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When Revenue Recognition and Executive Pay Collide

Joe Mont | February 18, 2015

The landscape for executive pay has been tumultuous in recent years, thanks to the Dodd-Frank Act, investor pressures, and the changing preferences and protocols of proxy advisers. So now let’s throw one of the largest changes in the history of accounting standards into the mix.

In the coming months, public companies are expected to begin implementing policies to comply with the new revenue recognition standard adopted by the Financial Accounting Standards Board last year. The standard, scheduled to go into effect at the start of 2017, reconceives business transactions as a series of performance obligations, with revenue recognized as each obligation within a transaction comes to pass.

The new standard is a tectonic shift in accounting, and it will affect everything from fraud risk assessments to internal control over financial reporting to, yes, executive pay—which is often based on an executive hitting revenue goals. Change the definition of “revenue” and all your...

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