Content area
Full Text
Premature revenue recognition gets SEC's continued attention in the form of QU guidance.
In December, 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101. It provides guidance on the recognition, presentation, and disclosure ot revenue in financial statements filed with the Commission. It discusses the basic criteria that must be met before registrants can record revenue with examples of how the criteria are applied to specific fact patterns.
SAB No. 101 was issued because the SEC identified revenue recognition issues as critical to registrants, and indicated that fraudulent financial reporting often involves overstating revenue.
Since the SAB's issuance, the SEC has received inquiries from financial professionals about applying SAB 101 to certain transactions. In response, the SEC's staff has offered further guidance on implementing SAB No. 101. This guidance, in Q&A format, supplements the deferral of the statement's implementation date until no later than the fourth quarter of fiscal years beginning after December 15, 1999 (see SAB Nos. 101A and 101B).
For this new guidance, the SEC obtained input from working groups consisting of representatives of major accounting firms and public registrants in preparing this guidance. It also held discussions with various industry groups to identify significant issues. Topics covered include transfer of title, substantial performance and acceptance, nonrefundable payments, accounting for certain costs of revenues, refundable fees for services, estimates and changes in estimates, fixed or determinable fees, and implementing the guidance in SAB 101. The SEC emphasizes that this guidance does not change the implementation date of, or guidance in, SAB 101.
Needed Clarifications
SAB 101 identifies four essential criteria that should be met before product revenue can be recognized. One is that delivery has occurred, and a necessary element of delivery of a tangible product is transfer of its title. The staff guidance addresses laws of other countries which don't provide for a seller's retention of a security interest in goods in the same manner as the Uniform Commercial Code.
The new guidance deals with the delivery of products and performance of services that are not directly addressed by authoritative literature. For example, does the failure to deliver one item or perform one service specified by the sales arrangement always preclude immediate recognition of any revenue for the sales...