Are you ready for earlier revenue recognition (and more estimation)?  The FASB approved an EITF consensus (issue 08-1) this week in which the EITF dropped one of the key requirements that often precluded revenue recognition for delivered items in a multiple-element arrangement (think Apple and iPhones). In current accounting standards (EITF 00-21 or FASB Accounting Standards Codification 605-25), a company cannot treat a delivered item in a multiple-element arrangement as a separate unit of account (with the potential to recognize revenue for that item) if the undelivered items in the arrangement lack verifiable and objective evidence of a selling price. Under the new standard (effective for transactions entered into in fiscal years beginning on or after June 15, 2010, with earlier application permitted), a company no longer needs verifiable and objective evidence of a selling price for undelivered items in order to recognize revenue on delivered items. As long as the other criteria for separation are met (standalone value for delivered items and general right of return considerations), a company is required to allocate the arrangement consideration to all units of account based on each unit’s separate selling price, even if that price must be estimated. If a company does not have its own objective evidence of a selling price or third-party evidence of a selling price, the company must estimate the price for which it would sell the delivered item on a standalone basis. As a result of this change, preparers, auditors, regulators, and users can anticipate more use of estimates and changes in the profitability of some companies.

Interestingly, when the EITF was preparing to finalize their consensus on this issue, they received a number of comments from constituents saying that they supported the proposed changes, but thought they should apply to software revenue recognition as well. Rather than upend the software guidance, the EITF decided to clarify when hardware devices that contain software are scoped into the software guidance in SOP 97-2 (ASC 985-605-15). This led to another EITF consensus (issue 09-3) that the FASB approved this week. This consensus removes from the scope of SOP 97-2 (ASC 985-605-15) tangible products that rely on software for the essential functionality of that product. As with EITF Issue 08-1, this change should also lead to earlier recognition of revenue than current standards allow.

Interestingly, these two changes by the FASB represent dramatic steps toward the revenue recognition model that the FASB and IASB proposed in their preliminary views document last December. And in many ways, the revenue recognition team was surprised to see the EITF take steps that would allow estimates of selling price in the absence of verifiable and objective evidence of a selling price. All of this has made me wonder why the boards are willing to allow estimates of selling price for allocation purposes in multiple-element arrangements but the boards are much less willing to allow estimates of fair value for non-financial assets. Not only that, if the standard setters who wrote EITF 00-21 were concerned enough about opportunism and manipulation to preclude (or severely constrain) revenue recognition for delivered items when undelivered items lacked VOE of selling price, do standard setters today think those concerns are no longer relevant? What has changed since early 2000 that has made standard setters more comfortable with allowing estimates of selling prices in multiple-element arrangements. I’m not sure. If anything, I would think standard setters (and regulators) would be even more concerned about allowing estimates in our current business environment.