Earlier this month we wrote about how the new revenue recognition rules are having an impact in the technology sector, but it doesn’t end there. In fact, my colleague Michelle Kupka and I will be leading a webcast regarding the current changes in revenue recognition this coming Tuesday, November 3.  And if there are readers out there who have struggled with rev rec, we’d love to hear your take on whether the new rules will be an improvement - or just another hurdle.

Among the industries that will be affected, life sciences and biotech stand out due to their long R&D cycles, their capital requirements and the infrastructure required to manage and market products from concept to distribution.  This hits home for us in Massachusetts, where the steady growth of the life science and biotech industries depend not just on science and commercialization, but on compliance and a strong balance sheet as well.

A great number of life science and biotech projects are embarked upon as joint development arrangements with pharmaceutical companies or distributors, and as a result, revenue is often generated under complex scenarios.  These arrangements often include payments linked to milestones, upfront payments, joint funding payments, joint product launch funding, licensing of future products developed and other issues. It is these complicated relationships that result in misstated revenue, in turn leading to an above-average rate of financial accounting restatements.

FASB’s new revenue recognition rules take these circumstances under consideration, and in particular they address:

1. whether the arrangement represents a single unit of accounting or multiple units;

2. if the arrangement represents a single unit of accounting, how the revenue should be recognized when such arrangements spans over multiple financial reporting periods; or

3. if there are multiple units, how revenue should be attributed.

Under the new revenue recognition guidance, the elimination of the requirement to establish fair value of undelivered products or services using objective and reliable evidence (replaced by the concept of “Estimated Selling Price”), as well as the elimination of the use of the residual method for allocating arrangement consideration will make things a bit easier and serve to facilitate consistency in revenue recognition accounting for these types of collaborative development arrangements.

While we will begin to see some clarity, vagueness will still persist in certain areas.  On the bright side, due to the life science and biotech industries’ unique approach to collaborative development arrangements and long-term view of success, companies should find some comfort in these new rules.

We’ve gone into detail in the past about the new Massachusetts Privacy Act that will take effect next year, and this Boston Business Journal story on data security breaches at Citigroup and Bank of America struck us as the deadline for compliance comes into sight.  It appears that credit card information was compromised, which of course leads to a host of problems for consumers and the banks alike.

The new Privacy Act will go a long way to ease these burdens, as for the first time laws will be enacted to prevent these breaches, as opposed to outlining steps to take after incidents occur.  On the consumer side, this is excellent protection to have, but of course on the business side it requires heavy lifting to comply with the stringent guidelines.

If you’re interested, you may want to check out this MFA webinar on the privacy law or this related Perspectives article.

During MFA’s annual Education Week this summer, we were lucky enough to get some time with Barry Melancon, President and CEO of the AICPA.  Barry shared a fascinating perspective that helped to draw the line between a high level, overarching outlook and the client work we conduct on a daily basis.  It was interesting to see that the discussion centered around issues that we often touch upon here in MFA’s Business Insights.

Much of the bird’s eye view centered around the nature of small and mid-sized enterprises and their role in the U.S.  We’ve seen a great many changes in the small business landscape, and Mr. Melancon was adamant that the focus on this segment continue to get stronger.  He noted that “In our society, small business is really the engine.  It makes up about 50% of our pre-recessionary GDP.  There are about 24 million private businesses (including work-at-home businesses), and about 16-17 thousand public companies.  It’s a huge part of our economy.”

Small businesses often fall out of the spotlight and struggle to have their viewpoints heard over the louder voices of large organizations. Certainly in this economic climate, the challenges encountered by small business owners run a wide berth, but our focus on reporting and compliance gives us a window into the difficulties of complying with regulations that aren’t necessarily written for that audience.  We’ve touched on this before in posts on XBRL, the FASB codification, Massachusetts privacy laws, and International Financial Reporting Standards (IFRS).

The slow momentum towards IFRS was of key importance to Mr. Melancon.  He noted that:

There is a lot of concern around the country about the complexity of accounting standards for private companies, especially FIN48 and FIN46R…We believe it points to a problem that we have an increasing number of private company statements that are not complying with GAAP.  Doesn’t that start to conflict with the concept of generally accepted accounting principles?  Is that what we want, or should we have standards that are more tailored to private companies?

There is a likelihood that we’ll see some process that will create a different set of accounting standards.  IFRS gives us an opportunity to look at this…Just last week the International Accounting Standards Board issued IFRS for SMEs, and maybe that’s the answer for private companies.  Or we have to look at several other options to begin to have a process where appropriate standards are in place for private companies.  There are many different approaches, and this will be a critical issue to work out over the next 18-24 months.

Mr. Melancon also had some great clarifying comments about the ongoing Fair Value debate that centers on whether Fair Value should be adjusted to help correct plummeting company values. We’ve written both on the conflict and on the opportunity provided by the situation, and Mr. Melancon added some texture to the conversation when he said that:

Fair value accounting reports on what has happened but the underlying business decisions are what caused many of the issues we’ve experienced.  But FASB has still come under tremendous pressure to modify Fair Value in order to not exacerbate the situation.  They did modify the rules to some degree, although there’s still lobbying in Congress for FASB to go further.  This lobbying in Congress brought into question whether the government should set accounting standards; we believe completely in the independence of the standard setting process.

Such wide-ranging discussion was invigorating, especially as we work earnestly towards the light at the end of this recessionary tunnel.  It is clear that there will be significant changes in a number of areas, even if the tides take some time to rise.  We believe that out of difficult times will come a stronger, more flexible system that will benefit U.S. businesses and enable us as a country to innovate our way back to a position of leadership.