SAB 101: New Revenue Recognition Guidelines.

• Author: Heffes, Ellen M.
• Position: Interview

Last year the Securities and Exchange Com mission issued Staff Accounting Bulletin 101 (SAB 101) and then followed up with SAB 101A and B, which clarify and again clarify guidelines for how and when companies can recognize revenue. These tighter measures were reportedly designed to end inflated revenue numbers and provide investors with more realistic numbers as to a company's worth. The guidelines affect the approximately 14,000 SEC registrants (public companies), as well as those aspiring to go public.

What's different about SAB 101? Isn't revenue recognition just fundamental GAAP? Financial Executive spoke with Paul Munter, KPMG professor and chair man of the department of accounting at the University of Miami, about SAB 101's purpose and impact, and how to adapt to it.

A majority of the corporate financial reporting problems over the last several years have been related to revenue recognition, and the SEC has dealt with these cases through a variety of traditional ways, such as enforcement actions and restatements.

"It's somewhat ironic, because although revenue recognition is fundamental to the financial reporting process, there's relatively little authoritative literture on it," says Munter. Indeed, the plethora of new business models and focus on short-term earnings are but two of the many factors causing companies to rethink their revenue recognition policies. "Certainly, marketplace pressures to meet current earnings -- quarterly numbers -- is causing companies to look for opportunities to accelerate revenues and profits," says Munter, adding that "new business models and structures do not refer to only e-commerce, since traditional companies are conducting business differently, such as more joint ventures and alliances."

Add to that the tremendous penalties imposed on companies falling short of expectations, and it's clear that this environment has spurred companies to rethink what constitutes revenue and when they think they have it, he says. "I believe the SEC staff [at this point] felt it necessary to give some clearer guidance to provide practitioners with a framework to work with."

SAB 101, issued by the Office of the Chief Accountant at the SEC, isn't an official rule, per se, as it doesn't modify existing regulations. Rather, it's a statement of the staff's views about the application of an accounting principle and, as such, carries a lot of weight -- making it imperative that SEC registrants, or would-be registrants, be...