One Size Gives Fits to All

Financial executives say that proposed changes to revenue-recognition rules ignore real-world realities.

What do TV sitcoms, cell phones, and construction sites have in common? At the moment, nothing. But a proposed rule change could create a thorny accounting challenge for companies as diverse as Time Warner, Apple, and Baker Concrete Construction.

The pending change to revenue-recognition rules would essentially create a one-size-fits-all approach, eliminating most, if not all, industry-specific applications and exceptions.

CFOs argue that the proposal isn’t practical, introduces too much subjectivity, and imposes too great a burden while doing little to satisfy its ostensible goal of providing investors with more information.

“As a regional controller for a large, privately held concrete construction subcontractor…I don’t [have] the luxury of breathing the rarefied air found only in the theoretical purity of regulatory boards. The construction industry is real-world [and] results-oriented,” commented Allan Korsakov of Baker Concrete, in a letter filed with the Financial Accounting Standards Board in August.

FASB, of course, sees it differently. The draft rules, which are open for public comment until October 22, are part of a larger plan to find a happy medium between the surfeit of U.S. revenue-recognition rules and the dearth of international standards on the same. Currently, U.S. generally accepted accounting principles offer more than 100 pronouncements regarding when and how companies book revenue, including industry-specific rules for 25 different sectors, from construction to film production to software to casinos to airlines.

FASB argues that those voluminous rules create comparability problems for investors and other financial-statement users, because similar transactions are often treated differently and produce different results, even for seemingly similar companies. At the other extreme, international financial reporting standards contain just two broad revenue rules augmented by four interpretations; as a result, some IFRS users complain about imprecision if not outright confusion regarding which overriding principle should be applied.

The goal is to meet in the middle by the second quarter of next year via a “converged” standard. From that perspective, the revenue-rule project “is probably one of the more practical changes I’ve seen come out of standards-setting bodies in a long time,” says Ed Hackert, audit partner at accounting firm Marcum LLP. Despite the inevitable anxiety that any major accounting change inspires, Hackert says that “once you peel back the onion, understand how it works, and begin applying it, you gain an appreciation of its practicality.”

Devilish Details

Some companies got a taste of the new rules before the exposure draft was issued. In January, Apple announced it would early-adopt FASB’s Emerging Issues Task Force (EITF) guidance in the first quarter of fiscal 2010, on a retrospective basis, and provided comparable financial results for its last three fiscal years as if the new rules had been in effect.

By adopting the guidance, which is similar to the rules laid out in the exposure draft, Apple accelerated the recognition of revenue for such popular products as the iPhone and MacBook, giving a boost not only to revenues but to profits as well. As it turned out, the quarter was Apple’s best ever.

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