Why VSOE Spells Trouble

As software becomes more ubiquitous, many CFOs must now confront the nightmare of revenue recognition.

Help on the Horizon

Companies that now struggle with SOP 97-2 may ultimately find respite in evolving international accounting standards. International financial reporting standards (IFRS) so far contain no industry-specific guidance regarding revenue recognition. That means a company selling software and using IFRS “would have a much less restrictive pricing policy” than under U.S. generally accepted accounting principles, says Jay Howell, an audit partner in BDO Seidman’s technology practice, and would almost certainly be able to come up with fair values for each product (absent the requirement to have actual pricing data).

The Securities and Exchange Commission is still considering whether or not to let U.S. companies file in IFRS, after deciding in November that foreign companies using it will not have to reconcile results to GAAP. Many companies, including Cisco Systems Inc. and United Technologies Corp., have submitted comments in favor of doing so, and Howell expects the SEC will concede, as U.S. companies “will feel the competitive pressure to switch” if more foreign technology companies begin using IFRS.

Longer term, the Financial Accounting Standards Board is looking to improve international standards by amplifying IFRS, but along lines similar to its current version. “Our hope is to have one single standard that will cover revenue recognition across all industries,” says Jeff Wilks, a project manager at FASB. Next quarter, the board plans to release two new models of revenue recognition for comment, in hopes of letting the market decide which is better. Both of the models are “very principles-based,” says Wilks, and both would allow companies to use estimates, rather than actual pricing data, for some undelivered items within contracts. — A.S.


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