On December 17, 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, corrected copy, which amends parts of SAB No. 103 (in part, recognizing that many prior SEC standards are no longer necessary due to private-sector developments in U.S. generally accepted accounting principles [GAAP]). SAB No. 104 also provides new guidance on how publicly traded entities should recognize income. It focuses on applying the provisions of the Financial Accounting Standards Board’s (FASB) Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables, to publicly traded entities, especially in the areas of bill-and-hold-arrangements, immaterial obligations, and nonrefundable up-front fees, all relating to the delivery of sold goods and the resulting revenues.
The accounting literature on revenue recognition includes both broad conceptual discussions as well as certain industry-specific guidance. Based on these guidelines, revenue should not be recognized until it is realized or realizable and earned. The guideline believes that revenue generally is realized or realizable and earned when all of the criteria are met: Persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. For example, a company’s practice of requiring a written sales agreement and persuasive evidence of arrangement would require a final agreement that has been executed by the properly authorized personnel of the customers.
Products delivered to a consignee pursuant to a consignment arrangement are not sales and do not qualify for revenue recognition until a sale occurs. Other situations may exist where title to delivered products passes to a buyer, but the substance of the transaction is that of a consignment or a financing. The staff believes that delivery generally is not considered to have occurred unless the customer has taken title and assumed the risks and rewards of ownership of the products specified in the customer’s purchase order or sales agreement. Acceptance provisions in arrangements that purport to be for trial or evaluation purposes. Acceptance provisions that grant a right of return or exchange on the basis of subjective matters. Acceptance provisions based on seller-specified objective criteria. Acceptance provisions based on customer-specified objective criteria. A seller should substantially complete or fulfill the terms specified in the arrangement related to the unit of accounting at issue in order for delivery or performance to have occurred.
