Revenue Recognition Gaffes Lead to Lack of Credibility

Challenge: when the CEO of a $25 million software company became concerned about the frequent and significant changes to the company’s P&L forecasts, he called on RBF to review his finance department’s methods for recognizing the revenue generated from customers’ multi-part contracts, and to establish better decision-making in the department’s revenue recognition and forecasting practices.

Background: The changing financial forecasts – in some cases, several times per month – were making it hard for management to plan strategically, and were raising investor concerns when it came time to raise capital. Yet with each new contract, the finance department was finding it hard to apply revenue recognition rules consistently. Typically, software contracts often feature widely varying performance obligations in areas such as licensing, training, implementation, maintenance and upgrades, and are among the most complex contracts to parse out from a revenue recognition standpoint.

Solutions: RBF obtained and reviewed the company’s five previous forecasts as well as its current financial statements. We also reviewed the company’s seven largest contract documents in order to determine the proper timing of each contract’s revenue and cash flow according to then-prevailing accounting rules.

Outcomes: After discussions with the CEO, the VP of Finance, other senior managers and the company’s external auditors, it was agreed that we would assume P&L and cash flow forecasting responsibilities until the finance department’s internal practices could be improved to deliver accurate, credible statements. We then prepared the company’s financial records for year-end external audit – an audit that ultimately yielded no adjustments to revenues.

RBF expertise employed:

  • Interim CFO and Comptroller Services
  • Contract Review, Budgeting and Forecasting
  • Investor Relations
  • Capitalization Table Management
  • Accounting Services

Timeframe: 9 weeks

 

 

 

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