By: John Klee, Senior Advisor, TPI
How many times have we, as advisors, heard that from both service providers and clients? What does that mean? Do they know what it means or is it just some vague, black hole that they are afraid to enter? Well, someone has to step through that door and while TPI does not give accounting advice it is often the TPI advisor who is looked at for answers when a question arises. Clients and service providers need to be strongly encouraged to engage their own accounting resources, but we need to do more.
Speaking from a U.S. GAAP perspective, there have always been accounting specific rules that impact outsourcing contracts. And since the passage of The Sarbanes-Oxley Act of 2002 (SOX, SOXA, SarBox, etc), the focus and need for accurate reporting and controls has risen. TPI is familiar with RFP formation and industry practices that should be incorporated into the client decision process.
Why are the underlying accounting considerations important? Sourcing strategy, RFP structure, SPsSolution, contract drafting and negotiations all will be impacted by the accounting considerations. Clients may not accomplish their goals if they ignore the accounting treatments of transactions. Service providers will be faced with several revenue recognition challenges as they maneuver to win the deals; clients should be aware of what motivates a Service provider during negotiations.
When is the best time to address these issues? NOW! Waiting to address and decide on these issues exposes the process to delays and temporary or permanent derailments.
Accounting considerations are integral to streamlining the process
- The client can improve the efficiency of the process by:
- Setting forth a strategy and RFP design consistent with their internal accounting direction
- Engaging the internal accounting team sooner rather than later
- Which should then:
- Avoid potential delays in the schedule and or rework, and
- Save both time and money on behalf of both the client or the service provider
The earlier you begin the discussions the better position the client has:
- In setting forth their sourcing strategy;
- Incorporating requirements into the original RFP;
- Getting service provider compliance;
- Service provider negotiations are generally more productive and efficient prior to contract signing than after;
- Restructuring financials to comply with accounting considerations is easier before “savings value” has been communicated than after.
What accounting issues can impact the Sourcing strategy and/or RFP structure?
- Asset ownership: asset valuations, embedded leases in service contracts, lease capitalization
- Start-up, transition and one time charges: expensed vs. capitalization
- Potential alliance agreements: Related party transactions, gross vs. net revenue recognition
- Regulatory compliance: Sarbanes-Oxley Act, SAS70, etc
- Pricing structure: service provider revenue recognition
- After collecting cash, recognizing the revenue streams related to those collections is often a Service providers management’s greatest concern
I will specifically address some of these accounting issues in future blogs.
Until next time, I leave you with this thought, “It’s an Accounting Issue. How do you know?”
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