Tag Archives: Accounting
MANA Nutrition: Applying For-Profit Accounting Principles at a Nonprofit
Posted by Barney Beal, Content Director and Kendall Fisher, Executive Producer and Host of The NetSuite Podcast
With a background in finance at a technology solutions company, a document publishing and delivery organization and an accounting firm for midmarket companies, Chris Whitfield joined the nonprofit organization MANA Nutrition as CFO with a strong background in for-profit accounting principles.
That background has proven valuable in the nonprofit world as well, Whitfield relayed during a session at SuiteWorld19.
“Both for-profits and nonprofits are mission-based, the missions just tend to be a little different,” he said.
For example, MANA Nutrition has structured its organization more like that of a for-profit even while it maintains a strict mission-based focus. The Charlotte, N.C.-based nonprofit manufactures nutrient-rich milk suspended in peanut butter, a ready-to-use therapeutic food (RUTF) used to treat severe acute malnutrition, producing about 500,000 meals per day. As a manufacturer, it may seem to have more in common with for profits than nonprofits focused on services or curing diseases, but that’s not really the case, according to Whitfield.
“MANA is a mission-based organization,” he said. “Our mission is to save kids’ lives and have a meaningful impact on reducing the lives lost from severe and acute malnutrition.”
But for-profits and nonprofits have a lot more in common than one might assume, Whitfield assured the audience. Both have a mission, it’s just that for-profits’ mission is profit. Both have a similar organizational structure: an executive director and organizational leadership in the case of nonprofits and CEOs and senior leadership in the case of for-profits. And, both largely operate under the same GAAP principles, aside from a few exceptions, and work under the same fundamentals of accounting and internal controls.
“For-profit stakeholders are investors, and there’s nothing wrong with that. I’m a big believer in capitalism,” Whitfield said. “Nonprofits tend to be service focused. At MANA we have a view that our shareholders, who receive our dividends, are the kids we serve. We like to think of ourselves as having capital. We have benefactors who say, ‘I’m ready to invest in your business.’ Their return is not a financial return, it’s the dividends we give to kids.”
Those similarities, among others, offer finance professionals in nonprofits an opportunity to apply more for-profit principles to their organizations. For example, where a for-profit might focus on reducing costs to improve margins, MANA has reduced the cost of a case of RUTF from $ 60 when it first started to $ 38, allowing it to sell to aid organizations in greater volume at a lower price, increasing its impact.
Financial Statements
There are similarities in financial statements, according to Whitfield. One might be a statement of financial position (nonprofit) and another might be a balance sheet (for profit), but they’re essentially both balance sheets. While nonprofits consider their net financial position to be a derivative of total assets minus liabilities, for-profits view the balance sheet are the cornerstone of internal control wherein total assets must equal total liabilities plus equity (that is, net assets).
“I think it’s an important and subtle difference, but nonprofits should take a look at what their equity position is,” he said.
Nonprofits can take a lead from for-profits when it comes to reporting on financials. Typically, nonprofits are focused on reporting to external constituents, whether it’s a board or donors or maybe outside agencies or creditors.
“Creditors, while they want to see external audited reports, are just as interested in internal reports that measure the success of your organization,” Whitfield said. “At MANA, we don’t report a statement of activities, we report a balance statement and income statement, but also a monthly analysis, KPIs in production, etc. That’s been valuable with creditors.”
Revenue Recognition, Subscription Models and Promises to Give
Nonprofits can also benefit from following the for-profit world when it comes to revenue recognition and subscription models. All over the for-profit world businesses are adding subscription models whether it be ongoing maintenance contracts or meal delivery kits. For nonprofits, pledges, or promises to give, can be treated similarly. Typically, a nonprofit will book the pledge as a receivable with installments paid against it. That needn’t be the case for internal reporting.
“When I have unconditional promises to give that extend over one year, I approach it like a subscription model,” he said. “We record it as a pledge receivable but instead of income we take deferred revenue and recognize it when conditions of the pledge are met, whether that condition is event-based or time-based.”
Whitfield added, “however, we of course have to restate pledges to meet the requirements of GAAP for external reporting in our audited financial statements.”
Whitfield concluded by summarizing, “Nonprofit organizations typically have a very different mission-based focus from for-profit companies, but many underlying financial management considerations are the same. The financial function in nonprofits must be focused on meeting the reporting requirements of its internal constituents, on establishing and maintaining strong systems of internal control, and on maintaining a healthy organization that has the financial fortitude to carry out its mission.”
ASU 2018-15 Simplifies the Process for Accounting for Cloud Computing Expenses
Posted by Christopher Miller, Distinguished Solution Specialist
New FASB standard offers guidance on accounting for cloud computing license costs and implementations.
I am frequently contacted by customers and our internal team about how to account for NetSuite costs. As cloud computing became more popular, businesses took different approaches to how they accounted for it on their financial statements. A few of the popular ideas were:
- Treat a cloud computing arrangement as a fixed asset and depreciate it. Capitalize everything.
- Present the contract as prepaid and amortize it as an intangible asset.
- Amortize the contract as an expense and capitalize all of the implementation costs.
- Reference the contract to lease accounting standards and follow those as an analogy for cloud computing.
- Treat the cloud computing arrangement as internally developed software.
