While new accounting rules may accelerate revenue recognition for some companies, the resulting "pleasurable sensation" may soon be replaced by a "lingering hangover of financial data reporting hassles," says a new report released by accounting and financial consultancy RoseRyan.
For instance, affected companies must choose between prospective adoption and retrospective adoption of the new rules, notes report author Kelley Wall. Fewer companies will choose retrospective adoption because the requirements are potentially time consuming and tough to comply with, she contends. That's because retrospective adopters, like Apple, are required to produce selling-price estimates for the individual components of "bundled" products going back two years. As a result, only companies that think the financial-statement impact is worth the time and money spent on converting historical data into verifiable price estimates will go this route.
Prospective adopters run into different problems. To start, they will have to use two sets of rules temporarily. They will use the old rule to recognize deferred revenue that exists as of the adoption date, and the new rules to recognize revenue for new contracts. Prospective adopters also must provide both quantitative and qualitative disclosures in the year the rule is adopted, so that financial-statement users get a clear picture of the company's financial health. The company has discretion regarding what to provide in the disclosures, but FASB's Emerging Issues Task Force provides some guidance.
What's more, management, investors, and analysts will likely want some type of trend data from corporate finance departments, so even prospective adopters will have to work up some high-level estimates of what the financial statements would have looked like under retrospective adoption -- which means unearthing prices for bundled components may still be necessary, adds Wall.
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