Staff Accounting Bulletin No. 101 –
December 3, 1999
Staff Accounting Bulletin (SAB) No. 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the Commission. SABs are not rules or interpretations of the Commission. Rather, they represent interpretations and practices followed by staff of the Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure requirements of the federal securities laws.
The staff has become increasingly concerned with apparent increases in inappropriate earnings management activities by public companies. One of the most common earnings management tools is reporting revenue before a sales transaction has occurred or before the seller has performed under the terms of a sales contract.
Improper revenue recognition is often the cause of spectacular, high-profile financial reporting problems. A March 1999 report entitled Fraudulent Financial Reporting: 1987-1997 An Analysis of U.S. Public Companies, sponsored by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, indicated that over half of financial reporting frauds in the study involved overstating revenue. A substantial portion of the Commission's enforcement cases involve improper revenue recognition. The Enforcement Division's Chief Accountant Walter Schuetze is often quoted that improper revenue recognition is the "recipe of choice for cooking the books."
On September 28, 1998, in response to growing concerns about registrants managing earnings in order to achieve earnings estimates, SEC Chairman Arthur Levitt gave a speech entitled The Numbers Game. One of the accounting gimmicks that the Chairman cited in his speech was abusive revenue recognition practices. He stated:
"Companies try to boost revenue by manipulating the recognition of revenue. Think about a bottle of wine. You wouldn't pop the cork on that bottle before it was ready. But some companies are doing this with their revenue - recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void or delay the sale."
This SAB fulfills a commitment that Chairman Levitt made in his September 1998 speech that the staff would issue three staff accounting bulletins to address earnings management problems. The staff previously issued two staff accounting bulletins: one in August addressing materiality in the preparation of financial statements (SAB No. 99) and another in November addressing restructuring charges (SAB No. 100).
Summary of Staff Interpretations
This SAB does not change any of the accounting profession's existing rules on revenue recognition. Rather, the SAB draws upon the existing rules and explains how the staff applies those rules, by analogy, to other transactions that the existing rules do not specifically address. This SAB spells out the basic criteria that must be met before registrants can record revenue. Those criteria reflect the recurring revenue recognition themes found in the existing accounting rules.
The SAB provides a number of examples of how the staff applies the criteria to specific fact patterns such as bill-and-hold transactions, up-front fees when the seller has significant continuing involvement, long-term service transactions, refundable membership fees, and contingent rental income. The SAB also addresses whether revenue should be presented on a fee or commission basis or at the full transaction amount when the seller is acting as a sales agent or in a similar capacity. Finally, the SAB provides guidance on the disclosures registrants should make about their revenue recognition policies and the impact of events and trends on revenue. Registrants may need to change their accounting policies to comply with the SAB. Provided the registrant's former policy was not an improper application of generally accepted accounting principles, registrants may adopt a change in accounting principle to comply with the SAB no later than the first fiscal quarter of the fiscal year beginning after December 15, 1999.
For further information concerning the SAB, please contact Richard Rodgers, Scott Taub, or Eric Jacobsen in the Office of the Chief Accountant at (202) 942-4400, or Robert Bayless in the Division of Corporation Finance at (202) 942-2960.