In the middle market of the Aerospace and Defense industry, revenue recognition can be a complicated accounting matter. While this may not seem like something that would matter to buyers, it can be very important to buyers who are required to have audited financial statements, such as public companies and private equity firms (“Institutional Buyers”).
A&D revenue recognition often does not fit a simple ship-and-invoice accounting model. Long-lead programs, milestone billing, progress payments, government contracts under FAR and DFARS, and multi-year purchase orders can all create accounting complexities relating to the timing of revenue recognition. Common problems that we have seen include revenue recognized at shipment when contract terms suggest an over-time approach, progress payments recorded as revenue rather than liabilities, bill-and-hold arrangements without adequate support, and little documentation of the policy applied.
When an Institutional Buyer conducts due diligence and looks to integrate your business into theirs, they will need to ensure that your accounting methods are brought up to their standards, especially when your revenue recognition policies are not GAAP and would not meet the standards required by their auditors. While the process of “correcting” unacceptable accounting revenue recognition seldom results in a permanent loss of revenue, it can cause your revenue to shift significantly between periods. That can make your earnings look “lumpy,” and that can often cause buyers to place a lower valuation on the discounted value of your cash flows. In other words, it can result in a buyer lowering their offer.
The message here is simple – if you are considering selling your business within the next 5 years, work with your accountants to ensure that your revenue recognition policies are fully compliant with GAAP. GAAP-compliant revenue recognition is a controllable driver of a defensible valuation, and far cheaper to address before diligence than trying to deal with it during buyer due diligence.
Have a good day,
Troy Medeiros
Vice President
