Sales Personnel Can Help Avoid Premature Revenue Recognition

Issues with revenue recognition have been around for decades. The American Institute of CPAs and the U.S. Securities and Exchange Commission have tried to provide detailed guidance to assist companies in their revenue determinations for complicated transactions. Ultimately, the appropriateness of revenue recognition boils down to the facts and circumstances of a given sale. There certainly are intricate revenue recognition rules (especially related to software), but many of the issues about premature recognition result from the normal blocking and tackling required by Staff Accounting Bulletin No. 104, "Revenue Recognition," which requires persuasive evidence of a sales arrangement, delivery, a fixed or determinable sales price and that collectability is reasonably assured.

Public companies can improve their chances to avoid revenue recognition issues by enhancing the information that is obtained from a company's own sales personnel by implementing a sales checklist and/or sales certification. There has been a tremendous effort made by public companies to provide revenue recognition training to their sales personnel. Training is a good first step, but material covered is easy to forget and often doesn't provide the level of detail that might make the light go off in a salesperson's mind for identifying a potential revenue recognition problem. Assuming that the sales personnel do not have an accounting background, it is unrealistic to expect them to understand and appreciate the significance certain situations may have on revenue recognition simply from having taken some training—save those salespeople that create fake purchase orders or other fraudulent activity. Salespeople are on the front lines with the customer and often have greater insight into the reasons for the transaction, as well as other facts that may be potentially accounting-determinative. By implementing a sales checklist to obtain information from the sales personnel, public companies are better positioned to appropriately analyze revenue recognition on the front end and to defend such determination, if questioned, on the back end.

Here are some examples where the sales personnel are in the most likely position to have an awareness of the facts that may challenge revenue recognition:

Side Letters – Side letters are oral or written promises that are made by a salesperson that essentially negate a term within the official sales documentation. This may seem to the salesperson...