Technology companies often have complex regulatory compliance and business process issues related to revenue recognition. Given the importance of accurate and credible revenue, many companies use a combination of business process steps and software solutions to help consistently and accurately recognize revenue. The purpose of this paper is to discuss important considerations for your business process and software deployment to most effectively recognize revenue. This paper starts with an overview of revenue for technology companies, proposes a framework to organize your needed company processes, considers process change requirements for revenue recognition, and then proposes important considerations when you implement any software solution for revenue recognition.

1. Revenue Regulatory Compliance Considerations in
Business Software Implementation
by Bob Scarborough & Jeffrey Werner
INTRODUCTION
Technology companies often have complex regulatory compliance and
business process issues related to revenue recognition. Given the
importance of accurate and credible revenue, many companies use a
combination of business process steps and software solutions to help
consistently and accurately recognize revenue. The purpose of this paper
is to discuss important considerations for your business process and
software deployment to most effectively recognize revenue.
This paper starts with an overview of revenue for technology companies,
proposes a framework to organize your needed company processes,
considers process change requirements for revenue recognition, and
then proposes important considerations when you implement any software
solution for revenue recognition.
REVENUE OVERVIEW
The credibility of the revenue component is probably the most important
aspect of a technology company’s financial reports. A company’s systems
and procedures for recognizing revenue are of critical importance and they
need to be carefully evaluated and examined. Accurate revenue recognition
is key to managing and growing a company as well as providing visible
integrity to investors, lenders, and customers.
There are some basic concepts that revenue recognition rules attempt to
follow. Revenue should be recognized when it is earned and realizable.
To help define when these two premises have been met, four guide points
have been established. To recognize revenue, a company needs to have:
1) Evidence of an arrangement
Tensoft specializes in innovative,
2) Fees need to be fixed and determinable
end-to-end ERP solutions,
3) Fees need to be collectable
including complex revenue, billing
4) Delivery or performance must have occurred
and contract management.

2. Revenue Regulatory Compliance Considerations 2
“The credibility of the revenue Technology company revenue recognition is a complex and difficult area
component is probably the most of accounting, with numerous, seemingly arbitrary rules and regulations
to follow. In addition, revenue recognition rules are continually evolving
important aspect of a technology
and changing. New business models continue to emerge and difficult-
company’s financial reports. A to-account-for situations arise. Given this environment, it is no wonder
company’s systems and procedures that technology companies find revenue recognition rules complex and
for recognizing revenue are of challenging to support.
critical importance and they need
Since revenue recognition rules are constantly evolving, company
to be carefully evaluated and
accounting systems and business processes need to continually be
examined. Accurate revenue updated to meet these new challenges. For example, when software
recognition is key to managing began to be sold separately in the early 1990s, some companies
and growing a company as well recognized revenue on a cash basis, even if they hadn’t written a line
as providing visible integrity to of the program code! More recently, the revenue recognition rules for
multiple element arrangements at non-software technology companies
investors, lenders, and customers.”
changed significantly. Accounting and ERP systems are still struggling to
catch up to these new requirements.
Failure to keep up with the new rules or adequately follow existing rules
can be financially devastating – potentially causing financial restatements,
SEC actions and legal problems. Inadequate reporting, poor visibility and
misunderstood revenue recognition rules can also hinder management
decision-making as well as negatively affect the company’s bottom-line.
A FRAMEWORK FOR REVENUE RECOGNITION
NEEDS ANALYSIS
Complex regulatory requirements, combined with the challenging business
models of the technology industry, can tax even the most flexible minds.
Given this fact, it is helpful to have a framework to analyze your company
revenue processes. Categorizing and organizing the company’s business
needs will better prepare you to build the processes and systems required
for accurate revenue recognition.
The framework we recommend organizes the requirements into three
distinct categories. These categories are based on the overall revenue
process model which consists of: determining the revenue model, applying
the revenue model to sales that occur, and recognizing revenue based on
the revenue recognition concepts:

