Revenue Recognition and How You Date Contracts

One of the pleasures of contract drafting is that the parties are as a general matter left to their own devices. Of course you have to structure any given transaction in a way that takes into account legal, tax, regulatory, or other considerations, but as a rule how you do that is up to you.

But sometimes outsiders are going to have a say. Here’s an example: A participant in my recent New York seminar mentioned that his company’s auditors have required, as part of the company’s revenue-recognition process, that all its contracts be dated by reference to dated signatures rather than a date in the introductory clause.

The standard way to date a contract is to include a date in the introductory clause. But it’s commonplace for that date to be a date other than the date that one or more parties actually signed the contract. (See MSCD 2.14–20.)

It might be that the discrepancy is only a day or two and is due to the sort of minor delay that is commonplace in business—for example, one of the signatories might be travelling. In such cases, using a date in the introductory clause has the benefit of simplicity and predictability. (Regarding use of an as of date in such circumstances, see MSCD 2.17.)

But the discrepancy might also be longer. For example, if a company signs a distribution agreement and sends it to a potential distributor for its review and signature, a couple of weeks might pass before the distributor gets around to signing and returning it.

I’ve suggested that in the latter circumstance, it would be best to omit the date from the introductory clause, have the signatories date their signatures, and provide in the contract that it becomes effective when the last party signs. See MSCD 2.11 and 5.4. If you do that, you’d want the concluding clause to read Each party is signing this agreement on the date stated opposite that party’s signature rather than The parties are signing this agreement on the date stated in the introductory clause. See MSCD 5.4.

But given what the New York participant said, at least one accounting firm is requiring that companies adopt this sort of approach for all their contracts. Evidently the reason for this is the revenue-recognition rules.

The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in 1999. In 2003, the SEC revised that guidance in SAB 104. SAB 104 states that revenue generally is realized or realizable and earned when all of the following criteria are met:

  • persuasive evidence of an arrangement exists
  • delivery has occurred or services have been rendered
  • the seller’s price to the buyer is fixed or determinable
  • collectability is reasonably assured

How contracts are dated comes into play in connection with the first criterion, that persuasive evidence of an arrangement exists.

SAB 104 discusses the following situation: Company Beta places an order for Company A’s product, and Company A delivers the product before the end of its current fiscal quarter. Company A’s practice is to enter into a written sales contract for such orders, and before the end of the quarter it prepares and signs a contract for this transaction. But Customer Beta doesn’t sign the contract, as it’s waiting for its legal department to approve the contract. Customer Beta’s purchasing department has orally agreed to make the purchase and has indicated that it expects the contract to be approved during the first week of Company A’s next fiscal quarter. SAB 104 poses the question whether Company A could recognize revenue from the sale during the current fiscal quarter if the contract isn’t in fact signed until the next fiscal quarter, and it provides the answer—no.

In this context, dating a contract by means of a date in the introductory clause could be misleading. Whether unwittingly or with intent to deceive, Company A could use in the introductory clause of the contract in question a date from the current quarter; that would give the impression that Company Beta too had signed the contract on that date. If questions subsequently arise regarding when Company Beta had actually signed the agreement on that date, Company A could legitimately claim that in using a date in the introductory clause it had simply been following a standard contracting practice.

Its understandable why an auditor checking on a company’s revenue-recognition practices might want the company’s contracts to make clear, by means of dated signatures, which signatory signed on which date. A company could, of course, simply provide fake dates, but that would require outright falsehood, a far riskier proposition than disingenuous reliance on a misleading date in the introductory clause.

I haven’t found anything in the revenue-recognition literature on how contracts should be dated. Ronald Clark, professor of accounting at Auburn University and author of a 2006 CPA Journal article on revenue recognition, has told me that he wouldn’t be surprised if an auditing firm were to insist on dated signatures: The final decision regarding recognition of sales involves a judgment call by auditors. Given the recent string of mega-frauds, auditors have become much more conservative in deciding what would be required in order for them to find that “persuasive evidence of an arrangement” exists.

Adding to the pressure is the fact that revenue recognition factors into a company’s compliance with the Sarbanes-Oxley requirement that companies document and evaluate the effectiveness of their internal controls and procedures for financial reporting.

Professor Clark tells me that although SAB 101/104 applies only to public companies, the word has filtered down to auditors of non-public companies. All auditors are now taking an aggressive stance when it comes to revenue recognition.

This raises the question whether companies that wish to run a tight ship when it comes to revenue recognition should as a matter of policy require that their contracts be dated by reference to dated signatures rather than a date in the introductory clause.

