New revenue rule for multi-element arrangements

By Cydney Posner

Compliance Week reports that FASB has approved a new revenue recognition rule that may accelerate revenue recognition for products that are bundled with post-sale service or software updates. The new rule was a consensus of the EITF ( EITF Issue No. 08-1). The new guidance will allow companies to estimate selling prices for the individual elements of a "multiple-element arrangement" and recognize revenue accordingly. Previously, companies were not allowed to use their own internal estimates, but rather had to establish selling prices for these arrangements by first looking to the price they would charge for each of the pieces and parts that go into the arrangement ("vendor specific objective evidence") or, if that data were not available, by looking to competitor pricing information. Now, if neither type of data were available, companies could use best estimates. The new guidance will be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted, but it must be adopted for an entire fiscal year and not a portion of a year, so it would need to be applied retrospectively (i.e., if it were applied in Q3, it would need to be adopted as of the beginning of the year). According to the article, some analysts for tech companies are predicting big spikes in revenue, but, keep in mind in connection with MD&A review, that it big spikes may well reflect only an acceleration of, not an increase in, revenue.

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