Welcome to year one of ASC 606
Last month a very strange thing happened — Oracle announced its quarterly earnings, then re-announced them a day later, with a half a billion dollars missing from the top line. Wall Street had a collective spit take. The end result was a lot of confused analysts and a hit to Oracle’s earnings estimates.
The management team in the Emerald City clearly dropped the ball here. But, you can expect to read a lot more stories like this over the next twelve months. Why?? Because 2018 is year one of ASC 606.
In 2014 the Financial Accounting Standards Board and the International Accounting Standards Board issued new standards — ASC 606 and IFRS 15 respectively — with new rules recognizing revenue across all industries around the globe. The goal was to simplify and harmonize revenue recognition practices globally, which is resulting in future revenue gain or loss when accounted for under the new guidelines.
FASB gave everyone around four years to adopt and comply with the new revenue rules. And now…time’s up! Starting this year, public companies and starting next year private companies of all sizes must adopt the new guidelines, which require recognizing an amount of revenue proportionate with the goods and services actually transferred to customers during the reporting period.
Clearly, not everyone is ready to make the leap. Oracle’s re-announced earnings report was ASC 606 compliant, but the company apparently failed to disclose or release 606 results on the day quarterly earnings were released. The re-announcement on the second day left analysts on Wall Street confused. Wall Street was expecting to see bulls, but was met with bears.
The new accounting rules are considered by many to be the biggest change to accounting standards in the last 100 years. Non-compliance is a huge risk. Revenue recognition errors are the biggest reason for earnings restatements. Earnings restatements can lead to firings, fines and even jail time.
What’s more, these new rules are particularly tricky for any company with recurring revenue. Companies with usage-based, “X-as-a-Service” subscriptions, or bundled revenue models like Box or Zendesk, must deal with deep complexity when accounting for revenue. To make matters more complicated, every modern business faces constant ongoing contract changes, which impact the way their revenue needs to be recognized and reported. If you don’t have some kind of automated solution to this problem, you’re going to be left with lots of conflicting calculations and broken spreadsheets. Poor reporting and inaccurate forecasting results in perplexed analysts (full disclosure — my company Zuora provides revenue recognition software).
This is why Verizon has been working on this issue for years. Workday hired a dedicated team of accountants to pore through thousands of contracts. Uber’s reported revenues might get cut in half. GM expects the impact to be upwards of $1 billion.
So why did Oracle mess this up so badly? Especially considering that it actually sells revenue recognition software that’s intended to address this very problem?
We’ll never know. But I don’t think this is just a case of poor corporate messaging. It’s becoming increasingly obvious that legacy ERP solutions like Oracle and SAP just aren’t made for these times.
ERP companies were built back in the 1980s to help companies manage supply chains and inventory. In other words, they were built to help companies sell widgets. That’s just not how things work anymore.
The real growth is happening in cloud services and subscription models: Amazon, Box, Netflix, DocuSign, Spotify, SurveyMonkey, etc. Oracle and SAP have tried to buy their way into this new Subscription Economy with acquisitions, but as this latest ASC 606 debacle shows, the leopard can’t change its spots.
That might also explain why Oracle hasn’t been breaking out its pure cloud revenue lately. “Generally speaking, when a company chooses to reduce the amount of financial detail it shares on its key strategic initiatives, that is not a good sign,” analyst John Dinsdale recently told Ron Miller of TechCrunch.
I couldn’t agree more.