I’ve heard some describe the Sarbanes-Oxley Act as the accountant’s version of the full employment act. If that’s true, what does it say about the current state of revenue recognition guidance the in U.S.? Recognition of revenue was once a simple concept - did you ship product or provide a service? If so, you likely recorded revenue in connection with such a transaction. Over the decades, however, business has become complex (or did we complicate it for ourselves?), and the complexity of revenue recognition has evolved as well.

We have seen the SEC, FASB, AICPA and other standard setting bodies develop reams of pronouncements and discussion on the subject of revenue recognition. Recognition of revenue has become so complex that it is among the top five reasons SEC registrants file restatements of previously reported financial results.

The topic of revenue recognition is also among the most concerning of issues that auditors contend with when planning and performing an audit. The rules can vary markedly depending on whether you’re a manufacturer, distributor, contractor, software vendor, service provider, financial institution, airline, broker-dealer, etc., etc., and can vary further if you have contracts with multiple elements, return or refund privileges, stipulated shipping terms, etc. For instance, there are currently at least 25 different industry-specific revenue recognition rules contained within U.S. accounting literature, including separate guidance for airlines, casinos, the film business, mortgage banks, hospitals, and software companies. Needless to say, we accountants have our hands full when it comes to this subject.

Given all this, it was intriguing to me when I heard that the Financial Accounting Standards Board (”FASB”) has agreed to issue a discussion paper [PDF] later this year with an eye toward boiling down the myriad industry-specific rules into a single general standard. This would mean that the airline industry would recognize revenue in a manner similar to the software industry.

Does such a conceptual framework make sense? Perhaps it can, but I will be watching closely for the FASB’s discussion paper this October/November. Despite the volume of existing revenue recognition literature and despite it’s occasional imperfections, it is a body of knowledge that has carried the U.S. far. As my dad used to say, “don’t fix it if it ain’t broke”. Let’s make sure we’re focused on the necessary fixes and not implementing change for the sake of change.