Your System – Not Guilty As Charged

Just another weblog

Fundamental Change Drives Need to Stay Current

Posted by Joel Schipper on February 11, 2015

A great example of how to keep your system “not guilty” comes from the recent JDE Summit 15 in Broomfield, CO, a key gathering of roughly 700 business partners for Oracle’s JD Edwards product line.

What’s at stake centers upon a fundamental change coming in the world of accounting and revenue recognition. The FASB and the IASB (accounting standard boards covering the USA and the world) have agreed that starting in January of 2017 there will be a dramatic change between how companies account for revenue that is related to an obligation to deliver on a promise. Today, this is called “deferred revenue” and in essence means that companies defer, or do not immediately recognize revenue – even if they have invoiced a customer and collected the cash – if they have a future obligation to deliver something, such as an unfinished (or promised) software release, or a piece of machinery subject to a final customer test and acceptance. In January of 2017, this will change to a different standard known as a ‘performance obligation’ meaning that the revenue will be recognized when the related contract obligation has been completed. A simple example is a company that makes and sells tractors and trailers. If the tractor can be used without the trailer, then shipping the tractor ahead of the trailer will be completion of the performance obligation, and hence revenue in January, 2017. If the tractor cannot be used without the trailer, then shipping the tractor ahead of the trailer will not complete the obligation, and therefore will not be revenue until the trailer is shipped and accepted by the customer, thereby completing the “set” and the obligation.

Where “your system” comes into this is through a major change in how contracted sales, and even sales without contracts but with implied ‘performance obligations’, are handled by your system. Some software companies will sell you a new “contracts management” module. If this is backwards compatible to your current release, then if you buy and implement it, your system will be keeping up with this fundamental change, and will “not be guilty.” If you fail to buy it, or if if requires an upgrade that you can’t undertake, then your system will become “guilty” but it will be your fault.

In the case of Oracle’s JD Edwards, both product lines (EnterpriseOne and World) will get the appropriate enhancements to handle the new accounting standards. And these will be at no charge for customers on maintenance support. The only rub will be that these enhancements will be made to a relatively current release of these systems. Since there is nothing to purchase, the JD Edwards systems will automatically be “not guilty as charged” … but a customer who can’t or won’t make an upgrade to reach those release levels will find themselves “guilty” and not their system.

Look for another key example from the JDE Summit in an upcoming post!


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