June 09, 2015 Articles

Changes in Accounting for Revenue Recognition, Part 1

Read about the impact on registrants and the SEC

By Marc B. Sherman, Monica K. Loseman, and Meghan Cardell

The accounting rules for the recognition of revenue in financial statements are changing. In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard. This will have a significant impact on financial reporting as well as potential legal implications, on registrants and private companies alike. Revenue is one of the more important measures utilized by investors, lenders, and other financial statement readers in assessing a company's current and future performance, and the accounting for revenue recognition has historically come under scrutiny by regulators. There is a certain category of revenue recognition fraud that will always attract the attention of regulators and the plaintiffs' bar alike (think falsifying contracts). But as to those closer calls—calls involving the exercise of judgment—the new revenue recognition standard may introduce a level of ambiguity and perhaps even a heightened risk for litigation and enforcement activity.

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