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U.S. Securities and Exchange Commission

Office of the Chief Accountant:
Letter from SEC Chief Accountant to FASB re: Revenue Recognition and EITF Issue 00-21

July 19, 2001

Mr. Timothy S. Lucas
Director of Research and Technical Activities
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

Dear Mr. Lucas:

For more than a year the Emerging Issues Task Force (EITF), its working group and the staff of the Financial Accounting Standards Board (FASB) have worked diligently on providing guidance on accounting for multiple element arrangements. That effort has lead to the tentative conclusion in EITF Issue No. 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." We commend the EITF, its working group, and the FASB staff for their hard work.

However, the process that lead to the tentative conclusion and recent comments about the model has made it clear that significant effort must be made to reach an operational solution that is consistent with the fundamentals of existing generally accepted accounting principles, and that provides adequate transparency and protection for investors. In addition, those comments make it clear that developing guidance for revenue recognition related to multiple element arrangements is a broad project with many implications that has "outgrown" the size and nature of a project contemplated by the mission of the EITF. This view has been reflected in the comments by some of those around the EITF table who have stated that this issue requires more due process and public comments than can be provided by the EITF's process. In addition, KPMG LLP has recently expressed this view in a letter to the EITF and other FASB constituents have expressed similar views at the Financial Accounting Standards Advisory Council and in letters to the SEC staff. The SEC concurs with that viewpoint. As a result, we are asking the International Accounting Standards Board (IASB) to undertake a project, in partnership with national standard setters including the FASB, to develop a comprehensive accounting standard for revenue recognition.

The staff would object to an EITF consensus on this issue pending completion of a comprehensive revenue recognition standard subject to full due process. Until further standards are developed, registrants should disclose their accounting policy for revenue recognition. In addition, the staff would not object to a registrant's accounting provided it complied with the broad principles in Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," and the related Frequently Asked Questions document on SAB 101.

Broad Project

We observe that the Issue 00-21 working group has met numerous times to address the issue of revenue recognition for multiple element arrangements, including gathering information from various affected industries. Largely because of those working group efforts, it has become clear that this is a broad project. Some of the specific observations the staff has noted include:

  • Many of the issues are fundamental revenue recognition questions with ramifications well beyond accounting for multiple element arrangements. As examples, the issues include defining what is a revenue element, what is a separate earnings process, what constitutes delivery and how to determine fair value of the separable elements in the arrangement.

  • Other models for multiple element accounting already exist in generally accepted accounting principles including SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and SOP 97-2, Software Revenue Recognition. The tentative conclusion would be another model added to the mix, not a comprehensive solution.

  • The question of vendor performance (or lack thereof) is an issue involved in many types of revenue transactions including multiple elements. This issue should be discussed in a broader context.

  • The staff is concerned that as broad as this issue is, and the resulting implications for all companies who commonly enter into such transactions today, that greater due process is necessary to ensure all significant issues have been identified, and there has been adequate input received to afford a transparent standard for investors.

  • Additional time for due process will allow standard setters to study actual practice given the enhanced disclosures now being made as a result of SAB 101.

  • Revenue is often the single largest item in the financial statements, while revenue recognition is the single largest issue involved in restatements of financial statements causing the greatest losses for investors. The development of a high quality standard for revenue recognition needs to be based on research of these issues and provide adequate investor protection.

Opportunity for Convergence

We are recommending that the IASB work in close partnership with national standard setters on this project. We believe the FASB should play an active leading role on this project. The project provides a significant opportunity for convergence of international accounting standards and those in the U.S. towards a single high quality standard that will provide transparency and protection for investors. The benefits of convergence on a high quality standard include achieving a standard that levels the playing field for companies worldwide. It also results in "best of breed" accounting standards by drawing on the knowledge of both international and national standards setters. A substantial amount of knowledge has been gained through the process and we are hopeful that it can be summarized and communicated to the IASB for use in the joint project.

If you have any questions or comments, please contact Jackson Day, Scott Blackley or me at (202) 942-4400.


Lynn E. Turner
Chief Accountant


Modified: 07/25/2001