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http://www.fasb.org/revenue_recognition.shtml
This past week my group and I presented to our classmates a tutorial on revenue recognition by looking at Priceline.com. I kicked off the discussion by asking the class a question, “Should Priceline report revenues gross (what it sells the ticket, hotel room, etc.… for), or net (what it keeps after paying the third party)?” The class gazed back at me as if I was Napoleon about to lead them out of a great accounting war with a definitive answer; that mood quickly shifted as I muttered the words, “It depends.” Suddenly I had found myself as a Benedict Arnold, pleading for a chance to explain myself. Similarly Priceline had to defend itself from an SEC inquiry regarding its revenue recognition practices over a decade ago. While better guidelines have and continue to be written since the SEC inquiry, IBM has also found itself in some hot water lately.
This past August the SEC officially opened up another inquiry into revenue recognition – this time at IBM. IBM is interesting because it was always know for its conservatism when booking revenues, usually when shipping the product to a dealer. In a recent article in the Financial Times, reporter Henry Mance mentions that while many companies in the IT space are raging about growing cloud revenues, very few actually report the figures. The debate over how and when these revenues should be recognized has long been an issue for companies. The article goes on to mention how aggressive accounting methods are now being investigated at Autonomy, which was acquired by HP in 2011. The fact that companies have flexibility when it comes to revenue recognition has resulted in the need for a better set of guidelines.
That need is currently being worked on jointly by the FASB and IASB, which intend to have companies conform to the new standards by 2016. The new guidelines will be broad, and will give managers more leeway when deciding what is appropriate for their business. Regardless of the industry, managers will now have to think about the process of how a good or service they are selling is being transferred to the customer and match that with the appropriate amount of revenue. Allowing management a greater amount of flexibility, to me almost seems counterintuitive.
So while we persevered in convincing many of our classmates what Priceline was doing was acceptable, I am not sure we could have made the same argument about the new literature. Giving management more power to decide how revenues should be booked, could lead to greater discrepancies between reality and fact. So while the intent of the new regulations is to make things less ambiguous, in my opinion they are doing just the opposite and will cause more stress amongst managers, and investors. This might not be a bad thing for Priceline though as people will be looking for ways to unwind their anxiety.