When we first started our company in the late 80’s, the focus was on managing orthodontic practices. One key question was how to properly account for revenue in a way that matched the actual work being done on the contracts that provided the income for every serviced practice.
The original system developed in the early 90’s was the proportional performance method of accounting for service contracts. These were service contracts after all and the method matched how the work on contracts was actually done with a lot of the work done up front and then relatively evenly over the remainder of course of treatment. This is how most practices of size record revenue today.
In 2000, the Securities and Exchange Commission (SEC) introduced Staff Accounting Bulletin 101 (SAB 101) which said that these contracts should be recognized on a straight line basis – the same amount every month over the course of treatment. But did it? Without getting into details, we’ll just say opinions varied and the “experts” on this did not cover themselves in glory.
We made the change at the behest (threat?) of the auditors and that led to a letter from the SEC’s Enforcement Division in 2001 and a call with members of that group. On the call, not only did they say that the original way was right, but that being on the cash basis (just recorded revenue when the money came in) would be even more correct. As a matter of fact, SAB 104 would suggest just that a few years later. The auditors could not contain their shock and immediately demanded that we protest. In fairness to them, they had been put into a rough position when they didn’t really have a lot of experience in these matters.
After some private communication with lawyers and the commission, the straight line system prevailed, but was it the right system? No one could say for sure they and cannot now.
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