Revenue Recognition at HBP

In early 2014, Paul Bills, CFO of Harvard Business Publishing (HBP), sat down with David Wan, the company’s CEO, to discuss budget preparations for the coming year. Bills noted that the performance of Corporate Learning, one of HBP’s three business units, would be affected by a business model change for its largest product that required a change in the timing of revenue recognition. Corporate Learning was in the process of revamping its flagship product, Harvard Manage-Mentor (HMM) from version 11.0 (HMM11) to version 12.0 (HMM12). The revamped software would be hosted exclusively on HBP’s server rather than on its clients’ servers, allowing updates to take place continuously. Given the change, accounting standards required HBP to change the recognition of revenue from the date of software delivery (for HMM11) to ratable recognition over its contract life (for HMM12). As Bills and Wan discussed the accounting change, they recognized that its impact on Corporate Learning’s and HBP’s performance could be material and would have to be reflected in the budget. In addition, they wondered how the new accounting would affect the company’s policy for awarding sales incentive compensation on HMM, as well as how they communicated with employees and the firm’s sole shareholder, the Harvard Business School.