One Size Gives Fits to All

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

Similarly, the draft rules tackle the controversial issue of assigning a fair value to bundled products, by incorporating the latest revenue-recognition guidance from the EITF into the proposal. Specifically, contracts that don’t fall within a higher level of accounting literature — such as percentage-of-completion accounting — are required to use the new EITF methodology on so-called multi-element arrangements.

Like the license-renewal options, the sticking point for bundled products under the draft rules is that each element in a bundle — like an iPhone or a biotech or construction contract that features multiple milestone payments — must be ascribed a value. But such items are rarely, if ever, decoupled from their bundles and sold separately, so determining a selling price is complicated and costly.

In the case of Apple, the bump in quarterly revenue was worth the effort, according to Marcum’s Hackert, who points out that when there is a significant difference between the estimated fair value of an element and the selling price, the new methodology can provide a material boost to the income statement. But for goods and services priced more like commodities, such as those in the low-margin retail sector, there generally won’t be much revenue recognition to accelerate.

Given that, most companies would like to put the brakes on the new rules. The remaining weeks of the comment period, therefore, offer an opportunity to speak up — one that companies should surely recognize.

Marie Leone is senior editor for accounting at CFO.

Ire Power

Pending changes to current revenue-recognition rules will affect dozens of industries, all of which have until October 22 to comment on them. None seem likely, however, to match the collective agitation of the construction industry, as evidenced by the following comments.

“The new standard will require construction companies to keep two sets of books, one for GAAP purposes and one for management and the bonding companies…. The monthly financials under GAAP would be meaningless, as significant swings in revenue would happen without any significant change in the construction of a project.”
— Mark Wheelis, CFO, Pogue Construction

“I believe the exposure draft is entering dangerous waters and is changing a system that has proven to work well for contractors, financial institutions, and surety partners. [The rule known as] SOP 81-1 can be improved, but making such a drastic change…leaves too much subjectivity and will increase costs for what is already a traditionally low-margin area of our economy.”
— Valerie Lind, CFO, Yearout Mechanical

“Not only would this change paint a very different picture of the progress on a project, [but] any deviation from the IRS-sanctioned percentage-of-completion method of revenue recognition will create additional complications in reconciling the two methods…[in addition] we have no idea…if the changes you are proposing can be handled by our existing software.”
— Allan Korsakov, Regional Controller, Baker Concrete Construction

Technical Difficulties?

Companies may run into major complications when their accounting systems try to handle the new fair-value allocation models, says Kelley Wall, a senior consultant with RoseRyan, a finance and accounting consultancy. The problem is that most enterprise-resource-planning (ERP) systems are programmed to handle the more popular residual allocation method, which assigns a straight dollar amount of revenue to each element of a bundled product. Under the new rules, companies will have to use the relative selling price method, which allocates revenue for bundled products based on a percentage. Generally, only ERP systems built specifically for software revenue recognition are configured to handle the percentage method. As a result, the proposed rules will force companies to either tweak their ERP programming or find a work-around solution.

ERP vendors, including SAP and Oracle, say that adjusting systems to accommodate new accounting rules is par for the course. But neither vendor is able to comment on the extent to which customers will be affected until the new rules are finalized. Meanwhile, some software vendors, including NetSuite, are offering service-based fixes. That is, companies can send their transaction information to NetSuite and the vendor will crunch the data using the relative selling price method and send back journal-entry-level answers. — M.L.

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