BTerrell Group Blog

What Kinds of Companies Benefit from Cloud ERP?

Posted by Brian Terrell on Thu, Jan 19, 2017

An implementer’s view from the trenches

An ever-increasing number of businesses are adopting cloud-based ERP solutions, and the momentum shows no signs of slowing. We’ve cloud_computing.jpgall heard many of the touted benefits of Cloud ERP, such as rapid deployment and minimal IT requirements. But what kinds of companies are truly the best candidates for a move to the cloud? Who can benefit the most – and why?

To answer those questions, we sat down for a chat with Chris Firra, a senior consultant here at BTerrell. Chris has been working in this field for 18 years and has more than 77 implementations under his belt. As a veteran implementer, he knows what works, when and for whom.

Are some types of companies better prospects for Cloud ERP than others?

Chris: A flexible Cloud ERP solution like Intacct works for companies across a wide range of industries, from service to distribution to nonprofit. Within those industries, though, there are two broad categories of companies that stand to realize the biggest benefits from a move to the cloud: new startups and established mid-sized enterprises currently running on an older infrastructure.

Let’s talk first about startups. What makes these companies good candidates for the cloud?

Chris: Armed with a mission – a new technology, service or product offering - startups come into the game rightly focused on that mission, not on financial software. These companies don’t have an IT department – their employees are all mission focused. To realize their mission, they need to get up and running quickly, and need flexible, scalable, easy-to-use technology tools to get there. Cloud ERP makes smart, logistical sense for these kinds of companies. They can be live on the software very quickly, and they do not have to devote any additional resources to servers, software stacks and internal IT support.

At the other end of that spectrum are the established enterprise organizations you mention. What makes these – very different kinds of companies – also good candidates for cloud ERP?

Chris: Established mid-market enterprises typically have an internal infrastructure of IT personnel, servers and often an older, on premise ERP application. At one time that ERP application served most or even all the company’s needs, but as the marketplace changes, the ERP cannot keep pace. We are seeing this frequently as the new revenue recognition rules are changing. Traditional ERP applications do not have the functionality needed to get and keep these companies in compliance.

So, faced with replacing or performing a major upgrade on their ERP applications, these companies are looking to the cloud. By doing so, many of them can significantly reduce – or even eliminate a cost center consisting of servers, software stacks and IT support. And for those companies impacted by ASC 606, Intacct is one of the only ERP solutions designed to handle the requirements. It quickly pencils out as an economically favorable decision.

What other kinds of companies do you think are particularly good candidates for cloud ERP?

Chris: Companies running a heavily-modified ERP application have all felt the pain of software upgrades. Updates are never easy with an on premise solution, but with modified code they can be a nightmare. Updates with a cloud ERP are completely different – they are seamless. For one thing, the user isn’t doing the work – updates take place automatically. Also, Intacct guarantees 100 percent backward compatibility with modified code. I can’t emphasize what a tremendous benefit this is for established companies that have lived with outdated software for years – or even decades – because updating was so difficult and risky.

If you’re wondering if your organization is a good candidate for a move to the cloud, we’d be happy to help you make the determination. Contact us for a free evaluation.

By BTerrell Group, Texas- based Intacct Partner

Tags: ASC 606

Principal or Agent? A quick look at a complex ASC 606 topic.

Posted by Brian Terrell on Tue, Nov 08, 2016

It is common for companies to partner with other organizations to provide goods or services for their customers. The new Revenue from Contracts with Principal_Agent_ASC606.jpgCustomers(codified as ASC 606) rules recognize this fact, and provide recommendations for how you should handle the revenue associated with these products and services. It boils down to determining whether you are acting as the principal or the agent in the transaction. While this may sound simple enough, like many aspects of ASC 606, it gets complicated.

What is my role?

A fundamental provision in ASC 606 is the identification of your performance obligations (deliverables, as we used to call them) in a contract. In a single contract with multiple performance obligations, it is conceivable that your firm could act as the principal for some of the obligations and the agent for others. Generally, the rules say that if you are directly providing the good or service, you are the principal, and if you are arranging for the good or service to be provided, you are the agent.

Below are some tips to help clarify your role:

You are the principal if:

  • You control the goods or services before transfer to the customer (even if you first took control from another party).
  • You are directing another party to provide a service for the customer on your behalf.
  • You combine the goods and services from another party with your own goods and services before transfer to the customer.

