Accounting Rule Change Ultimately Changes Nothing

When the Financial Accounting Standards Board (FASB) voted at its September 24 meeting to adopt a rule change recommended by its Emerging Issues Task Force (EITF), very little changed. Nonetheless, the adoption of EITF 08-1 has won praise from many technology and service companies. The change involves recognizing the revenue, or sales price, of items that involve multiple parts or whose sales contract covers multiple years. Examples include a piece of hardware whose accompanying software license spans multiple years or a two-year contract to provide consulting services. Typically, because a portion of the sales price relates to more than one year (accounting or reporting period), the sale must be recognized proportionally over the life of the agreement, rather than recording the full sales price in the year the agreement is signed.

The change adopted by the FASB revises the methods and guidance that companies use to determine what portion of a contract’s sales price is to be allocated over multiple reporting periods. Ultimately, though, because the contract price is unchanged, the FASB’s rule change simply allows companies to shift the revenue between reporting periods with no impact on the total revenue recognized.

Companies such as Apple welcomed this move because the change will allow it to record a greater portion of an iPhone’s sale in the period the sale is made. The rule change generally takes effect in 2011, but companies can adopt the new rule earlier if the change covers an entire reporting year.