Are technology companies getting a raw deal over a new international accounting rule?
Plenty of tech company CFO's seem to think so. In a survey released this week by BDO Seidman, LLP, an accounting and consulting group, about half - 49% - of all chief financial officers at U.S. technology businesses surveyed feel they are at a competitive disadvantage to their foreign counterparts.
The problem? A new accounting rule that allows foreign competitors to report their financial results under International Financial Reporting Standards (IFRS), without reconciling the figures to U.S. Generally Accepted Accounting Principles (GAAP). If that seems to be a bit wonkish for you, it all comes down to U.S. versus international accounting rules.
And U.S. tech company financial types prefer the U.S. accounting method - by a long shot. When asked which financial reporting standards provide better revenue recognition rules for technology businesses, by a ratio of over three-to-one, sixty-nine percent of CFOs cited U.S. GAAP compared to only a fifth - 21% - for IFRS. Given the opportunity, over a third of these CFOs would switch to IFRS in order to level the playing field with their international competitors.
All complaining aside, the all-important tech sector looks pretty rosy for 2008, if you ask a CFO. I find that strange, given the recessionary sentiment we face from the media and many Wall Street analysts every day. But the BDO Seidman survey says different: roughly three quarters - 73% - of CFOs at leading U.S. technology businesses expect to post increased sales revenue in 2008 over 2007, while fifteen percent are forecasting flat sales and only six percent believe they will experience a sales decline in the coming year. Of those predicting an increase, CFOs are forecasting ten percent growth in 2008 as compared to 2007, while CFOs in technology companies based in Silicon Valley predict fifteen percent growth in sales revenue, the survey reports.
It's not like the survey was conducted last autumn, or even around the holidays, when the economic outlook wasn't so bleak. The survey was taken in mid-January, 2008, right smack in the middle of the recessionary headwinds. BDO Seidman says they included 100 tech company CFO's from tech companies which had revenues ranging from more than $100 million to $15 billion.
Cue the obligatory survey leader quote . . . . “We created the survey to provide a highly-accurate barometer for measuring the opinions of financial executives at the premier technology firms in the U.S. This inaugural survey reveals broad-based optimism among these CFOs for revenue growth and continued merger and acquisition activity in 2008,” says Jay Howell, a managing partner at BDO Seidman. “However, the survey also revealed concerns among the CFOs about a new accounting rule they believe places U.S. technology businesses at a competitive disadvantage to their foreign counterparts. The new rule, while well intentioned, has unintended consequences for U.S. technology businesses in the area of revenue recognition.”
Some other significant results from the study . . .
Growth Drivers. Over a third of the CFOs cited consumer demand for innovative personal technology as the greatest driver of growth in the industry in 2008, closely followed by a third who indicated that international expansion would be the main driver. Seventeen percent cited increasing IT budgets as the greatest driver of growth in the industry.
Challenges. The ability to recruit and retain talent - 38% - is seen as the greatest challenge for the coming year, with risk management - 23% - finishing second, followed by access to capital at 15%, financial reporting and corporate governance issues at 14%, and foreign competition at 9%. Businesses based in Silicon Valley, Calif., a technology stronghold, strongly believe that recruiting and retaining talent - 55% - will be the greatest challenge for the coming year as well, but they were only one third as likely as companies not based in Silicon Valley to see risk management as the greatest challenge for the coming year (only 9% vs. 27% outside the Silicon Valley).
Limited Pursuit of Capital. Only twenty-seven percent of the CFOs expect their businesses to seek additional capital in the coming year. In fact, most Silicon Valley CFOs - 86%- do not anticipate seeking additional capital in the coming year.
Overall, a good look by BDO Seidman at the financial state of the technology union here in the U.S. Aside from potentially unfair accounting rules, maybe 2008 won't be such a bad year for tech companies after all.