Revenue Recognition

Revenue Recognition

January 9th, 2011 — 6:36am
While surfing the web tonight, I found Oracle’s social media policy for employees. It was dated January 2010.When I was at Intuit, I worked closely with the legal, privacy and financial teams to create something we called ‘Guidelines and Guardrails’ ™, because we wanted to provide Guidance vs. threatening employees. We also developed an opt-in training program for employees who wanted to help in figuring out what to do or not do – what they Rules of the Internet Road were.Oracle takes a similar common sense approach policy. Here’s their reference to revenue recognition. Its policy states:As a general rule, don’t discuss product upgrades or future product releases. Because of potential revenue recognition issues, it is especially important that we do not give the impression to customers or potential customers that a given product upgrade will include specific features that will be incorporated into the product within a specific time frame. See Revenue Recognition Guidelines. Any exceptions must be approved by senior management, Legal, and Revenue Recognition.Unfortunately, I cannot access or find Oracles Revenue Recognition Guidelines (highlighted above in red). After doing random sample of talking to ten people in ten different Silicon Valley companies, almost none of them could tell me where their own company’s Revenue Recognition Guidelines were located. And only half could define or provide an example of Revenue Recognition. And I have yet to see a company explain it with numbers. Some example. (Of course, I would love to see some examples of organizations that do this – there must be some)In most companies, they only provide links to revenue recognition guidelines and do not really spend time to explain the financial impact on a company.  Wikipedia defines it as:The Revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are (1) realised or realisable, and are (2) earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.It’s a good thing I took accounting in business school; otherwise, I would have no idea what they are talking about. Wikipedia and other sites provide examples of how to handle revenue recognition, but it’s difficult to find examples of what a violation would be and it’s financial impact.’ This becomes a bigger issue as employees play outside the company on social networks. Since it is so easy to accidentally talk about a new product features on Facebook, Twitter or LinkedIn. And it is even easier for someone to cut and paste an excerpt of something and spread it around the Internet. So while one person is sitting back and feeling special cause they shared some cool information about a new and upcoming product feature, the company mentioned will have to allocate some revenue for the quarter the features was mentioned in.Providing a roadmap of the new feature will cause all new sales of Quickbooks to be delayed until the payroll feature is released. Employees need to be careful in what they say or offer to their customers because any commitment or promise could cause delay in recognizing revenue the current quarter or fiscal year. BUT, it is up to the finance group to properly coach employees on the impact of ‘spilling the beans’ on the web.So what does a finance person do to make sure everyone in the company understands this? Here are some key recommendations:

  • Include an explanation of revenue recognition during new employee orientation
  • Make it easy for employees to find information and examples (I have yet to find a company that actually puts some numbers with their words, and explains the financial impact)
  • Provide some examples of what to say and not say
  • Give the employee the benefit of the doubt and trust they will not do anything intentional to violate Rev Rec rules
  • Think twice before editing or deleting a post or comment that has revenue recognition issues because there might be some backlash about editing a post

This last point is interesting because a company has to decide if they want to include the revenue in the quarter where the product feature was discussed. Finance people should also get the social media experts involved with new product launches so they can leverage monitoring tools to determine if an employee has accidentally shared a product road map or feature before a launch date.I also recommend visiting this site that is dedicated to Revenue Recognition issues.What’s the risk here? Your forecast and projected revenue could be impacted by just one simple blog post or statement on Twitter.


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