Revenue Recognition

Overview: Revenue is generally the largest single line item included in an enterprise’s financial statements, and issues involving revenue recognition are often among the most important that financial statement preparers and auditors face. It is often difficult to determine the appropriate accounting for transactions involving revenue recognition issues. Two key difficulties are: (1) obtaining all the facts surrounding a particular, often unique, transaction in order to determine that all of the pertinent terms of a transaction are understood, and; (2) determining whether, when, and how to recognize revenue based on the myriad and complex authoritative accounting standards relating to revenue recognition. Because of these factors, revenue recognition issues have historically been the largest single cause of enforcement actions brought by the Securities and Exchange Commission (SEC) and restatements filed by public registrants.

The SEC sought to fill the gaps in the accounting literature relating to revenue recognition with the issuance of Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, issued in December 2003. While extensive in its scope, SAB104 provides that, at a pervasive level, revenue is recorded only when: (i) evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) delivery has occurred, and; (iv) collectability is reasonably assured.

Services: We carefully examine revenue arrangements (both executed and hypothetical) under a proprietary step-by-step process, comparing all features to the requirements of ASC 605 Revenue Recognition and SAB104. Reports of our findings are generally presented in reports on application of accounting principles (SAS 50 Reports).

Case Study: A bottle manufacturer engaged us to read and document their revenue arrangements against the requirements of ASC 605 Revenue Recognition and SAB104. In examining the arrangements, we identified embedded derivative features (as defined in ASC 815) related to manufacturing cost-hedging activities. Ultimately, the derivatives required bifurcation and, unfortunately, since the contracts had not been reviewed carefully in prior years and the amounts were material, restatement was warranted.