New revenue recognition rules will have the biggest impact on companies that sell tangible products that include software, but they will also have an impact on every company that sells multiple elements at once.
The hotly debated rules (formally known as ASU 2009-13 and ASU 2009-14 or EITF 08-1 and 09-3) should allow companies to recognize revenue sooner but may also create a lot of additional work for them, says Nick Steiner, a partner at Burr Pilger Mayer.
“Even if you’re not a company that includes software in your products, the rules will be changing,” he says. “This is going to impact any company that is selling multiple elements, or bundling, at once.”
Smart Business spoke with Steiner about how the new rules will affect businesses and how to begin preparing for them now.
How will the new rules change the way companies recognize revenue?
The new rules may result in significant changes to a company’s revenue model. These rules introduce a ‘selling price’ hierarchy for multiple-element arrangements and remove the requirement to use objective and reliable evidence of fair value when separately accounting for deliverables. As a result, they should allow companies to recognize revenue such that it more closely matches the economics of the transaction.
The rules have become informally known as the Apple rules, as Apple was one of the key drivers in the changes. Because of the software embedded in an iPhone, Apple was recognizing revenue under software revenue recognition rules. Under these rules, Apple previously had to defer revenue when an iPhone was sold and recognize the revenue over an estimated two-year economic useful life. This was a result of Apple providing upgrades to the software on its iPhone to customers for free. Because it did not charge customers for this element, it could not establish evidence of fair value for it. Apple felt that the resulting accounting deferral and recognition over two years did not reflect the economics of the transaction and supplementally disclosed the number of iPhones it sold each quarter to satisfy its investors. Under the new rules, Apple will be able to recognize a significant majority of iPhone revenue upon sale rather than deferring all of it.
The new rules go into effect for fiscal years starting in July 2010 or after, but Apple has been an early adopter. Apple recently announced its financial results for its first quarter after adoption and reported record earnings as a result of the accounting change.