Each of these ideas had some merit. However, as the percentage of businesses using cloud products increased, the FASB and other standard setters realized that the “diversity” in practice was growing too large.
So, in 2015, the FASB issued ASU No. 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” to simplify to process. The goal was to help a business determine what kind of contract their arrangement included.
The key determination was to help a user know if their arrangement contained a software license or not. Using the guidance under ASC 985-605, customers are required to determine if their cloud arrangement contains a software license. If the answer is yes, then treat the contract as an internal use software intangible under ASC 350-40. If no, then account for the arrangement as a service contract.
The release of No. 2015-05 clarified several of the key questions presented above. If the cloud computing arrangement included a software license, then the contract was treated as internal-use software. This allowed the purchaser to capitalize the license and related implementation costs. It also clarified that when an arrangement didn’t have a software license embedded, that it was a service contract and should be treated as an operating expense. This clarification put an end to treating service contracts as fixed assets, etc.
However, ASU 2015-5 didn’t determine the process for handling the implementation costs of a service contract. Many of the same questions existed, such as whether you can capitalize implementation costs, or must they all be expensed?
To clarify the process of handling service contract implementations, FASB issued ASU No. 2018-14, effective for all filers after Dec 15, 2019.
Key Provision 1 – Apply Internal Use Software Guidance
When entering into a cloud computing contract that is a service contract, entities will now apply the same guidance toward implementation costs that are used for internal use software. Here are the key guidelines to be aware of when applying this new guidance:
- Project costs to purchase, develop or install the software generally can be capitalized.
- Activities related to testing, customization, configuration and scripting can be capitalized.
- Training and data conversion costs are to be expensed as incurred.
- These costs can be both internal and external, such as payroll, contractors and travel expenses.
Key considerations here are to consider how you define the different terms and the quality of your project timekeeping/management to identify the type of work performed.
Amortization of Implementation Costs
ASU 2018-15 states that implementation costs should be amortized over the term of the associated cloud computing arrangement service on a straight-line basis. In addition, it states that the usage rate (number of transactions, users, data throughput) should not be used as a basis for amortization.
In section 350-40-35-14 the guidance states additional periods to be included in the amortization period:
- An entity (customer) shall determine the term of the hosting arrangement that is a service contract as the fixed noncancellable term of the hosting arrangement plus all of the following:
- Periods covered by an option to extend the hosting arrangement if the entity (customer) is reasonably certain to exercise that option
- Periods covered by an option to terminate the hosting arrangement if the entity (customer) is reasonably certain not to exercise that option
- Periods covered by an option to extend (or not to terminate) the hosting arrangement in which exercise of the option is controlled by the vendor.
- When reassessing the amortization term, an entity shall consider the following to reassess the term:
- Obsolescence
- Technology
- Competition
- Other economic factors
- Rapid changes that may be occurring in the development of hosting arrangements or hosted software
Presentation
The new ASU makes a few critical changes to the presentation of cloud service contracts. A few highlights include:
- 350-40-45-2 An entity shall present the capitalized implementation costs described in paragraph 350-40-25-18 in the same line item in the statement of financial position that a prepayment of the fees for the associated hosting arrangement would be presented.
- 350-40-45-1 An entity shall present the amortization of implementation costs described in paragraph 350-40-35-13 in the same line item in the statement of income as the expense for fees for the associated hosting arrangement.
- 350-40-45-3 An entity shall classify the cash flows from capitalized implementation costs described in paragraph 350-40-25-18 in the same manner as the cash flows for the fees for the associated hosting arrangement.
The key takeaway for presentation in the new guidance is that no costs associated with a CCA Service Contract should be treated as depreciation or amortization and should all be included in operating income.
Disclosure Requirements
There are a few key disclosures required from the new ASU. Specifically they are:
- The nature of its arrangements for cloud computing.
- Any amortization expenses for the period
- Major classes of implementation costs that have been capitalized
- Accumulated amortization of the implementation costs
Conclusion
With the release of ASU 2018-15, the way to manage cloud computing contracts has clarity. It is now a three-step process that consists of determining whether an arrangement has a software license included. Manage the implementation project and capitalize the correct costs. Lastly present the costs correctly based on the new ASU.
by NetSuite filed under
Clear Signs Businesses and Their Accounting Partners Need to Move on from QuickBooks
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Posted by Jason Glass, Senior Director, Partnership Development
As a starter system, QuickBooks is a logical and economical choice. It provides the basic functionality that companies need to get going, supports a chart of accounts and manages both accounts payable and receivable. But QuickBooks could also be holding businesses back from achieving their full potential. And not just QuickBooks customers, but the partners and independent accountants that support them. As companies start to grow, expand internationally, or encounter more complex financial reporting requirements, their dependency on the QuickBooks system can turn into a burden.
That’s because this general ledger system doesn’t manage inventory across multiple sales channels; provide insights into the products that companies have on hand at a given time; streamline their ordering processes; or manage the reams of data that these companies receive and generate on a daily basis. It can also fall short when it’s time to add a new business, analyze sales or manage complicated cash flow reporting. Indeed, QuickBooks can hold back a fast-growing business.
