IFRS 15

Top 10 Quotes from NetSuite’s SuiteWorld 2016

It has been an extraordinarily busy spring conference season. I personally attended 10 events over the past eight weeks and missed a few more because of scheduling conflicts. Of all those I attended, I think NetSuite’s gets the prize for the best sound bites produced in an event. Here are my top 10 favorite quotes from SuiteWorld 2016.

“I love the smell of GL systems in the morning.”

Not. Of course this was said tongue in cheek by Zach Nelson, CEO, and was actually a veiled reference to the context of the next quote. Zach (somewhat proudly) noted that Gartner’s ranking of NetSuite’s Financial Management System (FMS) had progressed from #8 in 2014 to #6 in 2015.

“We didn’t set out to build a Financial Management System (FMS). Our goal was to build a system to run the business.”

Actually NetSuite originally started with three goals: to build an end-to-end system, deliver it only over the cloud, and include ecommerce natively. Of course, in order to deliver an end-to-end solution, it needed a back office accounting solution, but that was just one piece of the puzzle, not the end game. Through the years they were tempted to put servers on premise, especially in the early days before Software as a Service (SaaS) had come into its own. But they resisted. And they made sure even the early solution had a web store.

“We spent $1 billion so you didn’t have to.”

Continuing on the theme of including eCommerce, Zach touted the speed of Suite Commerce, giving some statistics on how it outperforms other leading sites. In a follow-on to Zach’s opening keynote, CTO Evan Goldberg (also one of the original NetSuite founders) noted they had delivered a 33% faster sales order save and 40% faster Suitecommerce advanced page load time. Obviously there is a cost associated with delivering speed and performance, but not a cost that comes directly out of NetSuite customers’ pockets.

“Security bugs? We find ‘em; we fix ‘em. The next morning, all are running with the appropriate patches.”

The reference to security bugs was in the context of a security bug, purportedly reported to and fixed by rival SAP three years ago. Yet some customers had yet to apply the patch and were therefore still vulnerable. My tweet with this quote sparked a bit of a push back from someone coming to SAP’s defense:

This was an SAP API fix that broke ISV integrations if applied, hence SAP made optional. Cloud companies have similar probs

To which I responded: would venture to say in a #SaaS environment, problems don’t linger 3+ years

His response: API fix is a little different, SAP gave customers option because fix could break ISV integrations – it was a useful defect

“Useful defect?” Is there really such a thing? And have we really become so inured to fixes of any kind “breaking” integrations? I hope not.

But the real point here is the value of a multi-tenant SaaS environment. First of all, the customer is relieved of the burden of applying patches. The SaaS vendor pushes them out in (hopefully) a timely manner. And with only a single line of code to maintain, more innovation should come along faster.

The other implied benefit is the value of a platform that allows partners and customers to customize and extend the code without fear of it breaking when fixes and enhancements are delivered.

“Customization is not a dirty word at NetSuite.”

The caveat to this is obviously… as long as you can upgrade. NetSuite customers are all running the same code, yet all are a little different. One of the unique features of NetSuite’s platform (unique for a SaaS-only solution anyway) is the ability to make even complex changes to the data model with no negative impact. This feature is becoming more and more popular among NetSuite’s customers. Within the last year, the ability to add custom fields went from the 5th most used feature to number 1. This actually comes as no surprise to me. My 2016 Enterprise Solution Study asked survey participants what type of customization they required. Fifty-seven percent (57%) selected user-defined fields. Only custom and ad hoc reporting were more widely selected (63% and 62% respectively).

In fact much of the “customization” that is typically required by NetSuite customers does not require you to muck around in code at all. Much can be done through tailoring and configuring, or personalizing screens. But let’s say you want to develop a whole new function that is either very industry-specific or helps you differentiate your individual business. NetSuite does provide development tools for this, including SuiteScript. Per NetSuite: SuiteScript is a JavaScript-based scripting solution for sophisticated coding and debugging within NetSuite that enables developers to build new applications, processes and business rules.”

In addition, a beta version of SuiteCloud Development Framework has recently been released after a multi-year effort. This framework includes all the tools for coding that you know and love, now with team development collaboration, richer code completion, version control, change and dependence management (i.e. discover what code might break if you make this change).

