Tech Vendors Face New Accounting Rules

NetSuite responds with cloud-based revenue-recognition module for ERP systems.
New rules set to go into effect next week will change the way technology firms ranging from cloud-computing vendors to cell-phone, medical-device and appliance manufacturers handle accounting. NetSuite, the cloud-based ERP service provider, responded yesterday by announcing a new module said to ensure compliance.

The new rules, EITF 08-01 and EITF 09-03, were issued by the Financial Accounting Standards Board (FASB) and must be adopted by affected firms in the first fiscal year beginning on or after June 15, 2010. Apple, for one, has already embraced the new rules. The move has accelerate recognition of revenues, increasing Apple's reported net sales by $6.4 billion, $5.0 billion and $572 million for 2009, 2008 and 2007, respectively, according to Apple's 10K.

"The new rules are designed to help figure out selling-price estimates to determine whether you're offering tangible products in software revenue recognition," said Ray Wang of Altimeter Group. "If you're selling an appliance or a box and there just happens to be software inside, this excludes the need to apply revenue recognition rules." The changes may even apply to auto manufacturers bundling software into onboard systems.

Taking advantage of the new rules is easier said than done. NetSuite Advanced Revenue Recognition, the cloud-based service the vendor announced yesterday, is claimed to be the first revenue recognition product designed to help firms automate the processes required to comply with the new rules. Once the service becomes available on July 1, it will be offered as an add-on module that will be integrated with the NetSuite Financials component of the vendor's ERP service. But NetSuite is also offering Advanced Revenue Recognition as a stand-alone service that can be integrated with on-premise SAP, Oracle and Microsoft ERP systems.

There's little doubt on-premise ERP vendors will address the accounting rule changes in the next releases of their financial applications, but Wang said NetSuite is taking the lead and demonstrating the agility of the cloud computing model.

"What this really shows is that in software-as-a-service applications, fixes can show up and be adopted much more quickly than in the on-premises world," he said.

Will the new module give NetSuite a foot in the door among tech firms using on-premise ERP? Wang said on-premise customers are only a software-upgrade cycle away from seeing a fix for the new FASB rules, but he also noted a two-tier ERP deployment trend; users of robust, on-premise ERP are sticking with those systems at headquarters while deploying lower-cost alternatives at divisional levels.

"This two-tier ERP approach is taking hold because many people don't want to deploy the full weight of an SAP or Oracle everywhere," Wang said. "So much the better if companies can also address these new revenue-recognition rules with the same approach."

NetSuite says it will use its own product to achieve early compliance with the new FASB rules before the 2011 fiscal-year deadline.