Jim Hunt: Great overview. I assume that a lot of the impetus for expanding the services has come about in response to the compliance standards changes over recent years. Can you talk a little bit about that?
Julio Dalla Costa: Yeah, so as we know, we always say that the FASB, which is the rule setting body here in the U S and IASB, the rule setting body in Europe, they’ve been very active these last seven or eight years. And the reason has come from it started off with the whole Sarbanes Oxley transition. When you know, investors as readers of the financial statements, okay, they’re looking for more transparency. You’re looking for more visibility within a company’s operations and companies have been talking about how to change revenue recognition, how to change lease accounting, how to change hedge accounting as a result of the standard setters changing the rule-making to disclose to account for these very important critical topics. Revenue recognition especially can be seen as the most important line item in any company’s income statement. Lease accounting has traditionally been off the balance sheet for years and many investors know that it could be off the balance sheet, but it’s a real liability that companies enter into, especially these long-term leases. Building leases can go as long as 25, 30 years. We talked about lease accounting. That’s very important because that’s a real cash outflow as it goes. It’s all about derivative and hedge accounting. It’s such a complex area. And the FASB has been trying to make it more simplified, make it more user friendly as we say, just to make people understand these instruments are very risky transactions and companies have to have the right personnel, they have to have the right policies, procedures, and most importantly processes involved. So, you know, taking a step back, the compliance aspect of these changes have been enormous.
Julio Dalla Costa: I’m sure Jim you’ve been hearing about there’s been delays, there’s been delays in lease accounting, there’s been delays in some revenue recognition for private company accounting recently as far as early as two weeks ago because everybody says the FASB just started to change foundational accounting too quickly. And companies large and small have been very challenged with actually making those changes in a timely manner. So in the last two weeks, the FASB just came out as a result of just accounting overload to actually delay for private companies. Let’s take one more year. And actually for private companies, if you have not filed your revenue recognition standard as of two weeks ago, you actually given one year extension. So that is the amount of compliance activities and companies have been pushing back. Companies have been saying this is too much too quickly and that’s how you see all these changes have been coming around. Jim,
Jim Hunt: That’s interesting. And then the next topic we’re going to talk about is the old way of IT leading change programs and so on, with the emphasis on accounting changes obviously it’s not something we can drop in a new piece of software and flip the switch and everything works. So talk a little bit about how the emphasis is shifting as far as leadership of these programs.
Julio Dalla Costa: So you know, that’s a good question Jim, because it really depends on who you speak to in your organization. You know, a lot of projects usually start out in operations in finance. I always like to have the saying that accounting and finance problems lead to IT projects. Why do I say that? I say that because you know, me working in corporate America, you’re an accountant, you’re a controller, you’re CFO, you know you can’t file your books on time, your accounting close process is too long, and your investors, if you’re a public company or your owners, they don’t like that because they have to file their statements with the regulatory bodies, the SEC, or their banking partners or just their owners, whether it be private equity or otherwise. And you know, in today’s very fast paced environment, companies want to do things quicker.
Julio Dalla Costa: And with that, that also applies to reporting. So with that, you find that a lot of these projects start out as a problem within the finance organization or it could be supply chain, it could be other areas. And then they go to their system of record or their IT within the organization and say, you know what, we need to improve this process. We need to do this faster. We need to do this more accurately. And that’s how it leads to these IT projects. So a lot of these changes in organizations usually start within the business. And then the business problems lead to these IT discussions about, well, you know, right now we’re doing revenue recognition in an Excel spreadsheet. Well it takes us 30 days to close our books because we have to reconcile our books for revenue recognition.
Julio Dalla Costa: In fact, in a real world example, we actually spoke to a customer out of Boston, a large defense contractor and they told us that they do their revenue recognition over 30 days and it takes them 15 days to report. So 45 days. Luckily they’re a private company, but they were doing it all in Excel spreadsheets. And that’s the reason why we were talking to them to try to help them implement a revenue recognition automation software. So I think Jim, that is what we see is that, you know, typically sometimes the budgets come out of IT but the issues and the end users are usually within the business. And that is how we like to think about when you think about advisory or advisory accounting, it really drives at the heart of being the tip of the spear for these projects. Because there’s a problem there. There’s a problem in reporting. They can’t report the numbers quickly. So we in Bramasol as an example, we created these revenue recognition ASC 606 software or we created on top of CLM, these ASC 842, and IFRS 16 disclosure reports that’s going to actually help them solve their problem of reporting.
Jim Hunt: Yeah, great overview. I like the way you, you focused on who the stakeholders are, who really use the information and that’s something that, obviously the IT organization doesn’t have a good view into, so that’s a big difference that accounting advisory services can help solve. Maybe you can talk a little bit about the Bramasol offerings. I know segmented into two pieces, technical advisory services and accounting and finance operational services. Could you kind of compare and contrast the differences between those two?
Julio Dalla Costa: Yeah, definitely. So when you think about advisory or even accounting advisory, we see it as two different areas. The first area is technical accounting. So what is technical accounting? Technical accounting is the application of accounting standard setting into a company’s environment. What do I mean by that? When I say the application of technical accounting is for instance, the new revenue recognition standard, the new leasing standard, the new derivative hedge accounting standard, ASC 815, so these folks at the FASB or IASB they come out with the new rules of accounting, which is what we call the technical accounting aspect of it. So these rules have to be interpreted and this is what people like myself actually do. We take the rules as written and then you apply it to your organization.