“SuiteScript allows you to do anything your wife wants you to do.”

This quote came from Evan Goldberg, one of the original NetSuite founders. When not performing his duties as NetSuite’s chief technologist, his alter-ego manages his wife’s ecommerce site, which she happens to run on NetSuite SuiteCommerce. The new release of the NetSuite Development Tools has had a profound impact on all developers, including Evan and his alter-ego as both took the stage. While it was quite hard to decipher everything going on (the font was way too small for my eyes, and I haven’t written code in almost 4 decades), it was clear the new code created for Mrs. Goldberg’s web storefront was a lot shorter and faster..

“Our goal is to stay out of your way [to innovate] in your business.”

While first spoken by Evan, this phrase proved to be thematic, popping up in other keynotes and sessions as well. Revamped developer tools were just the beginning. What the NetSuite development team has accomplished with the tools is equally important, if not more so. Among the new features and enhancements were many in the finance area, a new SuiteBilling module, complete with support for new revenue recognition rules for ACS 606 and IFRS 15, and “intelligent” order management. NetSuite places the dual goals of streamlining the development process and customers’ business processes on equal footing.

Disruption caused by today’s digital economy makes digital transformation compelling and the need for agility crucial. Traditionally ERP solutions were more likely to hold you back than to enable transformation. Can NetSuite be an enabler? They can certainly try. And trying is even more important than ever as business complexity increases.

“In the cloud economy everything gets more complex.”

Actually I would say it is the digital economy that makes things more complex. Perhaps in this quote, “the cloud economy” was meant to be synonymous with “the digital economy.” Indeed, it is hard to have a digital economy without the cloud. But I think there is a subtle difference. Cloud is an enabler in helping us participate in the digital economy, both as consumers as well as enterprises. On the one hand, the cloud has made our personal lives simpler. We can order dinner, entertainment, or a taxi ride online. We can shop online and have goods delivered right to our doors. But we can also still shop in a store. Or we can order online and pick up the goods in a store. This is the very definition of “omnichannel.” As we simplify our personal consumer experience, we complicate matters for the enterprise.

“Hybrid business models are the new black.”

Can one system handle all these different ways of conducting business? Certainly traditional ERP solutions made this difficult. They either catered to a retail/cash sale environment or an order-to-pay environment. But today blended environments are becoming more and more common. Many try to accomplish this with different systems. But when these systems don’t talk to each other the customer experience suffers.

But this isn’t the only example of a hybrid business model. We are rapidly entering a subscription-based economy. The software industry led the charge here. Enterprises and consumers alike used to license software and bring it on premise. While this didn’t really mean they “owned” it, as they might own a pair of shoes, in some ways they did own a copy of it. Today, these same software companies are much more likely to sell a subscription to the software.

Now even companies that sell and ship physical products are likely to sell a subscription either along with the product, or instead of it. Consider the water filter company that ships you a device that filters your water for free and then invoices you monthly based on how much water you filter. After a certain period of time, the filter needs to be changed and they charge you when they ship you a new one. Chances are you don’t own the DVR in your home. Your cable provider does. You simply pay for the cable service as a subscription.

More and more companies must invoice based a hybrid business model, invoicing for some combination of product, services or “as a service.”

“If you can sell it, we can bill it (and recognize it.)”

NetSuite’s SuiteBilling module not only supports all these different invoicing methods, but it can also combine them all on a single invoice. While this sounds simple, trust me, there are many solutions out there today that will struggle with supporting all these different billing methods at all, even without trying to combine them on a single order and then a single invoice. I applaud NetSuite for rejecting the option of trying to optimize for the intersection. Instead NetSuite chose to but have to optimize for each and make it easy to combine them.

And because many of these new ways of billing have a signed or at least implied contract, there won’t be too many companies that are not going to be impacted by the convergence of ACS 606 and IFRS 15 (Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606 and the International Accounting Standards Board (IASB) International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers.)

These converged standards for revenue recognition go into effect the beginning of 2018 for public entities, and in 2019 for privately held organizations, bringing very significant changes to financial statements and reporting for any company doing business under customer contracts. While revenue recognition, including expense and revenue amortization and allocation, has never been simple, with these changes, it is about to get harder – at least for a while.

