February 2000


Late last year, the SEC staff issued two staff accounting bulletins (SABs), one dealing with aspects of restructuring and impairment charges, the other with revenue recognition.

SABs are not rules or interpretations of the SEC. Rather, they are interpretations and practices followed by staff of the Office of the Chief Accountant and the Division of Corporate Finance in administering the disclosure requirements of Federal securities laws.

These two SABs, Nos. 100 and 101, as well as SAB No. 99, also issued last year, complete the work of the SEC staff in response to SEC Chair Arthur Levitt's concerns about earnings management.

In November 1999, the SEC released SAB No. 100, which provides guidance on the accounting for and disclosure of certain expenses and liabilities commonly reported in connection with restructuring activities and business combinations and the recognition and disclosure of asset impairment charges.

Specifically, SAB No. 100 addresses such practices as inappropriately recording restructuring charges and general reserves for future losses, reversing or relieving reserves in inappropriate periods, and recognizing or not recognizing an asset impairment charge in the appropriate period. Levitt has referred to overstating restructuring charges, one of the ways companies clean up their balance sheets, as the "big bath," in which the company hopes that Wall Street will overlook the one-time loss and focus on future earnings.

SAB No. 100 reiterates current criteria and provides guidance on how the staff interprets and applies those criteria. It states that costs and charges falling within the scope of Emerging Issues Task Force (EITF) Issues No. 94-3, 95-3, or SFAS 121 must be accounted for in accordance with the appropriate standard, and that the EITF issues and SFAS 121 should not be applied outside their respective scopes. The SAB provides examples of the staff's interpretations of how this accounting literature should be applied.

In addition, SAB No. 100 informs investors of the additional disclosures that the SEC staff requested to enhance financial statement transparency and provides the staff's views on assessing and measuring enterprise level goodwill for impairment in accordance with APB Opinion No. 17, Intangible Assets. The SAB also states that depreciable lives, amortization periods, and salvage values of long-lived assets need to be reviewed and, where appropriate, changed on a timely basis.

Finally, SAB No. 100 provides the staff's views on the measurement of liabilities and other loss accruals assumed in a purchase business combination.

SAB No. 101, released last December, provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC.

According to SEC staff, despite the fundamental nature of revenue to every company's business, the accounting rules on revenue recognition are not comprehensive, but rather a collection of industry or transaction-specific guidelines. Although SAB No. 101 does not change any of the existing accounting rules on revenue recognition, it draws upon the existing rules and explains how the staff applies them, by analogy, to other transactions. SAB No. 101 spells out the basic criteria that must be met before registrants can record revenue. Those criteria reflect the recurring revenue recognition themes found in the existing accounting rules.

SAB No. 101 provides examples of how the staff applies the criteria to specific fact patterns, such as bill-and-hold transactions, up-front fees where the seller has significant continuing involvement, long-term service transactions, refundable membership fees, and contingent rental income. SAB No. 101 also addresses whether revenue should be presented on a fee or commission basis or at the full transaction amount when the seller is acting as a sales agent or in a similar capacity. Finally, the SAB gives guidance on the disclosures that registrants should make about their revenue recognition policies and the impact of events and trends on revenue.

"Recognition of revenue before it is appropriate is a scheme that has cost investors tremendous sums in the past," said SEC Chief Accountant Lynn Turner. "I hope the additional guidance in this staff accounting bulletin, coupled with more vigilant efforts on the part of financial management and auditors, will significantly reduce the problems in the future. It should also create a level playing field for those who do provide their investors with high quality financial reporting." *

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