I read a very interesting article called Seven Accounting Changes That Will Affect Your 2010 Annual Report from SmartPros that nicely summarized how 2010 annual financial statements will be impacted. 

Here’s a Reader’s Digest version of the changes:

1.  Changes to revenue recognition if you sell bundled products with multiple deliverables:

• Old Rule: You needed to objectively establish the “fair value” of each bundled item. So if you sold a dishwasher plus installation and could not establish the fair value of the installation, you might have to delay recognizing revenue of the dishwasher days or weeks later until it was installed.
• New Rule (ASU 2009-13): “Objective” proof of each service or good is no longer required; you can simply estimate the selling price of the installation and warranty. So the dishwasher vendor can recognize the dishwasher revenue immediately at the point of sale without waiting a few weeks for the installation. Then they can recognize the estimated value of the installation after it is complete.

2.  Changes to revenue recognition for devices with embedded software:

• Old Rule: Hardware devices with embedded software, such as the iPhone, had to follow stringent software revrec rules. This forced Apple to recognize iPhone revenues over two years, the period of time that software updates were provided.
• New Rule (ASU 2009-14): Software revrec rules no longer apply to these devices with embedded software; these devices can now follow ASU 2009-13. This allows vendors, such as Apple, to recognize revenue sooner.

3.  Fair value disclosures:

• Companies (both public and private) now need to spend extra time gathering, summarizing, and disclosing information about items measured at fair value, such as significant transfers in and out of Level 1(quoted market price), Level 2 (valuation based on observable markets), and Level 3 (valuations based on internal information).

4.  Consolidation of variable interest entities (a.k.a special purpose entities):

• Consolidation rules for variable interest entities now require a qualitative, not quantitative, analysis to determine the primary beneficiary. Instead of simply looking at the percentage of voting interests, the primary beneficiary could have less than the majority interests as long as it has the power to direct the activities and absorb any losses. 

5.  XBRL:

• Starting in June 2011, all U.S. public companies are required to file financial statements to the SEC using XBRL. Note: Oracle supports XBRL reporting.

6.  Non-GAAP financial disclosures:

• Companies that report non-GAAP measures of performance, such as EBITDA in SEC filings, have more flexibility.  The new interpretations can be found here: http://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm. 

7.  Loss contingencies disclosures:

• Companies should expect additional scrutiny of their loss disclosures, such as those from litigation losses, in their annual financial statements. The SEC wants more disclosures about loss contingencies sooner instead of after the cases are settled.