We recently issued an alert about FASB’s new rules regarding “Revenue Arrangements with Multiple Deliverables” and “Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Contain Software Elements.” FASB ratified the standards in late September, and they will cause some shifts in accounting for technology companies.
Before the change, companies that made smart-phones, telecommunications equipment, semiconductor equipment and other related products were required to bundle the hardware in their products with vital software components, and then use software rules to recognize the revenue. From a business perspective, this raises the potential for a reduction in reported revenue. Companies like Apple, for example, suffered when sales and profits from their iPhone appeared lower (17% and 58% lower respectively) under the traditional system. CFO Magazine covered this nicely in their September piece, “New Revenue-Recognition Rules: The Apple of Apple’s Eye.”
The new rules allow companies to recognize more of the revenue from a hybrid-type product than before. Unbundling software from hardware allows the hardware sales to be recognized sooner, as software’s revenue is added up more slowly; over the life of the contract or according to the software’s expected life cycle. This is designed to give a more accurate picture of revenue, which can have a tremendous impact on corporate earnings and shareholder value.
The new rules also put the U.S. on par with the rest of the world, which has already adopted the practices. Companies will be required to comply by June 15, 2010 but are allowed to adopt the practice as early as this quarter.
Sounds good right? The change could create a bump in sales and profits in the short-term for the companies affected. However, as described in our September 8th post, the benefits come with a cost: “The new guidance will require enhanced financial statement disclosure – the new EITF proposal includes a four page example of such a disclosure (no, I am not kidding). These additional disclosure requirements will entail both qualitative and quantitative information surrounding the significant judgments involved with multiple deliverable revenue recognition.”
Thus, while the new rules will likely have a positive impact on financial statements, there may be significant leg-work involved in order to get there.
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