For independent accounting professionals and other businesses supporting the QuickBooks ecosystem, this means their fastest-growing, most successful clients are either seeing their growth slow, or walking out the door when they move to a different system. Unless, they support a more sophisticated system like NetSuite, these partners constantly need to replace successful clients with smaller, less established customers.
Though most customers probably recognize the shortfalls of QuickBooks and the need to innovate in order to keep pace, some may be reluctant to upgrade, replace, or enhance their business systems. Others aren’t convinced that they’ll be able to find a solution that can meet their needs in an affordable way, choosing to instead just “make do.” Unfortunately, those decisions can turn out even more costly in the long run.
Implementation partners and independent accounting professionals can often play a key role in helping a business to determine when the time is right to move on to a more sophisticated accounting system and what products might be right for them.
Here are five signs that it’s time for businesses to look beyond QuickBooks and implement a unified, cloud-based financial system:
- They’re not sure what’s really happening across their businesses. When departments, management groups and teams can’t share information, tools, priorities and goals with one another, the siloed mentality kicks into gear and takes over. Companies can break out of this mindset by deploying a financial system that generates and shares insights and data in real-time across the entire enterprise.
- Financial consolidation across systems takes ages. As they grow, businesses may find themselves dealing with a bewildering complexity of foreign currencies and languages, accounting standards, taxation structures and reporting and compliance requirements that far outstrip the capabilities of the standalone accounting applications they’d traditionally used for financial consolidation. Cloud computing offers a scalable model for sophisticated financial consolidation in a fraction of the time, and without the substantial capital expenditure of a typical on-premise ERP system. And by automating key accounting processes, a cloud ERP solution minimizes the risk of error and delay of manual approaches to multiple charts of accounts.
- Adding new sales channels, product lines or revenue streams (domestically or internationally) is extremely difficult. As businesses mature and their market share increases, they will surely hit the outer limits of growth in their current markets. In order to implement the growth strategies and gain a competitive edge in the world market, they need an integrated business system that centralizes accounting, order management, customer relationship management (CRM) and ecommerce processes. When everyone has access to the same customer information and transactions, it’s easier to respond quickly to customer inquiries. It allows salespeople to spot opportunities to cross-sell and upsell, and teams can confidently track pending orders, service issues or overdue invoices.
- They’re using more Excel spreadsheets and third-party applications to connect data. These band-aid solutions don’t “talk” or share data with one another, which means more human intervention, manual data reentry, errors and steps in the financial management process. With a cloud financial management platform, your clients’ marketing, finance, sales and inventory managers can all pull the exact data they need to understand trends and improve the accuracy of their forecasting. Because they all draw from the same data source, these users will have a more holistic insight into customer behavior at each stage of the transaction, and without the need for spreadsheets or bolt-on applications.
- They need better revenue recognition, allocations, planning & budgeting and/or better reporting insights. Financial reporting isn’t getting any easier, and it can be especially challenging for companies that are growing, expanding into new lines of business or exploring their global horizons.
If a business is dealing with any or all of these issues, it’s likely a sign that they’ve outgrown their current systems. A comprehensive cloud-based solution like NetSuite supports all aspects of a businesses by unifying financials, sales, project and product management, ordering, invoicing and revenue recognition on a single platform. It will also help your firm minimize complexity across a broad range of operations, allowing insights into the entire business based on a single, customizable platform.
QuickBooks partners that move to NetSuite can make 30-50% margin on new license sales plus high margins on renewals and service. In addition, they retain their fastest-growing clients while expanding their client base with other companies looking to migrate from QuickBooks.
Visit www.netsuite.com/quickbooks for more information on switching to NetSuite and reach out to the NetSuite Partner Recruitment team today to get the conversation started. Complete our contact form here or email SolutionProviders@netsuite.com to find out more.
Also learn more about adding NetSuite to your practice by reading our whitepaper, “Building Your Oracle NetSuite Practice: Reaching Beyond the Limitations of QuickBooks” and our datasheet “Helping Clients Think Beyond QuickBooks”.
by NetSuite filed under
Accounting For U.S. Government Contracts And Grants: What You Need To Know
Receiving a contract or grant through a U.S. Small Business Administration program is a milestone, but you can’t just take the money and do whatever you want. If you don’t meet your contractual obligations, you won’t pass an audit. Not passing an audit can mean losing your funding or having to pay it back.
The audits you’re subject to depend on the type of funding you receive. If you want to pass an audit in the Small Business Innovation Research or Small Business Technology Transfer (SBIR/STTR) program, here’s what you need to do.
For contracts: understand the different types of audit
For instance, a pre-award audit looks at your price proposals, forward pricing, and indirect rates. If it’s your first time having a cost-reimbursement contract, you’ll be subject to a pre-award accounting system survey.
Post-award, the most common audit is the incurred cost audit. This audit is required for all cost-reimbursable contracts where you’re supposed to report year-end costs to the government. Other post-award audits include truth-in-negotiations compliance, cost-accounting compliance, audits for contract changes, and even labor floor check audits.
A PDF file from the SBIR website explains several possible audits in detail.
For grants: prepare for a Uniform Guidance Audit
All SBIR/STTR grant recipients who expend more than $ 750,000 within a year are subject to a Uniform Guidance Audit (UGA). This audit is designed to verify that you are spending your grant money as proposed and that you have adequate internal controls in place. The audit will scrutinize your accounting system, how it works, and how you account for expenses.
