Nightmare of revenue recognition

January 1, 2008 from CFO Magazine “Ever since 1963, the year it first issued shares in New York, Japanese electronics giant NEC Corp. has proudly reported its financial results according to U.S. generally accepted accounting principles. The $42 billion (in revenues) maker of computers, monitors, and semiconductors was so steeped in U.S. GAAP, in fact, that its Tokyo-based finance staff had little knowledge of Japanese accounting standards.

Then, in 2006, NEC's auditors from Shin Nihon Ernst & Young began questioning how the company had recognized revenue for contracts that included multiple items such as hardware, software, maintenance, and support services. At issue was the company's approach to a one-two regulatory punch: SOP 97-2, which governs how companies that sell software recognize the revenue; and VSOE, or vendor-specific objective evidence, a method for determining the individual value of each item within a contract in order to recognize partial revenue before the entire contract is fulfilled…”

180 View – Revenue recognition requirements often lead to manual systems for many companies. When seeking new systems and you have revenue recognition requirements, look for systems that are able to automatically move revenue from deferred to recognized according to business rules so there is no need to back it out of the general ledger and re-allocate it manually.