Revenue Recognition Compliance Webinar
The landscape of revenue recognition for many firms has changed. As the FASB/IASB regulations evolve with the revised exposure draft that will be applicable to most businesses, CFO's need to stay ahead of the statutory requirements to ensure that their financials and their
This presentation is from the Proformative webinar "Taming Revenue Recognition Processes & Ensuring Compliance" held on December 6, 2012. The webinar features presentations from Kimberly Odom, Director of Solutions Marketing,
Revenue Recognition Compliance Webinar
I am very excited today to be talking to you specifically about how we have changed revenue recognition here at NetSuite to ensure that we are in compliance with EITF 08-01.
Before I get into the details of this Revenue Recognition Compliance Webinar and the processes that we use here at NetSuite, I'd like to share some background information. We are a publicly traded company, and we had our initial public offering back in 2007. Last year, for full year 2011, we generated more than $230 million in
revenue, and we ended the year with about 1,200 employees around the world.
We provide a Cloud-based financial suite. It's actually a broad suite of applications that include much more than just finance - also include
Before moving on to specific revenue recognition processes at NetSuite, I just wanted to give you a brief background on our sales order and revenue environment. I think this will be helpful if I go through some of our processes and best practices. In a typical month, we process more than 1,500 sales orders that come through the system. These orders are comprised of three classes.
We have new customers that are coming on board. We have upsells to existing customers, and then the final category of sales orders is our renewals. A new customer order will generally start from a lead. That lead will convert to an estimate, and then to a sales order from which we will invoice the customer and generate a revenue recognition schedule. These orders are stated in a variety of currencies and contain a significant number of item configurations. We actually maintain more than 300 items on our price list.
We basically sell three different types of products, the first being a subscription service which includes the main suite, the number of users who will be using the applications, and perhaps maybe some add-on modules. The important distinction here is that, since we deliver our service over the internet, we do not provide an on-premise solution, and our speakers after me are actually in the opposite model. They'll be talking a lot about that, so that's good news.
Support items comprise the second group of sales order types, and those include annual contracts to support the subscription service. Finally, we sell professional services, which cover customization, implementation of the service, as well as ongoing training.
In regards to revenue recognition policy, we adopted the guidelines required under EITF 08-01 back in 2010. Since we are not able to establish ESOE or TPE, we utilize estimated selling prices, or ESPs, for all of our items, in order to properly allocate our revenue among the items that we sell. We amortize our subscription revenue over the term of the contract, while we recognize professional services revenue on a percent completion basis.
Prior to the adoption of 08-01, we were only able to present one revenue line in our quarterly and annual filings. This was due to the fact that we had not achieved [subvertibility] among our different items. However, with the adoption of 08-01, we now report two separate revenue lines, one for subscription and support and the other for professional services.
I want to talk a little bit about the best practices that we have across our end-to-end process here at NetSuite. As I mentioned, it all begins with a sales order. Our sales team actually kicks off the sales order process by converting estimates into sales orders. These sales orders are then approved by sales management, and once that takes place they are routed automatically to our finance team for review and processing.
Processing includes running all the sales orders through an EITF 08-01 bundle, in terms of determining if we have contingent delivery requirements, and ultimately allocating revenue if we have multiple elements that require such allocation. An estimated selling price is populated for each item on the order, and the final allocation is shown on
the order as well.
Once the allocation [revision] is complete, our finance team then creates the rubric schedule. That comes directly from either the sales order or the billed invoice. Commitments cover the entire term of the sales order, while schedules will only cover the period billed by the invoice. Both commitments and schedules are stored in our system and posted to our general ledger through automated journal entries.
We close revenue on a monthly basis, which allows us to provide deep analysis of revenue trends, as well as gaining comfort that our revenue is reported accurately. Various searches and reports on our revenue permit us to evaluate if we need to reassess our ESPs during the year.
In addition to compliance requirements, these searches and reports allow us to forecast our revenue on a customer-to-customer basis, which is done at least monthly. We're also able to perform all of the above inside a single integrated system, which negates the need for us to utilize multiple systems and reconcile data.
Now I want to talk a little bit about the benefits that this integrated approach provides us. The first benefit is we're able to trace each transaction from the sales order all the way through the posting of the revenue into the general ledger. This allows us to more easily identify the root sources of questionable trends and other revenue recognition
anomalies. We can also look at the individual customer record to view all of their respective sales transactions and the resulting rev/rec journal entries.
Because the system integrates CRM and ERP functionalities, we don't have to spend time reconciling data between these two different systems. The process is automated and executed inside a single system with one database. Finally, the system is real-time, so that you have visibility to sales orders as they're processed, and the resulting revenue recognition as the journals are posted. This permits us to conduct research, reporting, and forecasting using a fairly small team.
Now, let's just take a step back and review some of the best practices we've established here at NetSuite to process our sales orders. First, we have put in place an offshore team that is comprised of high-quality CPAs, and they process all of the sales orders that are approved by sales management. Initially, we had contracted with a third-party to provide these CPAs. However, once it made sense in terms of our own company growth, we brought those employees in as full-time.
Due to the fact that all of our employees, regardless of the function that they have in the company, can access the system over the internet, we're able to locate these CPAs in a very, very cost-efficient location, and that location is different than our sales teams, which are actually spread out around the world. This team of CPAs is responsible for the end to end processing of orders, from executing to allocation under 08-01, to creating the revenue recognition schedules themselves, to
Secondly, all members of this team use the same standard desktop procedures. We've continued to refine those procedures as the business has grown and become more complex. Because we've got a standard set of procedures, it allows us to very quickly and easily train any new employees, and we do that training very efficiently. We also can assure that we have consistency across the team.
Finally, we've developed a standard QA checklist that issues throughout the month, and again at month end, to check each order for accuracy from a rev/rec perspective. Since this QA checklist is stored in each respective sales order, we're able to run searches and reports to generate metrics on error rates, as well as file cases if we know we need to make necessary corrections.
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From the high level, high quality, low cost offshore team to the standard desktop procedures, we have a great level of confidence in the revenue recognition. The information is being delivered in a timely manner and is very accurate.
Here I just want to show you a quick example of the sales order QA checklist that I just mentioned. Let me bring this up so you can see the detail. As you can see, we conduct a significant number of checks between the sales order and the corresponding support documentation. This allows us to ensure that our orders are being processed accurately and that the resulting revenue amounts can be relied upon.
Items such as the sales order amount, the date, things like signatures, discount levels, and maybe the specific product the customer has ordered, they're all included here on the checklist. In this example, the QA passed, and so everything is ready to go forward. We can use the results of these QA
I just want to talk a little bit more about the details of us providing our experience now and adopting 08-01.
End partial; Revenue Recognition Compliance Webinar.