Many CFOs Are Making This Costly Mistake with Subscription Software Accounting

In today's fast-paced digital landscape, companies are rapidly increasing their spending on subscription software. However, a significant accounting problem is lurking beneath the surface, one that could have serious implications for your financial statements. This recent report sheds light on this overlooked issue, revealing that only 1% of CFOs have automated more than three-quarters of their financial processes. Let's dive into why this is a problem and what you can do about it.?

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The Growing Problem with Subscription Software ?

As businesses transition from perpetual software licenses to subscription-based models, many CFOs and CAOs are discovering that their accounting practices are outdated and incorrect. The Financial Accounting Standard Board (FASB) has recently addressed some improvements, but an immediate issue remains: accurately accounting for subscription-based software licenses. Many finance leaders are shocked to find that they have been handling this wrong all along, with even external auditors missing the mark.?

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The Misunderstanding in Accounting Practice?

Traditionally, software was sold through perpetual licenses, making accounting straightforward: record the perpetual license fee as a capital expenditure and amortize the associated maintenance fee into operating expenses (OpEx). However, with the shift to subscription-based licenses, this method no longer applies. Subscription contracts often bundle software licenses, maintenance, and cloud services into a single fee. GAAP requires these payments to be treated as vendor-financed software assets in some cases, not as prepaid costs.?

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The Impact on Financial Statements ?

Several impacts need to be considered. Here are the primary ones.?

• Balance sheet: Wrong accounting results in understatement of software assets (typically included in property, plant and equipment or intangible assets) and understatement of liabilities.?
• Income statement: Understatement of depreciation and amortization expenses and interest expense, and overstatement of OpEx.?
• Non-GAAP EBITDA: For companies that look to non-GAAP EBITDA as a comparable measure relative to peers, EBITDA is understated due to overstatement of OpEx.?
• Cash flow statement: “Vendor financing payments” wrongly included in cash flow from operating activities instead of cash flow from financing activities.?

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Indicators of Potential Errors ?

If your company records 100% of software-related subscriptions as prepaid costs, it's likely that vendor-financed software assets are not being accounted for correctly. Public company financial statements may also reveal errors through MD&A commentary, purchase commitments disclosures, and cash flow statements.?

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Steps for CFOs and CAOs ?

• Verify Correct Accounting Practices: Ensure your company correctly handles subscription-based software licenses. If all software-related subscriptions are recorded as prepaid costs, an error is almost certain.?
• Assess the Error's Magnitude: Evaluate the potential impact of the accounting error, especially if your company's subscription spending is significant. Report any material errors to the audit committee.? ?
• ?Engage External Auditors: Inform auditors early about the potential error. They may need to consult their national office if the error is material.?
• Internal Control Impact: Identify the root cause of the undetected error and determine necessary remediation steps. This may involve reassessing risk processes, improving training programs, and enhancing due diligence on software subscriptions.?

Digital transformation is crucial, but it's equally important to ensure your financial processes keep pace. Don't let outdated accounting practices hinder your progress. ?

Are you ready to ensure your accounting is accurate and leverage the full potential of your financial processes? Schedule a free consultation with us today to explore tailored solutions for your specific needs. Visit?https://alldocumentsolutions.com/bundle??

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