An article published by Jameson & Company explains in detail what happens during a Uniform Guidance Audit and what an auditor looks for, including:
- How much money you’ve already spent
- How you’re tracking project costs
- An accounting system compliant with the Federal Acquisition Regulation (FAR)
- A profit & loss statement by job showing totals for each project category
- Accuracy of direct costs including labor, consulting, subcontractors, travel, and equipment
An auditor will also want to see how your costs relate to your award, who authorized each purchase and payment, how you coded each expense into your accounting records, and more.
It’s also normal for an auditor to ask questions related to fraud. You’re not being accused of fraud. It’s part of their job to use your answers to determine whether or not there is a potential for fraud.
Be prepared to hire your own UGA auditor; the government won’t cover it.
Get a FAR-compliant accounting system firmly in place
A short course on accounting and finance on the SBIT/STTR website will take you through the requirements of an FAR-approved accounting system. Since the SBIR and STTR awards contain multiple phases, each phase granting significantly more money, you’ll be held to higher standards as you progress. For example, in Phase II, you need an in-depth, detailed accounting system that keeps track of all costs and distinguishes those costs per project.
Avoid basic mistakes
SBIR accounting isn’t easy, and you can’t get away with half-hearted systems no matter how long you’ve been using those systems in your business. Here are a few words of advice.
- Don’t rely on spreadsheets. You might be addicted to using Excel spreadsheets, but they’re extremely limited in terms of manipulating data. For instance, you can’t use a spreadsheet to generate internal financial information for your tax returns. Your accountant will have to spend even more time configuring your raw data. Excel just doesn’t meet the government’s requirements.
- Use a proper accounting system, even when you have a fixed contract. Just because your contract is fixed doesn’t mean future work will be at fixed prices. If anything changes, you’ll regret not having a proper accounting system.
- Use a payroll service. It’s difficult, if not impossible, to have a proper accounting system without a payroll service. A payroll service makes sure employee tax withholdings are deposited on time, employment taxes are paid, paychecks are classified correctly, and W2s are filed on time.
- Make sure employees sign off on timesheet changes. Any time a change needs to be made to an employee’s timesheet, the employee needs to make the changes, initial it, and provide an explanation. Only the employee is allowed to do this. Adequate timekeeping is a best practice in SBIR accounting.
You won’t fear an audit when you’re prepared
It’s too easy to make mistakes without realizing it. However, when you plan ahead, there’s no reason to fear an audit. Connecting with a professional to help you establish your accounting system is the best step you can take.
Join our webinar series on the SAP S/4HANA Movement program and learn more about the different deployment options and available tools, services or assets, that lead your migration project to success.
Lease Accounting 101 – The Ins and Outs of ASC 842 & IFRS 16
By Anthony Stames, Software Industry Marketing Lead
New standards for reporting the financial impact of leases will require public companies to change their accounting practices by the end of 2019 and private companies to do so by the end of 2020. That might seem like a minor consideration at first, but most companies lease some assets. The transition can be tricky and the impact on balance sheets promises to be significant.
Today, the SEC estimates more than $ 2 trillion in lease-related expenditures and liabilities were left off balance sheets in 2018. The implosions of Enron, Tyco and WorldCom in the early 2000s inspired the new standards. Each of those companies used leasing agreements to hide massive financial and operating liabilities, and each used its distorted balance sheets to misrepresent its strength to auditors and investors while committing serious financial crimes whose exposure drove them out of business and many of their executives into prison.
FASB and international standards agencies jointly developed the new standards; as ASC 842 in the U.S. and IFRS 16 internationally, the standards are largely identical and address the same goal: getting lease information back onto companies’ balance sheets.
This represents a huge change for just about every accountant working today: The old standards were first adopted in 1966 and last revised in 1976. Chris Miller, a distinguished solution specialist and one of Oracle NetSuite’s experts on the new leasing standards, put together a hugely informative hour-long webinar to walk us through the changes and what they mean in practical terms for companies of all sizes.
The webinar is well worth a full viewing, but for now, here are three key takeaways:
Lease Accounting Has Impacts Beyond the Balance Sheet
Meeting the new standards will do more than affect the sort of balance-sheet information published in the annual report. It will require the participation of companies’ tax experts and real estate departments to supply needed data and IT to render it. Speaking of IT, most ERP systems aren’t prepared for the demands of ASC 842, so new software might be necessary. (More on that later.)
Bringing new liabilities onto the balance sheet also makes reporting more complex and may have broader financial and legal implications. Companies will want to review their debt covenants with banks, to ensure that key ratios aren’t thrown suddenly into dangerous territory. And all contracts should be reviewed for the presence of embedded leases, which merges with the new revenue recognition standard.
Get Your Implementation Plan Together Now
Miller walks viewers through a comprehensive lease-accounting framework that details the specific changes to journal entries and formal balance sheets. Each lease’s discount rate figures heavily here: Companies have a bit of leeway in how they value the asset underlying each lease, and the resulting discount rate can affect a company’s reported leverage, interest cover, asset turnover and operating profits/earnings.
Miller also works through Day one and Day two accounting measures, demonstrating how lease liability and right-of-use asset calculations combine to present a complete picture of a company’s lease obligations.
