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To: Mike Buckley who wrote (30423)	8/24/2000 5:59:52 PM
From: Thomas Mercer-Hursh	Respond to of 54805

Are you telling me that a company will legitimately put A/R on its balance sheet for which there is no invoice? And that that practice meets the muster of an independent audit? In the company's own detailed financials, the WIP will show up in its own account, but is an asset and would typically be up there in the current asset section. With the published financials, a lot of summarization goes on and so I can see the A/R figure including both, though I don't know for a fact that this is common practice. I can make arguments both ways. I most contexts it is very much like A/R in the sense that it is work performed and goods delivered for which the customer owes money, it just happens that the payment schedule agreed on means that it isn't due now. The bad part is that if it is a significant figure, it will inflate DSO. Except for very long term construction contracts and/or contracts where there is significant risk that one will not be paid for work performed (like bad debt, except that one migh tnever present the bill because goals weren't met or whatever), A/R and WIP are like stage one and stage two receivables.

To: Mike Buckley who wrote (30423)	8/24/2000 6:55:12 PM
From: sditto	Respond to of 54805

<<Are you telling me that a company will legitimately put A/R on its balance sheet for which there is no invoice?>> Yes - and legitimately so. Don't view this issue as an accounting anomaly as much as a billing practicality. Theoretically, a project oriented software vendor has just as much chance collecting WIP as A/R - they simply have agreed via a signed contract to bill the client based on project milestones rather than as incurred. This practice is somewhat analagous (but better) than putting inventory on your balance sheet since WIP is an asset someone has contractually agreed to purchase subject to delivery on time and at the quality level as promised. If at any time an amount is deemed uncollectable (whether in WIP or A/R) it must be "written down" - at which point it does not appear on or is backed off the balance sheet. Since financial reports are generated on a quarterly basis this issue is generally managed on a monthly basis to ensure uncollectable amounts do not make it to the balance sheet and are treated as unplanned discounts. However, this does happen (it's treated the same as bad debt which you can establish a reserve against) and as you can imagine this process can become a source of “managing” A/R to an “acceptable” level. The takeaways are: - Companies can and do manage and report the receivables process in different ways - There are several legitimate (and not so legitimate) approaches used by project oriented application software businesses to report their receivables - For a complete view into the receivables of a project oriented software company you must understand how they manage and report WIP and A/R - Establishing and managing scope, delivering against milestones, meeting client expectations, and managing the collection process pre and post sales are the biggest drivers of DSOs in the project oriented software business. - These practices differ from software vendors providing lower cost "shrink wrap" applications which are treated more like retail products.