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The new standard for revenue recognition—formally known as ASU 2014-09, Contracts With Customers—continues its march toward final adoption on Dec. 15. Corporate filers are still in various stages of implementing the system, and today we look at yet another company disclosing how its revenue recognition might change:

Salesforce caught our eye because, as we’ve written previously, software companies with long-term customer contracts are more likely to see material changes in the timing or nature of their revenue. ASU 2014-09 will allow the deferred revenue on the future years of those contracts, currently locked up in the liabilities section of the balance sheet, to be recognized all at once on the income statement.

Sure enough, when we peeked at Salesforce’s latest quarter report filed on Nov. 22, we found this:

The Company believes that the new standard will impact the following policies and disclosures:
  • removal of the current limitation on contingent revenue will result in revenue being recognized earlier for certain contracts;
  • allocation of subscription and support revenue across different clouds and to professional services revenue;
  • estimation of variable consideration for arrangements with overage fees;
  • required disclosures including information about the remaining transaction price and when the Company expects to recognize revenue; and
  • accounting for deferred commissions including costs that qualify for deferral and the amortization period.

In other words, that acceleration of revenue off the balance sheet, onto the income statement is going to hit Salesforce, too. Salesforce does not expect that shift to result in a material change in revenue numbers, although we’ve seen other companies—most notably, Microsoft—where the change has been material.

Instead, Salesforce is a good example of all the other items on a company’s financial statements that might change as a result of the new standard, and the implications those changes will bring for other systems and operations outside the accounting department. For example:

Under the company’s current policy, the company only capitalizes commissions that have a direct relationship to a specific revenue contract and the cost is deemed to be incremental. Under the new standard, the concept of what must be capitalized is significantly broader since a direct relationship with a revenue contract is not required. Accordingly, the new standard will result in additional types of costs being capitalized, including fringe benefits and taxes.

Translation: Salesforce will need to adjust the compensation practices in its sales department, and controls in the accounting department to track all those expenses—because more costs will need to be capitalized than under the old standard.

Will that change Salesforce’s revenue numbers to any material amount? No. Will it keep the accounting department busy as auditors inspect all those internal controls, to ensure they still work effectively under the new standard’s requirements? Yes.

Audit firms will also be under more pressure from their own regulator to be more skeptical of a company’s use of estimates, such as what Salesforce mentions above. That’s a whole other kettle of headache we’ll explore another day.

For now, we can see yet again that the new revenue recognition standard is a big deal, because it affects companies in ways both big and small. Salesforce is merely one example.

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