Crunching The Numbers
How do I handle paper
losses on real estate?
April 2008
"My company owns our office building, which we carry on our books at
the original purchase price. Recently, the building was reassessed for $200,000
less than we paid for it. Do I have to update the balance sheet? If so, it
will wipe out almost all of last year's profits."
Mike: As a general rule, companies don't write down long-lived assets, like
real estate, for temporary market declines (and they also don't book short-term
real estate gains). But if there are signs that the value of your real estate
has declined more or less permanently, you should recognize the loss as soon
as it's measurable--sooner, rather than later.
Incidentally, this situation is one reason why many companies move their
real estate off the balance sheet completely--for instance, by transferring
title to the company's owners.
How can we clean up
non-standard financials?
November 2007
"We plan to acquire about a dozen small service firms, to create a roll-up
we can take public. Most of the companies we've looked at have rather eccentric
(well, 'weird' might be a better word) financial records. We know we'll need
GAAP-standard reporting for the IPO, but the cost of going back and reclassifying
everyone's books is pretty steep. Suggestions?"
Mike: No question, at some point you're going to have to put in place uniform
accounting systems, reports, charts of accounts, etc. across all the acquired
companies. You'll also need to go back at least a couple of years and reclassify
each company's income and expense items to match your standard reporting model.
Depending on the nature of the business, you might also have to review everyone's
contracts to make sure there aren't hidden revenue recognition problems that
will surface during the IPO. It's a big job.
My advice would be to bite the bullet right up front, as you negotiate each
acquisition. Put the responsibility (and cost) for the financial cleanup on
each seller, and hold back at least some of the cash until the job is done.
This way, the companies with the best financial reporting will get close to
full price, while the "weird" ones will pay a price for their eccentricities.
Are we calculating "completion" correctly?
March 2007
"I need a reality check on our accounting methods. When we do big projects,
we book revenue based on the percentage of the job that we complete each month.
But our contracts also include a big chunk of long-term maintenance revenue,
which we bundle into the total price. How do we treat this revenue when we
figure the completion percentages?"
Mike: Regardless of how you present the project price in your contracts and
invoices, internally you need to break out the project work and the follow-on
maintenance as completely separate elements. You should record the revenue
from the project work on a percentage of completion basis (or something similar),
and record maintenance over the maintenance period.
And no, it doesn't matter when customers actually pay you for project work
or maintenance, unless you're running the company on a cash basis. You should
recognize revenue based on the work or services you provide during each phase
of the contract.
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