly. Many people are having difficulty complying with SAB 101.

"Interpretation of these requirements is where this seemingly simple definition becomes more complex." says Mary Barth, a professor of accounting at Stanford University. Barth says that SAB 101 creates industry-specific issues that, if misinterpreted, can cause noncompliance-such as multiple- element contracts, contingent rent, layaway sales, frequent flier miles, extended payment terms, and customer acceptance/installation.

Enter contract management software. Once a manual process, contract management software helps automate contract obligations, compliance, performance, and payments. …

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