Volume 19, No. 4

 

Rock 'n Roll Revenue Recognition: How Growth Will Thrive:  Revenue recognition (“rev rec,” in accounting-speak) is ratcheting up and arriving earlier for some companies. Firms making their living by engaging in multiple-deliverable arrangements (contracts for a plethora of services or goods to be delivered at various times, with one price tag for all) have long hated the accounting for such deals. They’re required to parse such arrangements into identifiable pieces and recognize the revenue from each piece as it’s completed. That’s not the problem for them: it’s the accounting requirements for evidence of each piece’s selling price frequently making the disaggregation goal impossible. If disaggregation can’t be achieved, the revenue is deferred, with recognition taking place after all contract elements are delivered. Sometimes, recognition may occur ratably over the contract term.

That retards revenue growth, making the accounting standards a target of wrath for many technology and consulting CFOs. Recently, the FASB’s Emerging Issues Task Force (EITF)greatly liberalized the requirements for objective evidence of each component’s selling price, making it much easier to achieve “componentized”revenue recognition for multiple-deliverable arrangements - and to recognize revenue faster than under the more restrictive fall-back deferral approach. The EITF also freed tangible products containing software from being accounted for under restrictive software revenue accounting methods, in many cases. The change to this new accounting was part of the reason for Apple’s recent revenue growth.

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