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.

But not all preparers are ready to embrace the proposed changes. Most of the more than 200 comment letters filed in response to a December 2008 discussion paper issued ahead of the exposure draft supported the idea of creating a single source of concise, meaningful standards, but criticized many of the details prescribed by FASB and its overseas counterpart, the International Accounting Standards Board.

In the exposure draft, FASB and the IASB acknowledge that the proposal may cause temporary upheaval, especially with respect to the required "retrospective application" of the rules. They also acknowledge that the rule revisions will be especially hard on companies with long-term contracts, and for those that find it difficult to estimate stand-alone selling prices at a contract's inception. To alleviate some of the transition pain, the boards may limit retrospective application if it is impractical, and provide a long lead time before the new standards take effect.

Companies are likely to need the breathing room to retool processes and systems to comply. One of the more significant changes proposed is the way revenue from exclusive licensing agreements is recognized. Under the draft rule, revenue is booked over the life of the contract, instead of up front, when the licensed items are available for use, says Allan Cohen, assistant controller at Time Warner and chair of the financial-reporting committee of the Institute of Management Accountants, a trade group.

That means that when Time Warner and other media and entertainment companies license exclusive syndication rights to television shows, recognition of the contract revenue must be spread over the life of those multiyear agreements. "That's a pretty significant change," asserts Cohen, referring to the shift related to when revenue hits the income statement, and a host of new required disclosures surrounding the contract elements.

Not Ready to Roll Forward
The draft rule contains four pages of new disclosure requirements, which include an explanation of changes in contract asset and liability balances from period to period. That means that if a contract is in an asset position, "you have to roll forward your balance-sheet accounts" and show the results in tabular form, explains Cohen. The table includes beginning balances, revenue from performance obligations and transaction price changes, and other adjustments that reconcile the ending contract asset balance — all data that Time Warner has, but is not ready to roll forward in the prescribed manner until its accounting systems are reconfigured.

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