Webcast: Restating Revenues

On Friday, March 27th, I will co-present a webcast with BDO partner Jay Howell. The topic is revenue recognition for product companies and some pending changes in the regulations.

To register: http://www.tpsaonline.com/webcasts.asp#vsoeinps

Jay is an expert on the topic of VSOE. He heard my plea in my previous post VSOE and the Auditors that stated “auditors that instruct product companies on how to interpret 97-2 are not motivated to publish their specific guidance.” Interest in the TPSA community on the topic of revenue recognition practices remains high. And for good reason. If a product company struggles with their interpretation of “revenue recognitopn principles”, revenues may need to be restated.  A March 23rd press release from Taleo makes the point.

On March 23, 2009, Taleo Corporation issued a press release announcing that it had completed the review of its revenue recognition practices, and as a result of this review, will restate certain financial statements and defer to future periods $18 million of consulting services revenue previously recognized through June 30, 2008. Postings  on the restatement contain the fact that Taleo is altering its interpretation of revenue recognition principles:

The restatement reflects a change in the Company’s historical application of accounting practices under Emerging Issues Task Force No. 00-21.  Historically, when application services and consulting services were sold together, the Company recognized consulting services revenue as the services were delivered.  Now, in similar arrangements, the Company’s consulting services revenue will be recognized ratably over the term of the application services agreement, typically three years.”

The decision tree below is repurposed from my previous post on revenue recognition. It outlines the general path companies follow when deciding when they get to recognize product revenue. However, revenue recognition practices require companies like Taleo to “interpret” the guidance provided by the American Institute of Certified Public Accountants (AICPA) in their statement of position (SOP) 97-2.

There is clearly some wiggle room in interpreting rev rec guidelines and navigating the decision tree below. In addition, there may be a shift in the winds regarding whether arrangements involving hardware fall under SOP 97-2 or EITF 08-1. My belief is that as professional and managed services become a larger component of both hardware and software company revenues, there will be an increased sense of urgency in the industry to drive clarity in the application of 97-2. From the TPSA perspective, our goal is to continue the efforts to shine a bright light on the common practices pursued by companies when applying 97-2 to their revenue recognition processes and to help product companies create revenue recognition processes that are not punitive to the services organization. We accomplish that by having product companies share how they are interpreting 97-2. We also accomplish this goal by hosting content rich webcasts on the topic with subject matter experts like BDO. I look forward to the day when there is enough information in the public domain on rev rec that we no longer need to publish or write or webcast about it. But that day is not today.

Navigating VSOE

Navigating VSOE

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