Why? First of all, while you can prepare for the change, you can’t jump the gun. You can’t recognize revenue based on the new rules until those new rules go into effect in 2018. At that point public entities must report under the new guidance and private companies can, but they have an additional year before they are required to do so. So any public entity better be ready to flip the switch, so to speak. But flipping the switch doesn’t only mean recognizing revenue in a new way. For any contract with outstanding, unfulfilled obligations, you also have to go back and restate the revenue for prior periods under the new rules. And for some period of time, you will need to do dual reporting: old and new. In addition, when contracts change, this can potentially have an impact on revenue previously recognized, including reallocation and amortization of revenue and expenses.

NetSuite has been working on this for quite awhile, starting with the support for multiple sets of books, which is how it will accommodate the dual reporting. It is not too early to be planning for this change and using multiple sets of books, you can be looking at how the revenue will be recognized in the future. I have seen some of these before and after revenue reports and the changes are not particularly intuitive. Best to understand what is coming or your revenue predictions for 2018 are going to way out of whack.

Bonus Quotes

While those were my top 10 favorites coming out of SuiteWorld 2016, there were a couple more that you might find interesting:

“Luck should not be a business strategy”

No further explanation required. Real “luck” is a combination of careful planning and hard work.

“The Cloud is the last computing architecture, the last business architecture.”

Sorry Zach, I just can’t agree with this one. I am sure some will immediately think of the famous quote: “Everything that can be invented has been invented.” While some give credit to Charles H. Duell, the Commissioner of US patent office in 1899, others point to a more contemporary source, a book published in 1981 titled “The Book of Facts and Fallacies” by Chris Morgan and David Langford. Either way, whoever said it, was wrong. Maybe Zach is right, but personally whatever the last computing or business architecture will be, I’m pretty sure nobody has even thought of it yet.

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ACS 606 and IFRS 15 Revenue Recognition Rules Are Coming

Are You Prepared? Intacct Has You Covered.

In May 2014, FASB issued Accounting Standards Update (ASU) 2014-9, Revenue from Contracts with Customers (Topic 606). At the same time the International Accounting Standards Board (IASB) also issued International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers. In doing so, these two governing bodies largely achieved convergence, with some very minor discrepancies. These converged standards for revenue recognition go into effect the beginning of 2018 for public entities, and in 2019 for privately held organizations, bringing very significant changes to financial statements and reporting for any company doing business under customer contracts. And of course with these changes come new audit challenges.

“The core principle is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

Source: FASB ASC 606-10-5-3 and 606-10-10-2 through 10-4

As a result of these changes, revenue is no longer recognized on cash receipt, but instead on the delivery of performance obligations. In summary, there are 5 steps:

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price for the contract
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when or as the entity satisfies the performance obligation

Sounds simple enough, right? Not really. Unless your business is dead simple and you operate on a completely cash basis, the process of billing, accounting for and forecasting revenue, in conjunction with expense and revenue amortization and allocation has never been simple. But with these changes, it is about to get harder – at least for a while.

Why? First of all, while you can prepare for the change, you can’t jump the gun. You can’t recognize revenue based on the new rules until those new rules go into effect in 2018. At that point public entities must report under the new guidance and private companies can, but they have an additional year before they are required to do so. So any public entity better be ready to flip the switch, so to speak. But flipping the switch doesn’t only mean recognizing revenue in a new way. For any contract with outstanding, unfulfilled obligations, you also have to go back and restate the revenue for prior periods under the new rules. And for a period of time, you will need to do dual reporting: old and new. In addition, when contracts change, this can potentially have an impact on revenue previously recognized, including reallocation and amortization of revenue and expenses.

If you are managing billing, accounting and/or revenue forecasting with spreadsheets today… good luck. If you are an Intacct customer, luck is on your side. Earlier this week Intacct announced a new Contract and Revenue Management module. Intacct claims it is the first solution to fully automate the new complexities created by ASC 606 and IFRS 15. They are certainly not the only company working on it. In fact QAD (which targets a completely different market: the world of manufacturing) highlighted its efforts in its own event in Chicago recently. But I have to say, Intacct seems to be right out front leading the charge in helping companies deal with what is sure to be a complex and potentially disruptive transition.

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