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Impact of Sarbanes-Oxley Legislation

Auditability has become a key watchword of corporate governance within US corporations and, by extension, public companies around the world. Within the intellectual property field, many companies do not meet minimum requirements for accounting systems integrity. In other words, there is no direct senior management control of how revenue is defined and recognized from intellectual property distribution and licensing activities. Accounting data is typically entered into multiple documents, databases and accounting systems to then be manually cross-analyzed. General Ledger transactions cannot be traced back to source work orders, invoices or contractual triggers. Departmental interpretations of contracts drive major revenue allocation and cash application decisions without automated support from normal contract administration workflow.

Sarbanes-Oxley is designed to legally restrict all types of corporations from obscuring, mis-timing and falsifying key accounting data. Corporate intellectual property licensing divisions are particularly vulnerable to non-compliance findings during routine audits. The dynamic nature of contract accounting within Apparel, Consumer Products and Entertainment industry production and distribution licensing relationships challenges finance departments to maintain acceptable revenue recognition audit trails. Sarbanes-Oxley at the operational level is intended to produce integrated accounting systems, consistent accounting policies and the ability to document past, current and pending implications of in force contracts.

System 7 Universal Rights Management is the only intellectual property financial system that meets this standard.

All other attempts at producing this functionality rely too heavily on manual adjustments, redundant data entry and non-transactional record keeping to be acceptable under new audit review standards. Parallel licensing divisions are no longer allowed to maintain separate redundant contract systems. Such administrative nightmares are seen as undue “complexity” inviting abuse. The combination of non-transactional accounting data and replicated contract databases places most IP organizations in direct contradiction to the intent of Sarbanes-Oxley.

The following article provides specifics on key functionality within System 7 that provides the integration and single-entry simplicity envisioned by the US Congress in enacting this legislation. System 7 makes all processes 100% visible, months, years or decades after their inception.

For additional information on Sarbanes-Oxley compliance and implications, www.bearingpoint.com, www.deloitte.com, www.ibm.com are recommended sources of downloadable articles that go into greater detail than is possible here.

Transactional Contract Accounting

System 7 sets the highest possible standard for transactional integrity within a contract rights management and finance system. Every consideration has been given to assure that heavy volume and highly dynamic contract accounting conducted over many years will never produce a disconnection between financial reporting and source activity.

Transactions take two forms within System 7: user generated and system posted. System posted transactions form the basis for all financial reporting, external and internal.

System Posted Transactions

	Invoices
	Receipts
	Sales Revenue
	Account History
	Royalty Reports
	Participations Activity

Each of the above has one to three sub-tables to accommodate allocations by Asset, Territory, Distribution Channel and Right as needed. All financial reporting and analysis is pulled directly from these Transaction tables. System 7’s exclusive use of transactions to drive its accounting operations preserves audit trails in perpetuity.

User generated transaction types are used to provide historical audit trails for system posted transactions:

User Generated Transactions

	Contract Revisions/Versions
	Currency Exchange Rate History
	Action Items
	Journal Vouchers

ERP Integration

Contract Revisions represent the core ERP integration value of System 7. An extensive Contract Revisions function is essential to seamless data flows among contracts, distribution, rights, royalties, participations, corporate ledgers, receivables and payables. Contract Revisions can be envisioned as an automated adjustment process designed to replace manual Debit Memos, Credit Memos, Royalty Allocations, Journal Vouchers, Workorder Revisions, Rights Revisions and Contract History. Contract Revisions are used to handle major revisions to licensed rights, payment schedules and revenue recognition. Minor adjustments to contracts, such as changes to exploitation begin and end dates, revenue recognition methods and key contractual dates are handled (and recorded for audit purposes) via Action Management. Reapplication of cash balances is processed through Cash Adjustments.

Revenue Recognition is an explicit function designed to post revenue to ERP systems based upon scheduled dates or defined events. Revenue is recognized to the contract, customer, asset, territory, right, distribution channel, deal type, division and accounting period levels. System 7 supports the following revenue recognition methodologies:

Periodic (net present value optional)

	Contract Term
	Guarantee Term
	Fiscal Period

Begin or End Date

	Contract Term
	Guarantee Term
	Fiscal Period

Scheduled

	As Invoiced
	Event Triggered
	Custom Plan

Multiple methods may be assigned through the use of Action Types within an individual contract. Action Types are used to set standard company revenue recognition policies which are then named (Pre-sold Television, for example) and then available to be either automatically assigned by default or selected during contract entry. In addition to the above, Cash Receipts trigger an alternative Cash-basis revenue recognition process designed to support Participations Payable activities.

Consumption of Advances and Guarantees

Interrelationships among Advances, Guarantees, Royalties and Participations shift dynamically over time within a single contract, contracts related by shared assets and contracts related by asset hierarchies as payments are made, invoices are collected, performance reporting is delivered, contract payment terms are revised, contractual dates are finalized and contractual royalty/participation terms are adjusted. Advances may be prepaid or collected in multiple payments. Guarantees may be contract-wide, right specific, single term, multiple stage, cumulative or non-cumulative. System 7 uses posting processes to convert the following contractual scenarios into internal transactions (invoice, sales revenue, account history) for presentation as needed to ERP systems.

Royalties

	Advances consumed via Guarantee Milestones
	Advances consumed via Royalties reported
	Guarantees consumed via Royalties reported

Participations

	Advances recouped via Guarantee Milestones
	Advances recouped via Participations reported
	Guarantees recouped via Participations reported

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