Over the past hundred years the accounting profession evolved and catered mainly to the needs of a manufacturing economy. Rapid obsolescence, lofty development costs and constant price erosion make technology radically different from mainline industries. Collectively, the accounting profession has struggled to adapt to the unique nature of technology firms because few traditional accountants specialize in technology.
For example, complex rules exist for multiple element sales. Distinct elements, such as sale of hardware, software, and Software-as-a-Service subscriptions, must be carefully measured in order to comply with evolving accounting standards. Moreover, depending on the terms of a contract, some elements may not be immediately recognized as revenue but instead must be deferred over several years.
Accounting for R&D costs can also be complex. Depending on how software is sold, development costs fall under one of two standards. Traditional software license models follow one standard while sales for cloud or software-as-a-service (SaaS) firms follow a different standard. Serious revenue recognition issues are triggered when SaaS models are combined with traditional license sales.
These financial matters greatly impact how companies are ultimately valued. That’s why the financial management of your tech firm should not be left to general business accountants. At Laurentian CFO Services, we have extensive experience in technology and can expertly guide you before you run into problems with your investors, creditors or other stakeholders.