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in Your Career by SherylNash01, 29-01-10 18:07
New revenue recognition rules may do little but confuse investors Print E-mail

I can't get too worked up about this change in the accounting rules for revenue recognition. It strikes me as reasonable enough under the circumstances, and hardly the profit inflation device that some commentators, at least in the blogosphere, make it out to be.

Yes, as the WSJ points out today, allowing companies to book revenue based on estimated sales prices for all the components of "bundled deliverables" at once instead of on their current fair value will boost upfront earnings for tech companies like Apple and Palm, whose products combine hardware and software.

That's because current rules require that value to be discounted to reflect the fact that deliverables such as software upgrades and service will be provided in subsequent quarters. And when the current value of future deliverables is difficult to estimate, the rules now require 100 percent of the revenue from sales of the product to be deferred.

Even the investors who wrote letters to the FASB over the proposed change seemed uniformly in favor of it, judging from their comments.

But it's not as if this is manna from accounting heaven for companies in need of a boost to earnings. In fact, the new rules will reduce the earnings that companies currently recognize from those deliverables in subsequent quarters. So it seems to me that all the change does is eliminate the smoothing of revenue and earnings over a number of quarters that the current rules provides, and will make earnings more volatile as a consequence.

What's more, not all companies will welcome the end of deferred revenue, as it provides a clue to investors as to future earnings. As Jack Ciesielski, an accounting expert who runs the investment advisory firm R.G. Associates in Baltimore, put it to me in an email today, "I have heard that some tech stocks trade off of deferred revenue buildup. If so, the whole idea of changing the recognition is for little effect."

The most serious concern may be that in carving out special rules for bundled deliverables, the move conflicts with the goal of the Financial Accounting Standards Board of simplifying accounting standards.Yes, the old rules may have been more difficult to comply with, that's a different issue, as FASB Chairman Robert Herz has pointed out on more than one occasion.

In any case, corporate executives often complain about the problem of GAAP's complexity, and the SEC and others in Washington have hammered the FASB over the issue as a result. Yet those complaints seem to fall by the wayside whenever it flatters corporate results.

No wonder Herz is known to dislike the role of the task force that came up with the change: The Emerging Issues Task Force's very mission seems designed to produce exceptions to FASB's rules, and thus add complexity to them.

Still, as one commentator said in his letter to FASB, in this case at least, the current rules made too little sense not to change them for the sake of "conceptual purity."

I can live with the lack of such purity in this case. But I don't want to hear the guy complain about the complexity of GAAP next time FASB issues a new rule that he doesn't like.


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