Make Sure That Your Software Meets the Challenge
Some of the new standards’ demands can be met using a combination of legacy software and hard work. Others simply can’t. The disclosure requirements imposed by the new standards, for example, result in simple demonstrations of a company’s future obligations and the operating leverage represented by its leases, but those simple expressions draw on such a complex array of data that most existing systems simply can’t be made to provide expedient answers.
Excel might be enough to do the trick, at companies with solid programmers on hand. More readymade solutions exist in products like NetSuite Fixed Assets and third-party solutions built on the NetSuite platform, such as NetLease by Netgain.
In any event, the new standards require a wide-ranging response—Miller offers a six-point transition plan—backed by software that’s up to the job. If you’re interested in learning more, please click here to view our on-demand webinar, Lease Accounting 101 – A Roadmap to ASC 842 & IFRS 16.
by NetSuite filed under
Five Tell-Tale Signs Your Business has Outgrown its Accounting Software
Posted by Suzanne Myerson, Public Relations, Oracle NetSuite JAPAC
For business owners in Asia Pacific, there are a few common refrains when it comes to their software systems.
“Our inventory system is very manual – there is a lot of duplication with data entry.”
“We use a basic accounting package for cash/POS transactions and our CRM is totally disconnected from our other systems.”
“It takes us ages to pull financial operational reports to assess our performance.”
If you rely on a basic accounting package to run your business, now might be the time to consider other options, such as moving the processes that are key to your business operations to an integrated system like ERP (Enterprise Resource Processing) that will give you complete visibility into every aspect of your business.
The challenges for a fast-growing business can be diverse. G2, an online review platform with more than 650,000 independent and authenticated user reviews read by more than 3 million users each month, recently demonstrated that fast-growing businesses face many of the same challenges as their enterprise counterparts. In the report, The Power of a Cloud ERP Suite, G2 identifies supporting growth and improving productivity and efficiency while lowering costs as the key challenges. No surprises here.
Yet, many businesses in Asia Pacific continue to rely on basic accounting packages to manage business operations. In fact, smaller and midsized businesses often rely on a patchwork of standalone software silos and spreadsheets to solve their immediate business needs, according to the G2 report. As the business and its complexity grows, these disparate systems create operational inefficiencies that can have a negative impact on the bottom line, hurt the customer experience and impede the company’s ability to reach its full potential.
What are the signs that your business has outgrown its accounting package?
- Limited configuration capability – The limited functionality of a dedicated accounting package means that it will be unable to deliver robust financial management requirements such as consolidation, support for multiple forms of depreciation, budget roll-ups, subscription billing or credit limits, to name a few. If you cannot fulfil these tasks with ease, your accounting software is restricting your flexibility and growth.
- Limited visibility to make informed decisions – As business models become more complex, owners often need customised reports by role and quality data to deliver fact-based analysis and insights. As the gap between the reporting that is provided and the insights required grows, the business turns to spreadsheets and other workaround tools. How long can your business survive without accurate and insightful reporting?
- Spending too much time to keep the system running – Growth across transactions, departments, supply chain, other channels and customers can strain an accounting platform to the point where performance is degraded, or workarounds are designed to circumvent its limitations. Are you spending too much time reconciling data between systems?
- Inability to expand to new markets – Whether you want to open a new location, sell to intermediaries or directly to customer via an online presence, businesses need to understand and comply with the unique needs of each channel. Can your accounting software cater to these needs including support tax, financial and compliance needs? If it can’t, you may need to consider a robust financial management (ERP) solution.
- Technology downtime starts risking business opportunity – It is said that time is money. What smaller businesses lack in size, they can make up for in responding to new opportunities or customer demands much faster than their enterprise counterparts. Often support is overlooked or even non-existent when it comes to basic accounting software offerings. Do you want to risk it?
If any of these signs impact your business, the time has come for you to consider your options – a platform that delivers financials, customer relationship management, inventory and warehouse management and ecommerce capabilities in a single solution.
Join fast growing businesses in Australia, Asia Pacific and across the globe by selecting a technology system that will propel you to new heights.
Determine whether your business has outgrown its accounting package.
by NetSuite filed under
Lease Accounting Standards- Ready for a Dramatic Change?
Posted by Christopher L. Miller, CPA, MBA, CMA, CITP || Distinguished Solution Specialist
With all the discussion and preparation of the new lease accounting standards, ASC 842/IFRS 16, the time has arrived for public companies to begin reporting their results. However, as we saw with ASC 606 last year, many companies have underestimated the effort and time required to comply with the new standards. KPMG has recently completed a study that found most companies are way behind in their lease accounting projects, but there is still time to get on track.
The new lease standard, known as ASC 842 or IFRS16, represents a joint effort of the FASB and international standard setters to create a unified standard for leasing activity. While some notable differences exist, there are several key features that all companies who have leased assets will need to understand. Those changes are:
- Lessees will recognize all leases, including operating leases, with a term greater than 12 months on-balance sheet.
- Key balance sheet measures and ratios may change, IT systems may need to be upgraded or modified, and accounting processes and/or internal controls will need to be revised.
- Lessees can choose between two transition methods, with additional practical expedients available.
- Sale-leaseback accounting is substantially changed.
