Mar 22 2005

Revenue Recognition Policy

Software revenue recognition can be incredibly complex in today’s world of SaaS, perpetual vs. subscription licensing, SEC SAB 101 (and others), new FASB pronouncements, and the legacy of bad (or fraudulent) revenue recognition policies at companies like Computer Associates.

I believe the right approach for an early stage software company is to come up with a revenue recognition policy, vet it with your outside auditors, document it, and then stick to it no matter what.  The only changes should come from direction from the outside auditors at the end of the year during the audit (or – quarterly during the audit if you are a public company).

So – it’s a great pleasure when I receive a copy of an email from a CEO to his entire management team who is obsessed with doing things right (in this case I’m the lead board member on the audit committee).

Folks – let me be crystal clear on this. We have our approved revenue recognition policy and we aren’t to deviate from it without proper authorization. Please do not ask X (CFO) to do anything differently than what is in this document. Additionally, if you see anything being done incorrectly please escalate to myself or Brad (or if anybody perceives me pushing for something incorrect, please alert Brad immediately).  Thank you.

Unambiguous, clear, unwavering, and inclusive of the board / audit committee.  As Q105 comes to a close, make sure you’ve got your revenue recognition policy in place, everyone understands it, and it’s unambiguous how to behave.