Understanding Accounting Implications in Contracts

Mar 8, 2025

Contract Teardown Show: Accounting Implications in Contracts

Introduction

  • Host: Mike Whalen
  • Guests:
    • Attorney Andrew Antos
    • Accountant Nick Tiscornia
  • Objective: Analyze clauses from three Master Services Agreements to illustrate accounting implications in contract language.

Key Points

  1. Importance of Money Language in Contracts

    • Legal language in contracts can have significant accounting implications.
    • Impact on a company's profitability and financial reporting.

  2. Documents Reviewed

    • Master Subscription and Services Agreements from:
      • Juno
      • Guide Spark
      • Workday

Guest Introductions

  • Andrew Antos

    • Background: Corporate lawyer, studied at Harvard, developed a natural language processing platform for document review.
    • Aim: Automate document review and understand broader applications.

  • Nick Tiscornia

    • Background: Career in accounting, previously at Slack and Riverbed Technology.
    • Focus: Technical revenue accounting and compliance with ASC606.

Detailed Analysis of Clauses

Acceptance Clause (Juno Document)

  • Legal Description: Allows customers to inspect and test software before acceptance.
  • Accounting Impact: Revenue recognition issues arise if acceptance is not confirmed.
    • Revenue can't be recognized until acceptance is given or period expires.
    • Different scenarios for hardware vs. software services.

Termination for Convenience (Guide Spark Document)

  • Legal Description: Allows termination without cause, with 60-days' notice.
  • Accounting Impact: Affects the contract length from an accounting perspective.
    • Contract might be considered short-term if fees can be recouped.
    • Important to determine significant penalties for pre-paid fees.

Option to Reduce FSE/SKUs (Workday Document)

  • Legal Description: Customer's right to decrease product purchase volume.
  • Accounting Impact: Affects contract valuation and revenue recognition.
    • Accountants must assess the likelihood of exercising options.
    • Periodic reassessment needed to determine contract value.

Strategic Importance

  • Contracts lay out rights and obligations affecting business transactions and profitability.
  • Legal negotiations must consider downstream accounting implications to avoid financial harm.
  • Harmonizing legal and accounting perspectives can enhance contract effectiveness.

Communication Between Departments

  • Open communication between legal, accounting, and sales is crucial.
  • Revenue accountants influence contract negotiations by relaying business impacts.

Conclusion

  • Legal contracts should facilitate not hinder business objectives.
  • Importance of making accountants happy to ensure company-wide success.

Contact Information

  • Further Resources: Lawinsider.com/resources for links to contracts discussed.

The episode underscores the importance of understanding the financial implications of contract language and the necessity of cross-departmental communication to optimize business operations.