- Both qualitative and quantitative disclosures are expanded.
Despite past experience with ASC 606 and the sweeping changes ASC 842 represents, many companies are still unprepared. According to the KPMG survey:
- Only 3% of respondents said their lease project was complete.
- Among those still working on their projects, 67% said that they were not on schedule due to the challenges they were facing.
- Only 44% had identified their leases and just 25% had assessed the accounting impact of ASC 842 and/or IFRS 16 on their business.
- 45% of companies believe they have software that can manage the process, but only 16% have developed the requirements necessary for implementation.
You may find yourself in a similar situation with lease accounting as you did with ASC 606. Whether that implementation went long, or the dates arrived sooner than expected, now is the time take action. For private companies, there is still a runway to complete projects on time and on schedule.
There are many ways to successfully transition to the new standard. The difference between them is often how long and how much will it cost? There are three vital steps to turning around your leasing setbacks.
First, make sure you have conducted an accounting impact assessment on how the standard will affect you. Many respondents have compared lease accounting to revenue recognition for its complexity and scope.
Second, resource the team correctly. Complying with lease accounting is a cross functional effort, even though it is concentrated in the accounting team for the final compliance results. For example, you can enlist the real estate team, office managers, etc. to help you find leases that require abstracting.
Lastly, address the four core challenges to implementation:
Identifying Embedded Leases
- Review all of your service contracts for embedded leases. Anywhere equipment or space is being allocated, there could be a lease.
- Look at your intercompany agreements to see if any of your allocations are in fact embedded leases.
Establishing an Appropriate Incremental Borrowing Rate (IBR)
- If possible, take advantage of the expedients with respect to simplifying your IBR.
- Conduct an analysis based on each asset to determine the appropriate rate. Remember, IBR is not the same for all assets, even in the same class.
Abstracting & Entering Leases into a System
- Collect all of the documents that show the four key data elements: the commencement date, the end date, the payment and the interest rate. These are the bare minimum requirements to construct a lease for the new standards.
- When selecting software, have a checklist of your company’s functional needs and focus on what you need for disclosures and existing business practices.
Integrating a Lease Accounting System into the Existing Environment
- NetSuite offers a limited use lease feature in its Fixed Asset Module.
- For NetSuite customers that need a complete lease accounting solution there are certified platform applications, such as NetLease fully compliant on the Lessor/Lessee side.
- Take advantage of prebuilt connectors if a 3rd party solution is necessary. These would include CoStar, Visual Lease, and Trirega.
Lease accounting is a big project, especially after finishing revenue recognition last year. If you begin looking for the right software, compile your records, and conduct the proper accounting impact, your team will be ready for the new standards.
Want to learn how you compare to your peers, when it comes to preparing for the new Lease Accounting standards? Take this short survey to help determine where pain points exist as well as how the new standard will affect business priorities.
by NetSuite filed under
MANA Nutrition: Applying For-Profit Accounting Principles at a Nonprofit
Posted by Barney Beal, Content Director
With a background in finance at a technology solutions company, a document publishing and delivery organization and an accounting firm for midmarket companies, Chris Whitfield joined the nonprofit organization MANA Nutrition as CFO with a strong background in for-profit accounting principles.
That background has proven valuable in the nonprofit world as well, Whitfield relayed during a session at SuiteWorld19.
“Both for-profits and nonprofits are mission-based, the missions just tend to be a little different,” he said.
For example, MANA Nutrition has structured its organization more like that of a for-profit even while it maintains a strict mission-based focus. The Charlotte, N.C.-based nonprofit manufactures nutrient-rich milk suspended in peanut butter, a ready-to-use therapeutic food (RUTF) used to treat severe acute malnutrition, producing about 500,000 meals per day. As a manufacturer, it may seem to have more in common with for profits than nonprofits focused on services or curing diseases, but that’s not really the case, according to Whitfield.
“MANA is a mission-based organization,” he said. “Our mission is to save kids’ lives and have a meaningful impact on reducing the lives lost from severe and acute malnutrition.”
But for-profits and nonprofits have a lot more in common than one might assume, Whitfield assured the audience. Both have a mission, it’s just that for-profits’ mission is profit. Both have a similar organizational structure: an executive director and organizational leadership in the case of nonprofits and CEOs and senior leadership in the case of for-profits. And, both largely operate under the same GAAP principles, aside from a few exceptions, and work under the same fundamentals of accounting and internal controls.
“For-profit stakeholders are investors, and there’s nothing wrong with that. I’m a big believer in capitalism,” Whitfield said. “Nonprofits tend to be service focused. At MANA we have a view that our shareholders, who receive our dividends, are the kids we serve. We like to think of ourselves as having capital. We have benefactors who say, ‘I’m ready to invest in your business.’ Their return is not a financial return, it’s the dividends we give to kids.”
Those similarities, among others, offer finance professionals in nonprofits an opportunity to apply more for-profit principles to their organizations. For example, where a for-profit might focus on reducing costs to improve margins, MANA has reduced the cost of a case of RUTF from $ 60 when it first started to $ 38, allowing it to sell to aid organizations in greater volume at a lower price, increasing its impact.
