Revenue and Expense Recognition at NetSuite, Inc. Teaching Note Suggested Case Questions

1. What services does NetSuite provide to its customers? What is the companys business model? How does the company generate revenue streams? What are the key success factors in the companys business? Will these be observable from the companys financial performance?

2. How successful has NetSuite been recently? What is your assessment of the companys financial performance? Its cash flow performance?

3. What is your assessment of the companys revenue recognition policy with respect to its subscription fees? Are these accounting methods in accordance with GAAP

4. Evaluate the impact on the companys financial statements in 2013 if the company had always expensed commission costs immediately, instead of capitalizing and amortizing them over time. [Hint: Using financial statement information, reconstruct the transactions made in 2013 by NetSuite with respect to commission costs.] What is your assessment of the companys policy of capitalizing and amortizing commission costs? Are these accounting methods in accordance with GAAP?

5. How should NetSuites management respond, if at all, to the criticism that its policy of capitalizing and amortizing sales commissions distorts the companys financial performance?

6. Is NetSuite worth the target price of $125 per share established by Credit Suisse? Why or why not?