The US Financial Standards Accounting Board, which makes the rules that bean counters use to juggle the books, last week approved a new rule about revenue recognition for systems that could cause a brief bump in hardware sales for some IT suppliers based in the United States or using US accounting rules. FASB ruled on a number …
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Remember Sarbanes Oxley? It has a nice rule in it, if you earn a bonus based on performance that later turns out to be false, then you have to repay the bonus.
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Software with support/warranty/ongoing was manipulating under similar rules
About 20 years ago I was active on the private/small business side in helping "determine" that when to recognize revenue for software sales and support contracts. Until we required a bit of sanity in the accounting, companies were showing "revenue" when they pushed inventory into their distribution channels and counted up front support or lease revenue, although some deliverables would not be made for many months or even years and customer payments might received over the course of the "lease" contract.
Before things were changed back then, essentially anything that moved or looked at all like an order would be booked and shown in total as revenue at booking, not even waiting for delivery to customers.. Since deferring the income recognition pro rata the contract and its deliverables has the tax advantage of cash flow prior to income recognition, then the only reason for this type of accounting is to pump quarterly earnings while not accounting for future contractural obligations. Among the worst offenders years ago was Oracle which had a major problem cleaning up its accounting.
II am not an accountant and have not been involved in this round of rules, but the discussion about financing component coupled with the hardware/software distinction appears to open up the system to a lot of the abuses that were widespread in the past.
Rather than thinking in terms of products like VAX Oracle database systems, think about things like the iPhone with a two-year contract. Consider not just the physical device, but its warranty requirements plus the ongoing software support and upgrade efforts that are required of Apple, combined with all the issues related to AT&T, its contracts, and ongoing operations.
And just when I thought his posts were becoming legible...
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