The Right Way to
Recognize Revenue
Learn the components of SAB 101 and mistakes to look out for.
BY THOMAS J. PHILLIPS JR., MICHAEL S. LUEHLFING
AND CYNTHIA M. DAILY
More than half of the financial reporting frauds among
“A
U.S. public companies from 1987 to 1997 involved overstating revenue, according to a study conducted by the
Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Auditors have always focused on possible revenue recognition overstatement in financial statements. Understanding the components of Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements—as well as the regulatory concerns the SEC addressed in issuing it will help CPAs choose the most appropriate revenue recognition practices for their companies and their clients. This article provides an overview of SAB 101 and demonstrates to auditors how they can help improve companies’ accounting practices.
t the SEC, we take the quality of financial reporting very seriously…. Transactions need to be accounted for based on their true economics rather than just their form. And we need companies, their auditors, financial analysts and investors to focus on this as an integral objective of high quality, transparent reporting, rather than trying to add bells and whistles to transactions purely to achieve a different accounting treatment. If you try to paint stripes on a horse just so you can call it a zebra, watch out when the rain falls! And you better make sure that horse doesn’t come back and kick you for trying to portray it as something it’s not.”
SAB 101—GENERAL REVENUE
RECOGNITION RULES
—Lynn E. Turner, SEC chief accountant, from remarks at Hylton
Lecture Series in Accountancy, Critical issues in Accounting Forum, Wake Forest University, April 25, 2000.
The SEC issued SAB 101 in December 1999 to provide guidance to auditors and public companies on recognizing, presenting and disclosing revenue in