Accounting Topics & Trends for Technology & Software Companies

Transcription

1 Accounting Topics & Trends for Technology & Software Companies NOVEMBER 14, 2018 TO RECEIVE CPE CREDIT Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar 1

2 PRESENTERS John Kmetz, CPA Partner Michael Van Booven, CPA Director Mary Reiser, CPA Director Tim Jackson, CPA Partner Andrew Kaempfe, CPA, CHFP Senior Managing Consultant Revenue Recognition 2

3 The Five-Step Model STEP 1 Identify contracts with customers STEP 2 Identify performance obligations STEP 3 Determine transaction price STEP 4 Allocate transaction price STEP 5 Recognize Revenue COST TO OBTAIN A CONTRACT Example: Sales Commissions Must be incremental Required to be capitalized Amortization over a period consistent with the transfer of services Need to evaluate all compensation plans 3

4 TRANSITION METHODS Full Retrospective Change everything: all periods presented Modified Retrospective Only change current year Cumulative effect in beginning retained earning in the period of adoption Can choose to apply to all contracts or only contracts not yet completed as of the date of the adoption Additional Disclosures LESSONS LEARNED You don t know until you know Performance obligations Transaction price allocations Significant judgment Single-year presentation Disclosures Time commitment 4

5 REVENUE RECOGNITION What You Can Do? Start early! Schedule a kickoff meeting with BKD Advisor Consult frequently BKD has tools to help Understand potential impacts Financial statements Disclosures Internal controls Educate financial statement users BKD Thoughtware Lease Standards 5

6 WHAT CHANGES? All leases will be recognized on the balance sheet of lessees Operating Leases Lease liability Right-of-use asset Don t appear anywhere on today s rules Finance Leases Lease liability Lease assets Similar to today s rules WHAT CHANGES? 6

7 WHAT CHANGES? ACCOUNTING TREATMENT SUMMARY Finance Lease Balance Sheet Right-of-use (ROU) asset Lease liability Income Statement Interest expense (on lease liability) Amortization expense (on ROU asset) Cash Flow Statement Operating activities interest payments Financing activities cash paid for principal payments Operating Lease Balance Sheet Right-of-use (ROU) asset Lease liability Income Statement Lease/rent expense (straightline) Cash Flow Statement Operating activities cash paid for lease payments 7

8 IMPLEMENTATION OPERATING LEASE Assumption No purchase option or transfer of rights at the end of the lease term Operating lease Annual Lease Liability Lease ROU Lease Payments 3.5% Cash Expense Asset Liability Year 1 100,000 $451,505 (100,000) 100,000 (84,197) 84,197 Year 2 100,000 $367,308 (100,000) 100,000 (87,144) 87,144 Year 3 100,000 $280,164 (100,000) 100,000 (90,195) 90,195 Year 4 100,000 $189,969 (100,000) 100,000 (93,351) 93,351 Year 5 100,000 $96,618 (100,000) 100,000 (96,618) 96, ,000 (500,000) 500,000 (451,505) 451, Due Diligence Trends 8

9 DUE DILIGENCE TRENDS Current trends for due diligence in technology companies Typical focuses of technology company due diligence includes: Main focus on monthly recurring revenue (GAAP versus cash basis) Calculation of deferred revenue using accrual GAAP Gross margin true up EBITDA normalization (earnings before interest, taxes, depreciation & amortization) Proof of cash MONTHLY RECURRING REVENUE Detailed analysis of invoicing detail to accrue revenues monthly (under GAAP, not cash, basis) Net Revenue Invoiced Recurring Revenue Month 9

10 MONTHLY RECURRING REVENUE Detailed analysis of invoicing detail to accrue revenues monthly (under GAAP, not cash, basis) Net Revenue Adjusted GAAP Recurring Revenue Invoiced Recurring Revenue Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Jul17 Aug17 Sep17 Oct17 Nov17 Dec17 Jan18 Feb18 Mar18 Apr18 Month MONTHLY REVENUE SUMMARY Detailed analysis of invoicing detail to accrue revenues monthly (under GAAP, not cash, basis) Adjusted GAAP Net Revenue SaaS Other Recurring Non recurring Month 10

11 DEFERRED REVENUE Analysis of historical financial statements to normalize earnings Calculation of deferred revenue typically includes Upfront SaaS invoicing recognized over the service period (quarterly, annually, etc.) Implementation revenues typically deferred over customer life, or, if indeterminable, the initial contract period Other revenues consulting, technical support, training, etc. Discuss with management the nature of these services & whether deferral is warranted GROSS MARGIN TRUE UP Analysis of expenses to determine proper classification Key focuses of gross margin analysis Focus is on labor costs Monthly employee build by department Determine whether departments are involved with delivering services to customers or general/administrative in nature Other costs Typically, most other costs are operating expenses in nature, but these are considered for the analysis 11

12 QUALITY OF EARNINGS Analysis of historical financial statements to normalize earnings Typical GAAP adjustments Revenue recognition (previously discussed) #1 priority Expense accruals (cash to accrual conversion, or true up of recorded accruals) Software development costs (no impact on free cash flow) Fixed asset capitalization (no impact on free cash flow) QUALITY OF EARNINGS Analysis of historical financial statements to normalize earnings Typical Nonrecurring items Owner/officer compensation true up can go up or down Owner personal expenses Transaction-related expenses Other nonrecurring items 12

13 PROOF OF CASH Tie out of financial statements to bank statements/recs Key analysis for unaudited companies Cash deposits compared to revenues, adjusted for Changes in AR Changes in deferred revenue Proceeds from debt Deposits in transit Transfers Cash withdrawals compared to expenses, adjusted for Noncash items Changes in AP Changes in accrued liabilities Capital expenditures Debt payments Equity distributions Outstanding checks Transfers State & Local Taxes 13

14 STATE & LOCAL TAX ISSUES Sales & Use Tax Nexus Physical presence Economic presence post-wayfair Taxability SaaS Downloaded software Exemption Certificates Collection & retention Use Tax Procedures STATE & LOCAL TAX ISSUES Income/Franchise Tax Nexus Physical presence Economic presence Gross Receipts Taxes & Local Taxes Ohio Commercial Activity Tax Washington B&O Tax Tennessee Business Tax 14

15 STATE & LOCAL TAX ISSUES Pass-Through Entities Entity-Level Taxes California Annual LLC Tax & Fee Tennessee Excise Tax Nonresident Withholding Tax Single-Member LLCs Alabama Privilege Tax Qualified Subchapter S Subsidiaries Georgia Net Worth Tax Questions? 15

16 CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at training@bkd.com 16

17 Thank you John Kmetz Michael Van Booven Mary Reiser Tim Jackson Andrew Kaempfe 17