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U.S. Securities and Exchange Commission

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

July 19, 2001

Sir David Tweedie
International Accounting Standards Board
30 Cannon Street
London, EC4M 6XH
United Kingdom

Dear Sir David:

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 revenue arrangements with multiple elements. Those efforts have lead to the tentative conclusion in EITF Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." A major hurdle for the Task Force has been that many of the issues raised involve fundamental questions regarding revenue recognition. Because of the fundamental questions raised, we believe that Issue 00-21 has "outgrown" the size and nature of a project contemplated by the mission of the EITF. It also has become clear that a more comprehensive accounting standard on revenue recognition is necessary. Accordingly, we ask that the International Accounting Standards Board (IASB) lead a joint project in partnership with national standard setters to develop comprehensive accounting standards for revenue recognition. We would request that the FASB be an active and leading participant in that project.

Critical Need for Revenue Recognition Guidance

The need for high quality, comprehensive revenue guidance is critical. Revenue is the single largest item in most financial statements. A majority of the fraudulent financial reporting cases investigated by the SEC involve improper revenue recognition. Studies on financial reporting indicate that revenue recognition is the single largest category of fraudulent financial reporting and financial statement restatements. For example, a March 1999 report entitled Fraudulent Financial Report: 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. And finally, investor losses when due to improper revenue recognition are typically larger then when due to other issues. The development of any standard for revenue recognition needs to be based on research into these concerns and problems. It must ensure adequate investor protection.

The diversity in practice in the accounting for multiple element arrangements along with the complexity of these arrangements, make it one of the most challenging areas of accounting for revenue recognition. Further, any guidance on accounting for multiple element arrangements must be consistent with a broad model for revenue recognition. Therefore, the starting point should be a broad project on revenue recognition, not a narrow project. Today we have too many standards on revenue recognition that are based on a piecemeal or industry approach and which conflict with one another.

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 with 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 US accounting standards setters.

Lesson Learned at the EITF

We observe that the EITF and its working group has met numerous times to address the issue of revenue recognition for arrangements including multiple element, including gathering information from various affected industries. 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. Some of the issues that have been identified include:

  • Many of the issues are fundamental revenue recognition questions with ramifications beyond accounting for multiple element transactions. As examples, the issues include defining what is a revenue element, what is a separate earnings process, and how to determine fair value of the 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 97-2, Software Revenue Recognition. The EITF tentative conclusion on Issue 00-21 would be another model added to the mix, not a comprehensive solution.

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


Lynn E. Turner
Chief Accountant

cc: Edmund Jenkins
Paul Volcker
Manuel Johnson


Modified: 07/24/2001