New Accounting Rules Make Tech Services Appear BiggerBy Lawrence Walsh | Print
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MSPs and professional services providers will benefit from accounting rule changes championed by Apple and other big vendors that allow the immediate full recognition of ongoing services revenue.
Solution and managed service providers are dissecting how changes to accounting rules will affect their businesses now that they can immediately recognize hardware and services sales.
The Financial Accounting Standards Board Sept. 22 approved changes to the way technology companies report revenue from the sale of products that bundle hardware and services. Under the old rules, companies could only recognize the revenue as it was periodically billed or paid over the term of the contract. The new rule allows companies to record nearly all of the revenue at the time the contract is initiated.
The accounting rules were championed by Apple and other big, publicly traded technology vendors that thought their quarterly revenues were dampened because they couldn't report the full amount of bundled sales. In Apple's case, the change means the company can now report the full amount of an iPhone sale plus the monthly service fee for a two-year contract up front rather than spreading the revenue over eight quarters.
"The move wouldn't change the total revenue and earnings a company reports over time, and the cash flowing into a company remains the same. But companies contend the change would better align their reported results with the true performance of their business," stated a Wall Street Journal analysis Sept. 24.
Analysts immediately focused their attention on the change's impact in the area of consumer electronics sold with supporting services, such as Apple's iPhone and Apple TV, or Verizon's bundled sale of netbooks with two-year wireless Internet access packages. The rule changes apply to all companies that deliver products and services, including managed services and HAAS (hardware as a service) companies.
Trust and stability are often at the top of the list of considerations for end users evaluating MSPs, and revenue is seen by many as a reflection of stability. The accounting rules change could allow MSPs to artificially inflate their gross revenue, making it seem as though they're larger than their cash flow.
"Strategic buyers will be very aware of the change and could possibly take more time during due diligence getting to know the customer base before pulling the trigger, as any cancellation after a closing could [mean] a significant change to the already booked revenue number," says John Marks, president of Coach Capital and former owner of JDMI Integration.