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About Zyme
Zyme is the leading provider of hosted channel data integrity services for global technology companies
that sell through indirect channels. On behalf of these companies, Zyme processes and validates millions
of private point-of-sale and inventory transactions each week from nearly 2,000 distribution and retail
channel partners in 175 countries. Zyme supports its customers with verified channel sales and inventory
data for mission-critical business processes such as revenue recognition, SOX compliance, incentive and
rebate payments, sales commissioning, and supply chain planning. Zyme serves clients through a unique
Service-ON-Software offering that combines a best-in-class channel data processing software platform
with domain-deep analyst teams, earning Zyme an unparalleled reputation for value in the industry. For
more information, call 1-877-262-8993 or visit www.zymesolutions.com.
Executive Overview
High-tech companies that sell through indirect channels face many challenges when deciding
on a revenue recognition policy. They must comply with regulations, ensure access to accurate
and timely channel sales data, and maintain robust systems and processes that support
revenue accounting. Company finance departments need to evaluate the pros and cons of the
sales-in vs. sales-out approach for revenue recognition. While the sales-out approach is
considered to be more conservative, and may benefit companies by leading to lower required
reserves, it poses implementation challenges because it is dependent on self-reported
distributor information and lacks because the company lacks control over information accuracy.
Transitioning from a sales-in to a sales-out approach is a significant effort, but one that can be
managed by systematically on-boarding channel partners, consolidating and validating partners
point-of-sale (POS) and inventory data, and using a compliance scorecard to ensure timeliness
and data quality. Partner compliance in providing timely and accurate POS and inventory data
enables companies to perform an accurate reconciliation of sales-in vs. sales-out data. Such
data forms the basis of inventory valuation, while rigorous monitoring of variances between
calculated and reported inventory can provide valuable insights.
Background
The technology industry has a complex, global, multi-tier distribution channel, and continuous
technological innovation, which drives short product lifecycles and constant price pressure. Due
to the pace of technological change, most products are sold with a right of return; many hightech manufacturers also offer some type of price protection, ship and debit, or back-end rebate
program based on sales volume.
These industry characteristics make proper revenue recognition a challenge, and one that is
complicated further by the lack of timely, complete, and accurate sales and inventory data from
channel partners. Too often, critical revenue recognition decisions are made without adequate
visibility into channel sales activity, which creates audit and regulatory compliance exposure for
high-tech companies. Improving the accuracy, timeliness, and transparency of channel sales
data has therefore become an important objective for finance and sales departments.
Before discussing the advantages and drawbacks of each method, its important to examine two
relevant publications: SAB 104, published by the SEC; and FAS 48, published by the Financial
Accounting Standards Board (FASB).
A ship-to policy may expose companies to risks of excess or insufficient reserves for returns,
particularly as trends in returns diverge from the estimates upon which reserves were based.
The Sales-out, or Sell-through, Method
The sell-through method is considered the more conservative of the two revenue recognition
policy options. Because revenue is not recognized until products ship to the end customer,
typically the company does not need to maintain reserves against revenue for estimated
returns. The sell-through method does, however, rely on POS and inventory data that is selfreported by channel partners. Channel partners vary widely in their ability and willingness to
report this data in an automated fashion, and reporting standards may vary regionally for
channel partners located around the globe. Given these challenges, this self-reported data may
not be as reliable, accurate, and timely as companies desire for revenue recognition.
Get channel partners on board in a systematic fashion and ensure that channel partners
submit the correct data at the necessary level of frequency, accuracy, detail, and
timeliness to meet sell-through revenue recognition requirements.
"
Cleanse data to ensure the accuracy of date formats, product names, contract
manufacturer names, and end customer names.
Follow up with partners on a weekly basis to resolve exceptions identified during the
validation process.
Apply complex pricing rules to POS and inventory data, using the rules to value
inventory and test POS-based calculations, such as semiconductor special pricing or
ship and debit functionality.
In addition to improving inventory valuation, SISO reconciliation also helps companies make
more accurate price protection payments.
The calculated inventory for SISO reconciliation is computed as follows:
Previous weeks calculated inventory
+ Sales-in
Shipments in transit
Sales-out (sell-through, POS)
Returns
Cross-shipments and other adjustments
= Current weeks calculated inventory
Conversely, a close convergence between calculated and reported inventory indicates that no
systemic problems exist; therefore, variations are likely due to issues either in the transit time
model or in the timing of POS vs. inventory reports.
Conclusion
While the high-tech industry uses both the sales-in and sales-out revenue recognition policies,
the sales-out approach offers some important advantages: It is seen as more conservative,
revenues are seen as more reflective of actual market dynamics, and it enables companies to
decrease reserves against returns. Transitioning from a sales-in to a sales-out approach,
however, can be a challenge. Ensuring accurate, reliable, and timely data from sales channel
partners and establishing a robust SISO reconciliation process are important steps in
addressing this challenge. To minimize risks in revenue recognition, technology companies
should focus on increased automation, improved channel data integrity, and enhanced analysis
of channel sales data, no matter what revenue recognition policy they follow.
This document contains proprietary information of Zyme Solutions, Inc., based on the experience and research of Zyme and its
partners, and may not be reproduced without prior consent from Zyme Solutions, Inc. While every attempt has been made to ensure
that the information in this document is accurate and complete, some typographical errors or technical inaccuracies may exist. The
information contained in this document is subject to change without notice. Zyme does not accept responsibility for any kind of loss
resulting from the use of information contained in this document. Further, Zyme is not, by means of this document, rendering
business, financial, investment, or other professional accounting advice or services. Before making any decision or taking any action
that may affect your business, you should consult a qualified professional advisor.