On October 13, 2006, Andrew Cotton presented to attorneys in Redwood City, CA on financial literacy. Topics included revenue recognition, accruals for litigation and other loss contingencies, equity compensation.
It is the Securities and Exchange Commission (SEC)’s view that revenue is not recognized and earned until all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) seller’s fee is fixed or determinable, (4) collectibility is reasonably assured.
Persuasive evidence of an arrangement exists when evidence demonstrates that there is a final arrangement. Evidence must be rational, supportable based on history and past business practices, and consistently applied. For example, if it is customary for a business to have a written contract, evidence of an arrangement requires a final signed contract by both parties in a transaction. If it is not customary for a business to have written contract, evidence may take the form of a purchase order.
Revenue recognition should not be based on preliminary documents such as letters of intent, memorandums of understanding, requests for proposals. There should not be any side agreements that indicate not all aspects of an agreement have been identified. Agreements should not be backdated.
Comment Preview