Are we approaching the end of the age of spreadsheets? The beloved of many accountants over the years is facing perhaps its first major threat according to a recent “Global survey of 6,000 accountants and financial professionals” by the Institute of Management Accountants (IMA) and FinancialForce.The report – entitled “The New World of Revenue Management” is available for download (registration required). It looks at the state of revenue recognition across the globe.
Unfortunately the reality is slightly different. While the survey may have been sent to 6,000, only 235 responded and of those 230 were from the US. It means that while the results are interesting they can really only be applied to the US market, which is often a few years ahead of the UK and EU. In terms of other demographics the survey respondents were fairly equally spread across industry. There was also a spread of company size by employee and annual revenue, though the spread does not portray a reflection of a true sample, it can be taken as representative across US industry.
The report looks at the state of revenue management across finance leaders and reveals some startling facts. In May 2014 an Accounting standards update (ASU) No 2014-09 (Revenue from Contracts with Customers (Topic 606)) was issued by the Financial Accounting Standards Board (FASB). In conjunction with this the International Accounting Standards Board (IASB) issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. Thus the report is of interest not just to US accountants but also to those in the UK. As a result it would be interesting to see what responses a similar cross section of UK finance leaders would say.
Does revenue recognition matter?
What is disturbing is that 19% of the respondents said that they were unsure if their company was unsure whether the guidelines applied to them. Nearly a third said that while they believed that their firms did not fall under GAAP revenue recognition guidelines they hadn’t actually checked the cost recognition aspects of the new standards. This is a worrying percentage and perhaps these finance leaders need to check up whether they should have changed their processes over the last two years.
The SEC has recently increased its activity against companies that falsify revenue recognition figures. It accused the Chief Operating Officer of Marrone Bio Innovations, Inc.and the company of: “…inflating financial results to meet projections it would double revenues in its first year as a public company.” This is not an isolated case and for companies whose share price is affected by the revenue recognition need to take heed or face fines. It is also the individuals that need to be aware of the risks of ignoring changes to the rules. In fact it should be noted that the regulations have only just been updated by the standards bodies and there are further clarifications to the standards that affect both US and global companies.
Companies need to make sure that they revenue recognition standards and if they are then ensure that as these regulations evolve they check their exemption. For those companies that are include they should be aware of the latest changes and how they need to be applied. The problem for many is that it is no longer that simple.
Revenue recognition is getting complex.
The report shows the growing complexity of revenue recognition. It is something of a nightmare for finance staff to ensure they are using the right models in the correct way. The report shows that there is no a 60/40 split between multiple element and single element contracts. Billing types are also becoming increasingly diverse and billing triggers vary between companies. With this growing complexity many companies are finding the spreadsheets are becoming too complex and prone to errors.
One respondent commented: “Too time-consuming, and error-prone spreadsheets. Currently looking into software solution.” This shift away from spreadsheets and towards software that has the formulae built into the solution is a growing trend. In the US, while 60% of companies are still using spreadsheets, 21% of companies are currently implementing or planning to implement an ERP solution that will automatically provide the revenue recognition answers.
The increasing reliance on analytics software and ERP solutions may mean that while the spreadsheet is not dead yet, its usage amongst the traditional accounting functions is declining as better, specialised or more comprehensive software tools fulfil certain roles better. While the survey does not reveal how many respondents were satisfied with their Excel solutions, it did state that ERP solutions were more popular. Those who used ERP applications were 40% “satisfied” and 51 “somewhat satisfied. It would have interesting for the report to reveal the Excel statistics.
Raphael Bres, General Manager for Financial Management applications at FinancialForce commented: “We are in the midst of the as-a-service economy boom, which is making recurring revenue the central model of new and traditional businesses. CFOs and senior management teams are at a crossroads and must address these major shifts or risk being non-compliant, inefficient, and worse yet, lose market share for failing to give customers the new billing models they want.
“As this survey underlines with the upcoming new revenue recognition rules, it is time to adopt a strong Revenue Management application, with customer retention in mind, helping companies to gain a reliable and predictable revenue stream, superior customer and revenue forecasting analytics, as well as automating complex accounting requirements.”
The findings of the report will concern CFO’s and CEO’s. They should be confirming that their business does have the requisite internal controls to meet the new standards. If they are still reliant on Excel spreadsheets to produce their revenue recognition figures they should certainly be reviewing this. In most cases Auditors will have been saying this for years, especially in the larger firms, but it often sounds like a broken record and an unnecessary costs.
Non exec board members should also be challenging the current state of revenue recognition. They should ask whether it is time to invest in, and even upgrade to a more modern ERP that delivers revenue recognition tools that meet the necessary standard and compliance requirements. It is also important that they push for solutions that deliver figures with less risk than the Excel spreadsheet that “has always worked well before”.
Is this the end of spreadsheets? Almost certainly not. However it does show that perhaps even accountants can be weaned off the tool they have used for decades and it might just signal the beginning of the end. For FinancialForce, this is a welcome finding as it seeks to expand the market share of it ERP solution with inbuilt revenue recognition.