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.

If you haven’t heard of XBRL before, don’t worry, many others haven’t either. Unless you enjoy following the actions of the SEC and their worldwide counterparts, XBRL doesn’t exactly come up at your usual dinner party. However, if you’re responsible for financial reporting at a SEC registered company or are planning to register your company’s shares with the SEC, then you should be familiar with XBRL and it’s potential impact on your financial reporting processes.

For the uninitiated, XBRL is an acronym for eXtensible Business Reporting Language. XBRL is not a new technology, but is a standards-based way to communicate business and financial information. There are a number of resources on the web to help educate yourself and your staff on the topic, such as the AICPA’s XBRL site. Whether you’ve heard of XBRL or not, one thing is for sure: whether you’re the director of financial reporting, a corporate controller, or the CFO for your organization, what you need to know about XBRL is that it will require planning and forethought and will certainly involve change to your existing systems and financial close processes.

Currently, the SEC does not require registrants to submit filings in XBRL format, though they did issue a proposed rule [PDF] on May 30, 2008 and are currently soliciting public comments until August 1st. This proposal may soon change things for registrants and investors alike. For registrants, there are a number of ways to tackle the implementation of XBRL reporting; some may opt to outsource the effort to their financial printers, others may convert their data ‘manually’ with easy-to-use software tools for each reporting period, and others may implement software solutions directly into their general ledger or ERM packages. Regardless of how one gets there, it is apparent that it will involve support from your IT and financial experts, and will likely require Section 404 considerations relative to the internal controls within the organization.

It is worthwhile to note that most major financial markets are are moving in this direction, and XBRL is now mandated for financial filings in multiple jurisdictions worldwide. XBRL is moving ahead with or without us, and other US agencies such as the IRS and state taxing authorities are considering the merits of XBRL filings. Despite this, according to a June 2008 Compliance Week survey [subscription required] of 236 financial reporting executives, 55% have either just started researching XBRL or are not aware of the subject at all, and less than 20% of respondents have anybody on staff considered to be an XBRL expert.

The time is now to consider the effect of XBRL on your business and planning process. The short term effects of XBRL will likely be limited; just ask the early voluntary filers. However, it is clear from SEC speeches and proposals that XBRL is coming, and coming fast. Long-term benefits are likely to be realized by those businesses that are willing and able to embrace the technological change that XBRL will bring about, such as easier and faster access to competitive information and knowledge. If you haven’t already, I encourage you to learn more about XBRL and prepare for the forthcoming changes.

From 409A to audits, independent valuations are a popular topic of discussion these days…and for good reason. They can make all the difference in defending your position – and that of portfolio companies – with the IRS and financial statement auditors.

Q. Why do I need an independent valuation for stock options, as opposed to a valuation performed internally?

A. A decade ago we may have said, “You don’t.” But these days, the big picture tells us that you should only use an internal valuation if your in-house capabilities have the right expertise. Valuations come into play on too many levels to take a chance, especially when dealing with 409A (taxation of deferred compensation), GAAP and audit concerns.

Just as important, an internal appraiser needs to understand how the valuation will be defended if regulators take a closer look and require you to “show your work.” Also, your auditors will be assessing the valuation as part of their audit of compensation.

Q. You mentioned 409A in relation to granting stock options as compensation, which is common practice for us. What will an independent valuation accomplish?

A. On the tax side, under 409A, regulators may at some point be checking into whether the stock option was granted at Fair Value. An independent valuator gives you a safe harbor for these stock options when the IRS comes calling.

There are certain safe harbor provisions for internally prepared valuations, as well. However, your in-house appraiser needs to have qualifications similar to an external valuation expert in order to meet the standards.

If you don’t meet safe harbor and are deemed to have granted stock options at less than Fair Value, you’re looking at significant penalties: the recipient of the options will be hit with a 20 percent penalty on top of regular taxes and interest.

Q. Is 409A the main driver for independent valuations, then?

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