STAY ON TRACK WITH TECHNICAL ACCOUNTING

Don’t Get Spooked By The Complexities

Devin Bissessur, Assistant Director, Corporate Accounting

Technical accounting can be a very complicated subject, especially for a startup business.  New entrepreneurs have innovative and inspiring ideas on how to improve their businesses with a laser focus on decisions that can take their company to the next level, and they may overlook this critical component.  

However, poor technical accounting can derail the future plans of a great business.  Recognizing revenue too early, a lack of proper internal controls and improper recognition of financial instruments can result in significant costs, legal charges, and overall stress for the management of a company.

IMPACT OF INSUFFICIENT TECHNICAL ACCOUNTING PLANNING

The lack of technical accounting and planning has resulted in numerous issues for both startup and mature businesses.  The result of U.S. Securities and Exchange Commission (SEC) charges can significantly impact the future success of a business and the founder’s reputation in their industry.  Below are some recent examples of charges due to the lack of technical accounting oversight and governance:

• July 3, 2023: Future FinTech Group (FTFT) was charged by the SEC for filing materially inaccurate annual reports and failure to maintain internal control.  It was discovered that the assets should have been impaired earlier, and ASC 360 (Property Plant and Equipment) was not followed.  The SEC ruled that the personnel did not have proper expertise in GAAP and SEC reporting requirements.
  
  
• June 27, 2023: Las Vegas-based supplement company MusclePharm executives were charged by the SEC for prematurely recognizing revenue early for orders that did not transfer to the customer.  In addition, the SEC stated that customer credits were misclassified as advertising revenue instead of reductions to revenue.
  
  
• August 3, 2022: The SEC charged Suralign Holdings with improper revenue practices to recognize revenue earlier than required which violated US GAAP ASC 606 (Revenue) guidance.  The result was a $2M fine and charges against the executives.
  

TECHNICAL PLANNING FROM INCEPTION

A startup can avoid costly adjustments, audit fees, and general stress if the right technical guidance is provided from the beginning.  Technical accounting includes the following functions:

• INTERPRETING ACCOUNTING STANDARDS.  Understanding the detailed guidance provided by US GAAP accounting standards on specific transactions or financial statement presentations.  Accounting guidance is constantly changing, and being ahead of the curve can reduce errors and costly misstatements.  The following are examples of technical topics that affect new businesses:
  
  
  • Treatment of Simple Agreement for Future Equity (SAFE) notes on the Balance Sheet
  • Change to the disclosure of Cryptocurrencies on the Balance Sheet
  • ASC 730 Capitalization of R&D expenses
  • ASC 606 Revenue Recognition
  • ASC 810 Consolidations
    
    
• COMPLEX TRANSACTION ANALYSIS.  Analyzing and determining the appropriate accounting treatment for complex business transactions.  This could include mergers and acquisitions, financial instruments, and revenue recognition for complicated contracts.  Proper analysis can unlock cost savings in a transaction and improve disclosures which potential investors would find attractive.
  
  
• FINANCIAL REPORTING.  Preparing and reviewing financial statements to ensure compliance with applicable accounting standards.  Appropriate historical compliance will ensure the IPO process will be quicker and less costly.  Proper financial reporting will be easier to read and attractive to potential investors and underwriters.
  
  
• RESEARCH AND DOCUMENTATION.  When faced with unique or complicated transactions, technical accountants often must research the relevant accounting standards or seek guidance from professional bodies or advisory firms.  They then document their findings and the rationale behind the accounting treatment chosen.
  
  
• LIAISING WITH AUDITORS.  Technical accountants interact with external auditors, explaining and defending the company’s application of accounting standards.
  
  
• STAYING COMPLIANT.  Accounting standards can evolve, and new ones can be issued.  Technical accountants must stay updated on these changes and understand their implications.
  

Investment into technical accounting can be a tremendous benefit to a business of any size who has strong growth plans.  Early recognition and compliance with accounting guidance can avoid costly mistakes and keep startups on track, ensuring the management team can focus on their business and be a leader in their industry. 