3. Revenue Regulatory Compliance Considerations 3
“The framework we recommend 1) Determination. Effective revenue processes start by identifying the
organizes the requirements into appropriate compliance regulations and the revenue rules for the products
sold based on these concepts. For many technology companies, an
three distinct categories. These
independent analysis and valuation of the items sold in multi-element
categories are based on the overall models is also necessary. Determination is usually completed annually
revenue process model which for private companies and quarterly for public companies, and may be
consists of: determining the revenue monitored during the year.
model, applying the revenue model
2) Application. The determination occurs in a static environment.
to sales that occur, and recognizing
However it is only useful if the determined revenue rules and values
revenue based on the revenue are applied to real company transactions as they occur. Application
recognition concepts.” understands your sales model (how sales occur) and the transactions
that are created to which the determined revenue rules are applied
and automates the consistent processing of the revenue.
3) Recognition. If you have applied the revenue rules and policy to the
appropriate sales transactions as they occur, revenue recognition
becomes much more streamlined. Validation of sub-ledgers and
manual review of special case or exception rules is also required.
Establishing the fair value of a single element within a multi-element sale
is a Determination need. Ensuring a consistent approach to revenue
recognition based upon company policy and compliance requirements
is an Application need. Our experience shows that addressing the
requirements becomes significantly more manageable once the proposed
framework is applied.
The best starting point is a solid, documented understanding of the company’s
go-to-market model(s). By go-to-market we mean the combination of
channels, sales efforts, and customer actions that result in sales. This type
of process, analysis and thinking may not be standard in many financial
organizations, but it is critical when thinking about how to best manage
and implement the required business processes and systems.

4. Revenue Regulatory Compliance Considerations 4
“This process requires a team INCORPORATING REVENUE RECOGNITION INTO
approach, with sales, management, YOUR ORGANIZATION
order fulfillment, development,
So far, we have gained an understanding of the general nature of revenue
marketing and finance working recognition. We’ve also looked at internal processes and needs and
together. Communication is organized them around a framework for analysis and application. We
critical to keep all team members now need to look at incorporating and adapting this information to your
informed and productively working specific company.
to resolve business and revenue
There are different revenue recognition methods depending on the type of
recognition issues.” business, the nature of its transactions, the company’s sophistication and
its ability to perform certain accounting procedures. The choices of revenue
recognition will depend upon the company’s ability to produce dependable
and reliable information to use in the revenue recognition process. Often,
a company can choose more favorable accounting treatments based on
its ability to make estimates, utilizing its history of past transactions and
business practices.
Revenue rules are guidelines that offer some interpretation and application
flexibility to your company. It is important to align the accounting and
revenue recognition methodologies to the company’s business style and
objectives. If a company wants to emphasize upfront revenue recognition
for delivered elements in multiple-element arrangements, it is important to
have the data and discipline to establish VSOE (Vendor Specific Objective
Evidence) or the value of elements when sold separately to value elements
when sold together. If a company is involved with large service- or
construction-type transactions, accounting must be able to estimate costs
and outcomes in order to recognize revenue on a percentage basis as the
work proceeds, rather than waiting until the project is completed.
Business objectives, company imperatives, and regulatory requirements
help to determine what will be needed to support independent (determined)
element values and how you plan to recognize revenue. They also
incorporate the company’s business model into the analysis and review
process, so you can match systems and business processes to your
company’s needs.
This process requires a team approach, with sales, management, order
fulfillment, development, marketing and finance working together.
Communication is critical to keep all team members informed and
productively working to resolve business and revenue recognition issues.

5. Revenue Regulatory Compliance Considerations 5
“A complete understanding of a Teams can craft a fast-track or devise a standard approach to transactions
company’s revenue recognition that can easily comply with revenue recognition requirements. Unusual or
complex transactions will require a review process to develop the best
goals, go-to-market models, and
business and revenue approach before negotiating or signing contracts
regulatory compliance needs is an with customers. Decisions can be made in advance with the revenue
excellent base for approaching recognition options and consequences in mind, rather than after-the-fact.
system implementation.”
Data collection and retention systems (financial, ERP CRM, and document
,
management) can facilitate the flow of information to support a company’s
revenue processes. They can also substantiate and implement processes
once these processes are determined. So it is important that IT and
accounting systems are able to collect, distribute and analyze transaction
information to maximize business and revenue recognition goals.
INCORPORATING REVENUE RECOGNITION
INTO SYSTEMS
A complete understanding of a company’s revenue recognition goals,
go-to-market models, and regulatory compliance needs is an excellent
base for approaching system implementation. With this information in
hand, we can now use the previously proposed framework to analyze and
organize our approach to implementing business software which supports
the revenue recognition process.
Beginning with the determination requirement, one should know what
information is required to support your determination needs. For example,
as previously mentioned, if VSOE value determination is required for some
elements, you need to make sure you are collecting the information
for those elements clearly and apart from other sales elements. Most
companies start with the need for SKUs to identify products. What
additional information is needed about every SKU to support your
determination? What about the transaction type and customer category?
Defining and answering the required questions will help define your solution
setup needs. It is important to group products and services by type,
transaction timing and contractual terms.
Determination, or establishing the independent value of your elements
in multi-element sales arrangements, is an often an annual process for
private companies and quarterly process for public companies. Once the
value for your elements is set, you need to apply these values, along with

