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New Accounting Rules Make Tech Services Appear Bigger

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 […]

Written By: Lawrence Walsh

Sep 24, 2009

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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.

New Accounting Rules Make Tech Services Appear Bigger

Lawrence Walsh

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