Financial Statements
There are similarities in financial statements, according to Whitfield. One might be a statement of financial position (nonprofit) and another might be a balance sheet (for profit), but they’re essentially both balance sheets. While nonprofits consider their net financial position to be a derivative of total assets minus liabilities, for-profits view the balance sheet are the cornerstone of internal control wherein total assets must equal total liabilities plus equity (that is, net assets).
“I think it’s an important and subtle difference, but nonprofits should take a look at what their equity position is,” he said.
Nonprofits can take a lead from for-profits when it comes to reporting on financials. Typically, nonprofits are focused on reporting to external constituents, whether it’s a board or donors or maybe outside agencies or creditors.
“Creditors, while they want to see external audited reports, are just as interested in internal reports that measure the success of your organization,” Whitfield said. “At MANA, we don’t report a statement of activities, we report a balance statement and income statement, but also a monthly analysis, KPIs in production, etc. That’s been valuable with creditors.”
Revenue Recognition, Subscription Models and Promises to Give
Nonprofits can also benefit from following the for-profit world when it comes to revenue recognition and subscription models. All over the for-profit world businesses are adding subscription models whether it be ongoing maintenance contracts or meal delivery kits. For nonprofits, pledges, or promises to give, can be treated similarly. Typically, a nonprofit will book the pledge as a receivable with installments paid against it. That needn’t be the case for internal reporting.
“When I have unconditional promises to give that extend over one year, I approach it like a subscription model,” he said. “We record it as a pledge receivable but instead of income we take deferred revenue and recognize it when conditions of the pledge are met, whether that condition is event-based or time-based.”
Whitfield added, “however, we of course have to restate pledges to meet the requirements of GAAP for external reporting in our audited financial statements.”
Whitfield concluded by summarizing, “Nonprofit organizations typically have a very different mission-based focus from for-profit companies, but many underlying financial management considerations are the same. The financial function in nonprofits must be focused on meeting the reporting requirements of its internal constituents, on establishing and maintaining strong systems of internal control, and on maintaining a healthy organization that has the financial fortitude to carry out its mission.”
by NetSuite filed under
Continuous Accounting is the Key to Faster Close, Smarter Reporting
Posted by Thomas Sutter, Global Solutions Centre of Excellence
For many in the finance department, the phrase “financial period close” brings with it visions of long days filled with time-consuming, cumbersome and stressful processes. Yet, despite the time devoted to it, this record-to-report process of accounts reconciliation, journal entries and financial reporting is essential for providing accurate information on business performance and ensuring compliance.
It doesn’t have to be so painful, however. Indeed, every CFO dreams of a faster close. Recent research shows why. In APQC’s General Accounting Open Standards Benchmarking survey, the bottom 25 percent of the 2,300 respondents said they need 10 or more calendar days to complete the monthly period close – the days between running the trial balance to completing the consolidated financial statements. In contrast, the top 25 percent of performers complete the monthly close in 4.8 days or less.
A faster period close process has two significant benefits. It gives executives in the business timelier access to the very latest data available, enabling them to make quicker and better-informed decisions. For the CFO and finance team, less time spent on closing the books means more time providing the analysis and insight that the business needs to make key decisions. They can provide input into scaling operations up or down in response to cash flow demands or changing market conditions, or how to reallocate resources in order to jump on an emerging opportunity.
At the same time, however, there is no room to sacrifice accuracy for speed. There are ways to have both. Smart finance teams are now employing ‘continuous accounting.’ Continuous accounting distributes the finance team’s workload evenly over an accounting period. If tasks normally associated with period close – such as reconciliations – are embedded in day-to-day activities throughout the month or quarter, there’s no last-minute demand for extra work as period end approaches, speeding up the process of closing the books.
The impact of continuous accounting can be felt beyond just faster close periods and relief for the finance team. Done right, continuous accounting can also improve real-time reporting and keep the finance function in step with the wider business, more closely attuned to the rise and fall of the organisation. The link between opportunities and challenges and their financial impacts are more immediately visible to all, enabling better-informed decisions.
However, there is a significant barrier to continuous accounting for many organisations: a hairball of incompatible finance and IT systems and unconnected spreadsheets.
To truly embrace continuous accounting, organisations need a modern cloud-based finance and ERP system that delivers data integrity and consistency, standard processes and automation. A unified ERP system with all departments working of the same source of data with access to the same general ledger, provides a common chart of accounts and a single version of data on inventory, payroll, sales orders and customers.
With a common data source, organisations can automate many of the previously manual tasks, such as journal entries, account reconciliations, variance analysis and intercompany transactions. With the cloud those can be executed automatically.
What’s more, with the entire finance team united through the cloud no matter where they are, it’s easier to more efficiently delegate financial close responsibilities. For example, if a typical financial close takes five days and requires 25 processes, the CFO can assign out five tasks per day to the global finance team. On day two, with all those tasks in the system, the CFO can see a report on what tasks from the prior day are not yet complete and address it. Gone are the days when managers and staff are giving CFO the answers they think he or she wants to hear. Moreover, the CFO knows who’s on target and where and how. In a cloud-based system, the CFO never has to ask the question and they always get a straight answer.
The CFO also has the ability to run KPIs on the close process identifying which individuals or locations are not completing their tasks on time and reallocating resources appropriately.
