DealBook: Regulators Set New Rules for Companies’ Revenue Accounting

John Minchillo/Associated PressUnder new accounting rules, cellphone companies may be able to report revenue earlier.

Accounting for revenue — one thing that every company has, or at least needs if it is going to stay in business — will be significantly changed in 2017, the two boards that set accounting standards for companies in most major countries around the world announced on Wednesday.

The new rules — issued by the Financial Accounting Standards Board, which sets rules for United States companies, and the International Accounting Standards Board, whose rules are used in the European Union as well as a number of other countries — replace those specifying how and when revenue can be recognized in different industries. Those rules sometimes differed among countries, and often differed among industries.

"It will result in changes for most every company," said Dusty Stallings, a partner in PricewaterhouseCoopers. Even companies in industries that do not have major changes will discover they may need to make more estimates and disclose more to investors, she said.

In many, but not all industries, one result will be to give companies greater leeway in recognizing revenue earlier, thus allowing them to report profits sooner than they previously might have.

"Because there is a greater need to estimate, there is a greater need to disclose," Russell Golden, the chairman of the Financial Accounting Standards Board, said in an interview. He said new disclosures would be required in footnotes to financial statements, "so that investors and other users of financial statements better understand the economics behind the numbers."

Mr. Golden said that current rules for revenue recognition for sales of computer software often forced companies to delay revenue, while it could be reported earlier for hardware sales. Under the new rules, the accounting is likely to be much closer for the related industries.

The new rules will take effect for companies that are on calendar years at the beginning of 2017. American companies will not be able to make the changes earlier, but the international board will allow that, in part because some countries are likely to move from national rules to international standards before 2017, and it would not make sense to force them to change twice.

Kamil Krzaczynski/European Pressphoto AgencyNew accounting rules will impact car manufacturers who sell a vehicle and promise to pay for maintenance.

Under the new rules, companies must first analyze the so-called contract between themselves and their customers. That contract could be implied rather than written, like the contract between a grocery store and a customer who buys a gallon of milk. In some cases, more than one product is being sold — for example, when a car manufacturer sells a vehicle and promises to pay for maintenance for the first two years. Under the new rule, that promise creates a "performance obligation" that must be accounted for separately from the sale of the car.

Then the price must be determined. That is easy for the grocer selling milk, but not so easy for companies whose revenue could vary based on factors not yet known, for instance an investment manager who gets a share of the profit earned by the customer.

The issue of how much revenue may be reported immediately will depend on estimates of what is likely to happen. If it seems very likely that the payment will be made, it can be recognized upfront even though old rules might force a delay in revenue recognition.

If there are two or more things being sold — as in the car and the later maintenance — the price paid must be apportioned between the things. Then the company must figure out when it meets its obligations — delivering the car and performing the maintenance — and report the revenue appropriately. In some cases, that may mean delaying some revenue. In the case of a car sold for $20,000, current accounting would report the entire price as revenue when the car is sold, while the new revenue would allow only perhaps $19,000 of that to be recognized immediately, with the rest deferred until the service is performed. So carmakers may have to defer some revenue.

Cellphone companies may now be able to report revenue earlier. When Verizon sells a phone for $200, with a contract to pay $50 a month for two years, it generally now reports revenue when the cash arrives. In fact, the phone is worth more than $200, and some of its cost is included in the monthly fees, but that does not show up in the accounting.

Under the new rules, Verizon would divide the revenue into two parts, for the service and for the equipment. When it delivered the phone, it would be able to take more than $200 in revenue, even though some of the cash would not arrive for many months. So it would report more revenue immediately, and less later.

Kevin Moloney for The New York TimesAn area where many grocery companies will have to make new estimates is loyalty programs.

An area where many companies will have to make new estimates is loyalty programs. A grocer that gives "points" to regular customers — points that eventually can be used for a $20 discount on an order, for example — would have to make estimates upfront. So on the milk sale, it might report a little less than the $3 price, and defer part of the revenue until the points are cashed in.

Some companies may choose to amend contracts with customers, which in some cases have been written to correspond with specific accounting rules and assure the revenue will be reported as desired. To get a desired effect under the new rules, contracts might need to be altered.

For investors, a result is likely to be more information, assuming the new disclosures are made, and greater comparability among companies in different industries and countries. But they may have to work harder to compare a company's results in 2017 and 2018 with their results in earlier years.

That will be true in part because companies will have some discretion in reporting the effects of the changes. They may restate previous years, but they do not have to do so. Instead, they can simply adjust the balance sheet for the end of 2016 to reflect how it would have been had the new rules been in effect before.

In some cases, that means the same revenue and profit will have been reported twice, in both 2016 and 2017. For other companies, some revenue will never be reported. Readers of footnotes will be able to adjust for that, but casual readers of financial statements could be misled.

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