August 2000

SEC Delays Implementation of Revenue Recognition Bulletin

The Securities and Exchange Commission has released Staff Accounting Bulletin 101B, which allows SEC registrants to wait until the fourth quarter of their fiscal year, beginning after December 15, 1999, to implement SAB 101, guidelines released last December on recognizing revenue.

SAB 101 summarized certain SEC views regarding applying generally accepted accounting principles to revenue recognition in financial statements. The SEC provided guidance in part due to the large number of revenue recognition issues that registrants encounter. For example, Fraudulent Financial Reporting 1987-1997: An Analysis of U.S. Public Companies, a March 1999 report sponsored by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, revealed that more than half of financial reporting frauds in the study involved overstating revenue.

"Since the SEC staff does not seek comments or go through any due process before issuing a staff accounting bulletin, several acute implementation problems were created when they issued SAB 101," NYSSCPA SEC Practice Committee Chair Robert Waxman said. "The staff's interpretations in the SAB deal with the inherently complex issue of revenue recognition. The original release was to be effective in the first quarter of 2000 (for calendar year companies), but since the guidance was so thin and registrants had so many questions, SEC staff delayed the implementation date by three months. Still the questions continued, and the staff is now preparing a frequently asked questions paper. Despite the initial extension allowed by SAB 101A, registrants and their auditors still needed more guidance in certain key areas. The twice-amended release warns registrants that they have only until the fourth quarter to do whatever is necessary to change their revenue recognition practices and record whatever cumulative effect is needed."

SABs are not SEC rules or interpretations; they represent interpretations of existing rules, standards, and practices followed by staff of the chief accountant's office and the corporation finance division in administering the disclosure requirements of the federal securities laws.

Waxman says that SAB 101 was not a typical staff accounting bulletin.

"SAB 101 is an example of a higher reality, one that goes well beyond GAAP and is in fact changing accounting principles," Waxman said, adding that he is aware of more than 100 public companies that have either changed their recording of revenue or are now examining policies for conformity to SAB 101.

One of the more important positions in the release is the staff's view that a sales price is not fixed or determinable when a customer has the sole right to cancel the contract and receive a refund. So, unless the sale is expressly covered by SFAS 48, Revenue Recognition When Right of Return Exists, the sale will be fixed only when certain future events occur, such as when the refund privilege ends or when the right of return lapses. Until that point, no revenue should be recorded.

"Whether or not a client is a public company, it can't ignore the SEC's GAAP upgrade version 101," Waxman said. Philip D. Ameen, chair of the Financial Executives Institute's Committee on Corporate Reporting, expressed similar comments.

"The revenue recognition principles covered in the SAB are both fundamental and pervasive in their applicability," Ameen said. "The extent to which the SAB amends practices that were historically universally accepted renders the SAB an important accounting change, not a clarification of existing GAAP."