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New accounting rules to juice IT numbers

Hardware revenue bump?

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The US Financial Standards Accounting Board, which makes the rules that bean counters use to juggle the books, last week approved a new rule about revenue recognition for systems that could cause a brief bump in hardware sales for some IT suppliers based in the United States or using US accounting rules.

FASB ruled on a number of revenue-recognition issues at a meeting last week, but the two that potentially affect IT and consumer electronics suppliers are called "Issue No. 08-1, Revenue Arrangements with Multiple Deliverables" and "Issue No. 09-3, Certain Revenue Arrangements That Include Software Elements."

According to Christine Klimek, a spokesperson for FASB, the rule change will allow companies that sell a product that tightly combines hardware, software, and possibly services to immediately put the hardware portion of the sale on their books (as well as its profits) rather than spreading the sale of the entire product out over the course of its entire useful life, as is currently done for software and services.

The useful life of a product can range from a few years to many years, and hence the revenue and profit recognition can be spread out over a long period of time for something as small as an iPod or as large as a computing system that has a complete software stack bundled on top of a server that is sold as a single unit.

This latter item is more of a past and future problem than a current one. There are very few integrated systems like IBM AS/400s and DEC VAXes around, but such integrated machines could be all the rage in the coming years, if Cisco is right about its California Unified Computing System and Larry Ellison achieves his dream of transforming Oracle into IBM.

Also, as smartbook and netbook machines get cheaper and the software and services components of the devices grow to make up a larger portion of the revenue stream from their sales, you could argue that such devices should not be accounted for as hardware, but as software. The new rule will allow vendors of such kinds of machinery to keep the hardware separate, from an accounting standpoint, no matter how tightly integrated it is with the software. It will also allow companies that sell hardware as part of a services contract, as HP and IBM do, to recognize the hardware revenue immediately rather than having to spread it over the term of the services contract.

Klimek confirmed that the new rule officially goes into effect for corporate fiscal years that begin on or after June 15, 2010, but there are provisions in the rule that allow it to be adopted before that.

A slew of IT giants kicked in their input in favor of the rule change approved by FASB through official comment letters, which you can see here. Apple, Cisco Systems, Dell, HP, Honeywell, IBM, Juniper Networks, Palm, Riverbed Technology, Salesforce.com, Verizon, and Xerox all expressed support for the rule change.

At press time, FASB's experts were not available to confirm if IT vendors would be required to adopt these two new rules (rather than adopting them voluntarily), or how FASB might require vendors who employ the new revenue-recognition methods to restate prior quarters' financials as they implement the rule in current quarters so investors would be able to make apple-to-apple comparisons for hardware, software, and services sales on devices covered by the new accounting rules. ®

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