You are the agent if:

  • You do not directly control the goods or services before transfer to the customer (you have no inventory risk).
  • You are responsible for fulfilling the promise to provide the goods or services (an example would be where you bear the responsibility for the goods or service meeting customer specifications).
  • You receive a commission for your activities.

You may be wondering about price determination. Intuitively it seems that if you determine the price, you must be the principal, but this is not necessary true. Recent clarifications to the rules state that both an agent and a principal may have discretion in establishing the price for the specified good or service – depending upon the actual circumstances.

What about that revenue recognition?

Under ASC 606, if you are acting as the principal for a specified good or service, you should recognize revenue as you pass control to the customer. If you are acting as the agent for a good or service, you should recognize revenue when you promise to arrange for the provision of the good or service to the customer. This is a significant, if subtle, difference. When acting as the agent, for example, you might recognize revenue at the customers’ point of purchase, rather than at the point of delivery. 

Talk to the pros

ASC 606 speaks a lot to the topic of principal versus agent, and this post contains only a very high level overview of this complex issue. We urge our clients to consult with a tax professional to ensure compliance. BTerrell writes a great deal about the new revenue recognition standards, and we work directly with professional service companies to implement the technology tools that ease compliance.

BTerrell Group works with software and cloud services companies to help them obtain and retain compliance and grow their success. 

By BTerrell Group, Texas- based Intacct Partner

Tags: ASC 606

Now or later: when should SaaS companies recognize revenue under ASC 606?

Posted by Brian Terrell on Mon, Oct 17, 2016

The impact of ASC 606 for SaaS companies, Part 2

In our last post, we started the conversation about the impacts ASC 606, Revenue from Contracts with Customers, will have on Now_or_Later_ASC_606.jpgSaaS companies. The impacts are broad, and significant enough to warrant continuing coverage – so here we pick up where we left off in an attempt to make sense of a confusing new landscape for software providers. A particular area of confusion surrounds when companies are to recognize revenue on term-licensing contracts that also include maintenance and updates.

Terms of confusion

As you’re well aware, software providers typically sell their products through either perpetual or term licenses. Under today’s GAAP, revenues from perpetual software licenses are recognized upon delivery of the software, while revenues associated with term licenses are often recognized proportionately over the license term. Regardless of the licensing, Post Contract Services (PCS) such as maintenance and updates are typically lumped together with the portion of the contract fee allocated to PCS and recognized monthly over the period that the services are supplied. Simple enough to understand.

Things will change under ASC 606. First, you’ll need to determine whether the software license is distinct from the maintenance and updates in the arrangement. If so, then the license and the PCS would be considered separate deliverables, regardless of whether the license was time-based or perpetual. Distinct is the operative word here. To be considered distinct, a deliverable must meet the following tests:

  • The customer can benefit from the license and the upgraded features individually.
  • The deliverables are distinct from one another within the context of the contract. For example, the customer does not need the upgraded feature set for the licensed software to function and provide value.

Subtleties in the interpretation

The following example can help illustrate how a subtle change in the situation changes the revenue recognition landscape:

Company A is a SaaS company that sells ERP software licenses. Company A typically provides periodic updates to the software containing bug fixes and general improvements. They have determined that the updates are a distinct deliverable under the contract, as each individual component (software plus future updates) provides value to the customer. Under the new revenue recognition guidelines, Company A would likely decide to recognize revenue attributed to the term license at the point in time when the software is transferred to the customer, while the revenue associated with the updates would be recognized over time. 

Company B is a SaaS company that sells licenses to its traffic-mapping software, Company B may update the software as frequently as daily to ensure accuracy. Under the new revenue recognition guidelines, Company B would likely determine that the updates it provides are not distinct, since a customer might not purchase a product containing outdated maps. Company B’s revenues for both the software and the updates would be recognized over time.  

As you can see, ASC 606 will require SaaS companies to make more judgment calls than they may be used to making. And you’ll want to ensure there is consistency in those judgment calls. It’s well worth the investment to seek out your professional accounting advisors who can make the most prudent and defensible recommendations to ensure you obtain and retain compliance. 

BTerrell Group works with software and cloud services companies to help them obtain and retain compliance and grow their success. Contactbrian.terrell@bterrell.com for a free consultation.

By BTerrell Group, Texas- based Intacct Partner

Tags: ASC 606