HOW TO BUILD A SUCCESSFUL PAYMENTS NETWORK FAST

Four Rules To Get You There

Dan Rogers, CEO

I see more and more startups building bespoke “payment networks” in their specialized verticals.  I’ve experienced this a handful of times in the last 15 years and taken stock of the winners and losers.  Payments is a volume business, and while there is a lot of great new technology you can bring to accelerate payments and build new payments connectivity, founders tend to value the speed and ease of the new methodology setup and forget about the importance of volume.  So here are my rules for building a specialized payment network.

1. USE EXISTING RAILS AND INFRASTRUCTURE WHEREVER POSSIBLE.  Test your use case on well-worn rails.  Existing rails are compliant, stress-tested, and bank grade.  Some examples of existing rails include: credit rails (Visa, Mastercard, AMEX, and Discover), PIN debt (Jeanie, Star, and NICE), and closed-loop rails (gift cards).  I encourage startups to think of their initial launch as a minimum viable product, as opposed to the “build it and they will come” approach.  Prove you have a viable product that delivers exceptional value and inspires payment dollar volume: and only then invest in custom infrastructure.  This approach saves time and investment dollars in proving your business case.
   
   
2. FIND THE VOLUME.  Profitability in payments is all about payments dollar volume.  Successful payment networks spread their infrastructure and operations costs over billions of dollars of payment dollar volume.  This is how payment networks add value at very low margins (3%-5% gross margins).  If you’re operating a payment network at higher margins, eventually your customers will find a lower cost alternative to move funds.  The best way to accomplish massive payments volume is to find the 800 lb. gorilla in your segment, and partner deeply.  PayPal became the default option for eBay customers, Amex found American Express Travelers Cheque customers, Visa started with Bank of America, and Discover leveraged Sears customers.  The most successful payment networks are actually started by big companies with vision, opportunity, and a ton of customer cash to move.  Find your partner that has the most to gain from an innovative payments approach, and win 100% of their volume.  Once you have achieved that goal, expanding across your ICP becomes a lot easier.
   
   
3. INVEST IN COMPLIANCE.  Compliance is really expensive and many startups look at the investment as overhead.  If you’re building a regulated Fintech and expecting to move cash, it’s not optional.  I encourage everyone to think about compliance offensively.  At the end of the day, compliance spending is all about product acceleration and sales enablement.  Companies that fail to invest in compliance have slower product rollout and problematic growth.  More and more, the failure to invest and implement appropriate compliance programs leads to products and companies shutting down.  Regulators are actively looking at Fintech companies for non-compliance, so if your business has had any success, you’re already on the radar of regulators.  Do yourself and your investors a favor: invest in a good compliance program.
   
   
4. DON’T FORGET TO RECONCILE.  Most founders with exceptional motivation and vision have never heard of reconciliation.  They are appropriately focused on delivering an exceptional experience and unseen value.  At the same time, the very simple task of reconciling the inbound and outbound cash of your payment network to the penny every day is an absolute necessity.  The role is typically assigned to a staff accountant or settlement operations specialist – the lowest FTE investment on the team – and involves matching bank transactions and unsettled transactions with your system of record.  A startup doesn’t need a CFO or EVP of Reconciliation, but they definitely need a respected team member to reconcile that isn’t afraid to raise their voice when the cash flow doesn’t match up.  Time and time again, FintechForce’s biggest clients are startups that failed to reconcile their payment networks.  The cleanups are long and expensive, and could have easily been avoided with one capable hire.

Fast, reliable payments have been around for a long time, and startups can leverage them easily.  Every existing payment network executive wants to support your new, innovative payments volume.  Go to an ETA event or a prepaid event and talk to anyone.  Find a great partner in your vertical with lots of customers.  If startup founders and product teams can leverage these four rules, they can benefit from a proven path to success and grow with less risk.  Startups can also get to market and validate their MVP that much faster.  Good luck!