Posted on June 5, 2014 | Investor Update
Sometimes a sale isn’t a sale. Under accounting rules, the date when a company can record revenues depends on what it sells. A change to rules will simplify matters and change how revenues are booked by a broad range of companies. In the process it will alter valuations and growth rates.
It’s a big change. Even if you view accounting rules as exciting as reading the phone book, you should be spend some time familiarizing yourself with the new rules. I’ll try to make the discussion as least arcane as possible.
The new rules are the result of the work by the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) to establish a unified stance on when companies should recognize revenues. Here is how the IASB and FASB described the change:
“The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements.”
The Wall Street Journal used mobile phones to describe how the rule change will impact reported revenues, and I’m going to do the same. Currently, you can buy an iPhone 5C from AT&T (T) for $99. The price is subsidized and AT&T recoups the difference between what you pay and the wholesale cost of the phone over the life of the two-year contract you sign. Under current rules, AT&T has to book its cost of the phone at the time of the sale, but recognize the revenues for the phone over the life of the contract. The new rules will allow AT&T to recognize more of the revenues related to the phone at the time of sale.