Michael Doan

Yesterday the SEC’s Division of Enforcement sought voluntary production of documents from Green Mountain Coffee Roasters, the maker of the single-cup Keurig brewers. At issue is Green Mountain’s revenue recognition policy. Green Mountain is a publicly traded company with a market capitalization of $4 billion and is audited by PWC, so it most likely has a revenue recognition policy in place.

Smaller companies, particularly privately-held companies, probably don’t have a written revenue recognition policy, but they should. Revenue recognition is always a hot-topic with the SEC and it should be hot topic with any business owner. Revenue recognition under generally accepted accounting principles in the United States is a complex area where even seemly simple transactions can open some very complicated recognition rules.

Companies should maintain a written revenue recognition policy for each of their products or groups of products (if they are homogeneous). Having a well written policy is the first step in ensuring that revenue is recognized in a consistent manner on a company’s financial statements. When I’ve written revenue recognition policies in the past, I’ve generally followed this outline:

1. Describe the product or group of products
2. How and where the product will be sold.
3. How and when the earnings process is complete.
4. References to any accounting literature
5. The journal entry to record the revenue and/or deferral of revenue and supporting accretion schedules.

Because each product or transaction is so unique, it’s very difficult to devise a standard “check-the-box” approach to determining revenue recognition and it’s probably ill-advised. Many companies have well-trained and talented accounting staff that can go through all the complex revenue recognition rules to write up a policy. In the event that they don’t have the expertise or resources (mainly time), hiring a certified public accountant to perform a SAS 50 engagement (reports on the application of accounting principles) is also an option.

Note: SAS 50 was later amended by SAS 97, Amendment to Statement of Auditing Standards No. 50, Reports on the Application of Accounting Principles. It’s also known by the less sexier name AU Section 625.

The FASB released Concepts Statement No. 8—Conceptual Framework for Financial Reporting—Chapter 1, The Objective of General Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful Financial Information (a replacement of FASB Concepts Statements No. 1 and No. 2). Con No. 8 can be downloaded from the FASB website.

The release is intended to create a sound foundation for future accounting standards that are principles-based and enables the convergence with IASB’s international standards.

To further it’s mission to protect investors, the SEC turns to social media to spread the word. In this interview Mark Story, the SEC’s director of new media, explains how the SEC uses social media.

Tools like Twitter, YouTube , a mobile site and an investor-focused microsite enable us to put important information where our stakeholders “live” online, using tools that spread our reach beyond the SEC website.

Ed. note: This is an article I wrote when I had my own consulting practice. Originally, this article was posted to my company’s website and one of the groups on LinkedIn. I’ve noticed that the template has been download consistently month after month. The fate of the Doan + Associates website is questionable, so I decided to reproduce the article here with some minor changes.

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Performing a monthly reconciliation of your general ledger accounts is hard, not because it is complex, but because it is so time consuming. As such, it’s a task that is often neglected. When auditors ask for an account reconciliation, they often get a print out of the general ledger detail from the accounting software. The general ledger detail does contain all the information affecting an account, but it often contains too much information (e.g., correcting entries, reversing entries, etc.) making it difficult to use for the both the accounting staff and auditor.

I’ve been a controller for several companies in the past. One of the first procedures I implement when I come into a company is to assign account reconciliations. Its often not a popular procedure, but everyone pitches in to lessen the pain. To facilitate the procedure, I ask that a standard general ledger reconciliation form be used. Using a standard form enables everyone involved in the procedure to quickly interpret the information and help out when a staff member is out sick.

Here’s a partial screen shot of the form:

Here’s some guidelines on how to use the form:

1. Use the account reconciliation form for EVERY general ledger account including control accounts like accounts receivable and accounts payable.
2. Having staff reconcile accounts that are not part of their daily responsibilities. For example, let the billing clerk reconcile the fixed asset accounts. Because the billing clerk isn’t familiar with the transactions going in and out of the fixed asset accounts, they will be less likely to “go through the motions” of reconciling the account. Also unfamiliarity with the account will prompt the billing clerk to communicate with the person responsible for the account — they might even find an error!
3. Start reconciling the accounts before the end of the month so that at month end, you only have one week of activity to reconcile.
4. Put all supporting calculations in individual tabs in the workbook. This leaves an audit trail for others.
5. Record only the net activity onto the form; that is, ignore all the ins and outs that completely eliminate in the account in the same month.
6. Fill in the “Account Use” field. Sometimes its not so obvious why an account exists, so this field will help reinforce the purpose of the account.
7. Complete that “natural balance” field. Similar to item #6 above, sometimes its not so obvious.
8. Always use debit/credit format for the form so there’s no confusion.

Keep up the use of this form on a monthly basis and you’ll always know what’s in your accounts.

Download: General Ledger Reconciliation Form (Excel).

See this form in Google Docs.

The U.S. school system is failing our children. The U.S. ranks lower than most developed nations in math and science and children spend fewer says in school (about 180 days –  this Time article has a great graphic; however it’s not available on the web version). While in school, children are being taught to pass tests because that’s what teachers are forced to do under the  No Child Left Behind Act of 2001.

Waiting for Superman, a documentary due out this Friday, sheds light on the problem with education in the United States. One quote from the short trailer on the website that sums up the state of education pretty well and it’s sticking in my head:

Your children, and future generations, are on the bridge of the Titanic and everybody is going to drown.

I am curious to see if the documentary talks about how to fix the problem (hint: more standardized tests are not the solution). Education needs to move from rote learning to critical and, just as important if not more important, creative thinking.  For more on the revolution in education, I suggest reading Daniel Pink‘s A Whole New Mind and watching the two videos of Sir Ken Robinson below:

Sir Ken Robinson on why education reform doesn’t work:

Reform is no use any more because that’s simply improving a broken model. What we need is not…evolution, but a revolution in education.

Sir Ken Robinson on why schools are killing creativity:

The SEC today is proposing amendments to enhance the short-term borrowing disclosure. If the proposal is adopted, companies will have to provide a comprehensive  explanation of short-term borrowing that includes quantitative and qualitative information. Disclosures will have to made on an annual and quarterly basis, as well as on information statements that contain financial information, registration statements under the 1933 and 1934 Acts, and proxy information. Form 8-K will also be amended to use terminology that is required in the short-term borrowing disclosure. The new disclosures will be made under a sub-section of the Management Discussion & Analysis.

The SEC will provide an interpretive guidance.

This is an amazing statistic and the sign of the times:

In 2004, more than a third of auditor changes were the result of audit firms walking away from clients. Last year, 82% of auditor changes resulted from companies firing their auditors. And among the Big Four, the number was 90%.

Firms are doing their best to retain clients and they are tripping all over themselves to low-ball each other to get new clients and retain existing ones. This July 2010 article (PDF) on industry trends by Allan Koltin of PDI Global indicates that some firms are quoting fees “between 30% t0 50% below the existing fee range”. My guess is that for most firms the “existing fee range” was already heavily discounted.

The emerging picture from such studies is that ten thousand hours of practice is required to achieve the level of mastery associated with being a world-class expert — in anything. In study after study, of composers, basketball players, fiction writers, ice skaters, concert pianists, chess players, master criminals, and what have you, this number comes up again and again…no one has yet found a case in which true world-class expertise was accomplished in less time. It seems that it takes the brain this long to assimilate all that it needs to know to achieve true mastery.