Ahead of sweeping changes slated for all revenue-recognition rules in 2011, the Financial Accounting Standards Board threw some companies a bone in October by tweaking two parts of the current rules that could help many companies recognize more revenue earlier, potentially amplifying year-end earnings.
Thanks to Update 2009-13, which applies to sales of all items other than software, firms that sell bundled elements (for example, a cell phone plus a calling plan) no longer need to provide objective evidence of each piece’s value. Instead, they can rely on estimates in order to recognize some value before all items are fully delivered to the customer.
Update 2009-14, also known as the “Apple amendment,” applies mainly to companies selling software that is embedded in hardware. Companies that sell “tangible products” that rely on software to operate, such as the iPhone, no longer need to follow the onerous software accounting rules for the sales of those products, but can instead recognize revenue when the product is sold, in general. “This is better accounting,” says John Hepp, partner with Grant Thornton. “The old software rules may have been a fit in 1997, when they were created, but the world has changed since then.”
Hepp says FASB made the changes with the expectation that they would complement larger changes to come. “These changes are a step toward the proposed revenue-recognition model in the broader project” that FASB is currently working on with the International Accounting Standards Board, he says. The boards are reviewing comments; an exposure draft on revenue recognition, which is the penultimate step to a new global rule, is expected next year.
The rule changes could affect more than just the timing of revenue recognition. Christine Gorjanc, CFO of wireless-router maker Netgear, says that in the past, the hardware company restricted some product offerings simply to avoid the onerous accounting rules associated with selling software. Now, “as we grow, this may change the way we set up products and go to market,” she says. “It’s a really good thing for us.”
Many companies would like to adopt the provisions ahead of the June 2010 deadline, but the complexities of adapting internal systems will likely take some time, as will the requirement to recast any revenues already reported for the year in which the switch is made. The first quarter of next year “seems to be optimal,” says Gorjanc, who is planning to adopt early as well.