6. Revenue Regulatory Compliance Considerations 6
“Even the simplest multiple-element the appropriate regulatory requirements, to the appropriate transactions for
revenue recognition becomes revenue recognition. The residual method (SOP 97-2) or the relative selling
price method (EITF 08-01) requires specific approaches to applying the
complex when you add substantial
transaction face value to the individual elements of a sale.
transaction volume. Complex
go-to-market models and customer Application and recognition are where the bulk of your system’s support
transaction models definitely benefit resides. Successfully deploying a system to automatically support both of
from a consistent, repeatable these needs offers numerous benefits: from streamlined auditability, to
improved confidence in your revenue numbers, enhanced productivity for
approach to revenue.”
your financial team, and improved valuation of your organization through
substantiated revenue numbers.
Application, or the consistent use of your determined revenue policy to
transactions that occur requires a combination of business process and
systems support. Straightforward revenue recognition policies (sales =
revenue) require little effort here. Multiple element sales, along with the
impact of other rules that define when revenue is earned and realizable,
create more complex application needs. There are also issues of revenue
allocation and recognition when the elements in a sale are delivered at
different times. Ideally your business software will support the variety of
scenarios that your company requires. At a minimum you will need to
make sure that sales transactions are captured and processed in a manner
that supports application (and determination) analysis.
Recognition of revenue, after analysis and implementation of the preceding
steps, often appears to be easy. This is often a misleading perception for a
number of reasons:
Reason #1 is the need for transaction auditability and traceability. The
ideal scenario should be a direct flow from the sales transaction through
the policy application to the deferred and recognized revenue ledgers.
Reason #2 is the need for consistency and simplicity in the revenue
recognition process. Even the simplest multiple-element revenue
recognition becomes complex when you add substantial transaction
volume. Complex go-to-market models and customer transaction models
definitely benefit from a consistent, repeatable approach to revenue.
Reason #3 is visibility – for financial reporting, for forecasting and for
detailed sales and customer analytics. Extracting the requirements for
consistent and repeatable revenue journals, traceability, and visibility will
help to complete the requirements set needed for your company.

7. Revenue Regulatory Compliance Considerations 7
FOR MORE CONCLUSIONS
INFORMATION
In this paper we looked at revenue recognition and the factors that impact
revenue. We proposed a framework for organizing and understanding the
revenue recognition requirements in your company. We discussed applying
compliance and revenue goals to your company’s specific policies and
approach. Finally we looked at how all of these tools can be combined to
help you select a business software solution that most effectively meets
CONTACT TENSOFT: your business’s ongoing needs.
2121-B Ringwood Ave.
San Jose, CA 95131 Revenue recognition for technology companies is complex and ever-changing.
Pressures for speed and resolution are often at odds with the analysis,
www.tensoft.com
visibility and accuracy required for legal compliance and corporate integrity.
E-mail: solutions@tensoft.com But done logically, and supported by intelligent business systems, efficient
Telephone: (888) 450-4030 and effective revenue recognition can do much to improve a company’s top
and bottom lines.
Tensoft President and CEO, Bob Scarborough provides leadership for the
company’s strategic direction and day-to-day operations. His background includes
roles in software solution product marketing, business development, business
process automation and project implementation. He has managed over 200
business software solutions and designed a number of highly sophisticated custom
and out-of-the-box software applications.
Before co-founding Tensoft, Bob was the Vice President for West Coast Operations
of Deltek Systems (PROJ). He established Deltek's first successful California field
office, growing regional revenue over 500% in five years. Prior to that, Bob was
the CFO of a Washington, D.C. consulting organization. He holds a BS in Finance
from the University of Maryland, and an Executive MBA from the Anderson School
at UCLA.
© 2011 Tensoft, Inc. All rights reserved. Jeffrey Werner is an acknowledged expert in the area of software revenue
Tensoft is a trademark of Tensoft, Inc. The recognition. He’s been providing revenue recognition consulting services to software
names of actual companies and products and high tech companies since 2001. Earlier, he was the CFO for Antrim Design
mentioned herein may be the trademarks Systems, a Silicon Valley mixed-signal synthesis company. He also served as V.P .
of their respective owners. of finance for TelePost, a Web-based communications services company and
This document is for informational spent 11 years as a senior manager at the KPMG Silicon Valley office. He regularly
purposes only. TENSOFT INC. MAKES teaches software revenue recognition classes in the San Francisco Bay Area
NO WARRANTIES, EXPRESS OR and has over 15 years of experience helping companies comply with revenue
IMPLIED, IN THIS SUMMARY. recognition regulations through sound policies and best-practices.