Julio Dalla Costa: In my experience, I took the RevRec rule for company I worked for in Houston and I applied it. Now, the whole purpose of these rules is to give some sort of comparability among companies. So if for instance, let’s talk about a revenue recognition standard. It’s a five step model which applies to all types of companies. Whether I am producing about of water or I am delivering a service to a company, it doesn’t matter what industry I’m in. I have to now apply that five step model. That is where the role of technical accounting comes in. In business environments is that people like myself help companies apply these rules to their specific environment.
Julio Dalla Costa: Contrast that to operational accounting, which looks at process. It looks at, so we have a financial reporting process at a company or we have a fixed asset process. What are the ways in which we can optimize that fixed asset process and many of the optimization strategies, will probably include the implementation of a software to help automate that process so you can have more timely reporting, more accurate transactional accounting.
Julio Dalla Costa: I want to talk about operational. Operational is very akin to transactional accounting, so you have these guys or these teams who are doing the technical accounting in one area. Once that is figured out and applied and usually that’s applied within an accounting policy. The next step is the handover from technical accounting to the operational accounting about, okay, we have now figured out the best way to apply the five step model in revenue accounting to our specific company, such as we make air conditioning units. Now, we hand over that policy or desktop procedures to the operational accounting team who will now execute against those policies in a day to day operational type environment where they are now saying, okay, when a contract comes in for our purposes this is what we consider to be variable consideration within revenue accounting. This is how we apply warranty accounting under the new guidance and this is how we’re going to actually book warranty accounting within the framework of our company. So Jim, I hope that clears up the differences between technical accounting and the operational accounting areas.
Jim Hunt: Yeah, it definitely does. And as you emphasize, there’s a certain amount of crossover, like the example you had of the air defense company in Boston that took 30 days to manage their revenue accounting and then another 15 to close. So that kind of crosses over. There are technical aspects of streamlining the revenue accounting piece and operational aspects of overall trying to reduce the close cycle. So they really kind of go hand in glove.
Julio Dalla Costa: Exactly.
Jim Hunt: Yeah. Excellent. So in the time we have left, let’s talk a little bit about what are the indicators of when I need to seek accounting advisory inputs and how do I go about doing that?
Julio Dalla Costa: So it’s a good question Jim. And from my perspective, if we are allowed the opportunity, it always starts with a discussion at the CFO, controller or accounting manager level where we’re trying to find out what are the company’s initiatives as far as the office of the CFO goes. So as you know, in companies, large and small, most companies would have a five year plan. A five year plan could include to install better reporting capabilities or to increase profitability, reduce cost structures. And those are the high level plans. And then you take that into a tactical or operational plan, which is usually three years or less. And then you have these one year objectives. So you go from a long-term planning strategy of I want to increase my profitability, I want to increase my international presence by moving from a US-based company into international markets. And then the CFO basically takes that into smaller bite size pieces of three year goals and then one year goals.
Julio Dalla Costa: And you know, some of it may be to say, okay, my five year goal is to increase my international presence. Well how does that impact finance? It impacts finance because we have to start doing international accounting, we have to start dealing with foreign currency transactions. We have to start understanding different cost structures for segment reporting or for international accounting rules and regulations. Well maybe that company does not have a good foundation of what it means to operate internationally. What does your international close process look like? So that is where technical accounting comes into play of understanding well, we want to operate in Europe. What are the record revenue recognition guidelines in Europe? What are the technical accounting guidelines for fixed assets? What is the ideal or optimal close process as it relates to international accounting? Or simple things such as we make products we want to get into service revenue, what are the differences in different accounting structures that makes up that?
Julio Dalla Costa: So we would like to get involved in planning alongside of the trusted business advisor with the CFO and the CFO organization. Another area of when to call a technical accounting a team is when you’re having issues, problems. And that is when we see most of the problems come in. What transactions? A company just did a big M&A project. We just bought a big company. How do you integrate that company into our existing infrastructure? Or like I said earlier in the conversation, you know, we have to now close our books from 15 days to five days. How do you do that? And actually it’s a real world example. I used to be the VP of finance for a telecom company based out of the UK. They purchased a company, actually a set of companies and basically the mandate I had was we need to go from a 10 day close to a five day close, Julio.
Julio Dalla Costa: Well how do you do that? So you need to understand from an operational perspective, what are the mechanics that makes a successful close? What can we do to go from 10 days to five days? Maybe you start doing instead of actual accounting recording on the last day, you start pulling these back five days before the last day. And what does that mean? That means that now I have to start estimating, I have to start accruing quicker, which is going to help me close my books faster. So Jim, as I see it really from three different angles. You work as a business partner with the office of the CFO, where you understand what are their initiatives. You work as a transaction organization. When the company does divestitures, acquisitions, you get involved then to help them integrate or divest. And then generally when you talk to companies, you understand what are your pain points, how can we help you improve upon your processes from a business perspective?
Jim Hunt: That is an excellent overview and we’re going to let it serve as the wrap up. This has been a great discussion, Julio, I always learn from you and I really appreciate the time. Thank you again for being with us and I look forward to the next session.
Julio Dalla Costa: Thank you very much Jim, and have a great day.