In these ways, continuous accounting means less stress for the finance team, while also providing the greater efficiency, higher accuracy and the cleaner financial statements that boards expect today.
A faster – and smarter – period close can deliver considerable value to the organisation, giving more relevant management information earlier and freeing up a lot of valuable time for the finance team and CFO to contribute more strategically to the business.
For more on strategy and finance, download the paper A Finance Director’s Guide to Planning, Budgeting and Forecasting for High-Growth Companies
by NetSuite filed under
Navigating the New Lease Accounting Regulations: ASC 842 and IFRS 16
Posted by Tom Kelly, Senior Director of Product Marketing
Now that public companies have adopted ASC 606 for revenue accounting and private companies are on track to do the same by the end of this year, a new accounting change is on the way that will address the way companies account for leases.
These new lease accounting regulations will require strong accounting acumen. The new standards will require organizations that lease assets, or “lessees” to recognize the assets and liabilities of those leases on their balance sheets. The new guidance requires lessees to recognize assets and liabilities for leases with terms of more than 12 months.
The new regulations are consistent with Generally Accepted Accounting Principals (GAAP) in that lease reporting will depend on its classification as a finance or operating lease. Unlike GAAP, which requires only capital leases to be recognized, the new standards require both types of leases to be recognized on the balance sheet.
The new standards are aimed at helping investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. Some confusion still exists around the topic. In 2005, the SEC conducted a survey that estimated the off-balance sheet obligation associated with operating leases for public companies was $ 1.25 trillion.
To that end, the new standards are designed to improve lease accounting in the following ways.
- Providing a more faithful representation of the rights and obligations arising from leases.
- Fewer opportunities for organizations to structure leasing transactions to achieve a particular accounting outcome on balance sheet.
- Improve the understanding and comparability of lessees’ financial commitments.
- Aligns lessor accounting and sale and leaseback transactions guidance more closely to ASC 606.
- Provides additional information about lessors’ leasing activities and lessors’ exposure to credit and asset risk as a result of leasing.
In preparing for ASC 842 and IFRS 16, there are lessons to be taken from the implementation of ASC 606. The process of adopting ASC 606 required businesses to gather all customer sales contracts and determine how to account for each component in the contract based on the standards. The process for lease accounting will be similar in approach to ensure that leases are compliant with the new lease accounting regulations.
The new lease accounting standards will be most challenging for dual reporting companies – those who are required to publish their financial information under both international standards – IFRS 16 and US GAAP – ASC 842. Dual reporting companies will need to maintain different processes, controls and accounting systems for each framework to comply with the different lessee reporting requirements.
Once companies have determined how leases should be accounted for, NetSuite can help keep tabs on each lease by uploading them to the NetSuite digital file cabinet. After determining net present value (NPV) and effective interest, you can amortize leases through simple customization by creating a vendor bill for the total capital lease liability and a payment schedule. The payment schedule will prompt a payment to be made based on the schedule date. The payment schedule will then provide an automated process for the lease payments. Then you can import adjusting journal entries with NetSuite’s import assistant. The journal entries will automatically post monthly adjustments, without the need to manually create multiple journal entries each month.
On a more granular level, let’s see how you would handle this if lease payments of $ 1,500 are made at the beginning of the period for 10 periods. Our lease calculation for this scenario in Excel is as follows:
Now we create a Vendor Bill in NetSuite for $ 15,000 (the total capital lease liability), with an accompanying Payment Schedule. Once created the Payment Schedule will prompt for a payment to be made based on the scheduled payment date. The Payment schedule will provide an automated process for payments.
Now you can import an adjusting journal entry with NetSuite’s import assistant. The journal entry will automatically post monthly adjustments, and now there is no need to manually create lease journal entries each month thus expediting the monthly close process.
If the business has requirements to report information under both ASC 842 and IFRS 16, they can separately account for their leases using NetSuite’s multi-book accounting functionality.
In future releases, NetSuite will provide added functionality that will make compliance with the new lease regulations even easier. Functionality for things such as NPV and effective interest calculation requirements will be added.
Effective January 1, 2019 for public companies and January 1, 2020 for privately held companies, the IASB’s and the FASB’s new lease standards will require that almost all leases be reported on lessees’ balance sheets as assets and liabilities. At a high level some of the key aspects of IFRS 16 and ASC 842 include but are not limited to:
|
CATEGORY |
IFRS 16 |
ASC 842 |
| EFFECTIVE DATE | January 1st 2019 | December 16th 2018 – Public Companies December 16th 2019 – Private Companies |
| APPROACH & COMPARATIVES | Full or Modified Retrospective | Modified restrospective is required for all leases existing at, or entered into on or after, the beginning of the earliest comparative period. |
| BALANCE SHEET IMPACT | Lessees have the option to exclude 'low-value' leases (≤ $ 5,000 in value), even if they are material in aggregate) | No Exemption for 'low-value' leases. |
| LEASE CLASSIFICATION | Single Classification | Dual Classification – Finance and Operating Leases |
Public companies should start the process soon (if they have not already done so) to make sure they will be compliant with the new regulations and disclosure requirements. Private companies have until the end of 2019 to make sure they’re ready for the new requirements – but it never hurts to start sooner.
Learn more about the importance of software in managing lease accounting in this analyst report.
by NetSuite filed under