I’d be interested to hear from any readers—and their auditors!—who have encountered this issue.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

11 thoughts on “Revenue Recognition and How You Date Contracts”

  1. We encountered this request from our auditors when I was in-house (this was now about 7 years ago). The request really didn’t matter much to me–it was fine with me to add the extra line–but the reality is that the blank line rarely got filled in, and even more rarely was filled in using the date that ink was hitting paper. IMO, the better approach is that auditors shouldn’t recognize revenue on contracts until those mutually executed contracts are physically in the possession of the finance department–this avoids all the silliness about real or fictional dates written/specified in the contract. Eric.

  2. Our auditors require us to have all signatures on our contracts dated, but they have not required us to change the practice of putting a date in the introductory clause.

    Unless there is a reason to have a contract dated on a specific day, our contracts administration people insert the date of the last signature as the date of the contract in the introductory clause.

    Having a date in the introductory clause makes it easier to refer to and locate contracts. It’s awkward to refer to a contract that was signed by X on date 1 and by Y on date 2, and it requires the reader to look through the contract to find the signatures to determine if he or she is looking at the contract that’s being referred to. Much easier to simply refer to the ABC agreement between X and Y dated MM DD, YYYY.

  3. David: I think it’s a little misleading to date the signatures and also include a date in the introductory clause. A date in the introductory clause suggests that the parties agreed on a date, but that wouldn’t be the case if the contract provides for dated signatures. For administrative purposes it would indeed be useful to know what date to give the contract without having to flip through it, but I suggest that that can be accomplished by stamping the effective date at the top of the contract. (You might want to say “Effective April 26, 2007” rather than “Dated April 26, 2007.”) Ken

  4. Ken: Our contracts do state that the date in the introductory clause is the “Effective Date.” “This agreement is entered into as of April 26, 2007 (the “Effective Date”), between . . .” In most cases the effective date will be the date of the last signature, but there are cases where we need to have a specific effective date.

    I tried to do away with dating the signatures, but the auditors required us to put it back in. I suppose they think it’s an extra measure of control to ensure we aren’t playing games with revenue recognition, although in truth there are many times when the person signing for the customer does not date his or her signature, and there’s certainly no guarantee that the date inserted is the actual date of signature.

    Our contracts do not reference the signature dates and therefore (I think) do not give those dates any legal effect. We would have a real problem with the auditors if a contract stated that it is effective as of the date of the last signature, but one or both parties neglected to date it. David

  5. I’d like to follow up on Eric’s comment. He suggested that auditors shouldn’t recognize revenue on contracts until the contracts have been signed by all parties and are in the company’s possession. As I’ve mentioned to Eric, the problem that I see with that is that the auditors arrive on the scene after the reporting period is over, so they have to rely on the company’s account of what happened when.

  6. Surely this is not the only instance where an objective fact (for instance, was there ‘persuasive evidence of an arrangement’ in existence on April 30 or May 1) can only be determined by an auditor’s examination of any number of pieces of potentially contradictory and not necessarily authentic evidence.

    I think an auditor who suggests that any one piece of evidence, particularly one that is so easily faked (by intention or innocent mistake) like the penned signature date, should somehow be dispositive to the question is misleading his client.

    At least Eric’s suggestion of ‘what date did it arrive at the revenue recognizer’s finance department’ is a bit more likely to lead to a truthful answer, since it would require outright fraud instead of just an innocent error. (On the other hand, I’m sure the sales guys who get their contracts ‘signed’ by the customer at 11:59 PM on the last day of the quarter would never stand for such a rule if they ruled the world.)

    Like any question of law that depends on a particular fact, we must resign ourselves to marshalling many perceived truths of the date the deal became somehow an ‘arrangement.’ Those perceptions will come from any number of sources, and may well be contradictory. Then we must make a determination of credibility of all of them and ultimately take our chances on which allegations should actually rule the day (or rule the date, so to speak).

    Auditors who look for simple ways out of that mess, which mess could never have a simple answer, deserve some degree of scrutiny in my humble opinion. And, I have confidence that the auditing profession already demonstrates an ability to ferret out truths from contradictory pools of evidence in other instances of interpreting GAAP, so why this one should somehow be different is beyond me. (I, of course, do not believe that ALL auditors say these things.)

  7. I dislike intensely a date in the introductory clause. It has no meaning unless all parties sign the contract on that date, something that rarely happens in my practice. There is confusion over which party should fill in the introductory date. I require signatures to be dated and recite in the clause establishing the term of the contract that the contract will become effective from the date it has been executed by all parties. Even auditors can figure out which date next to the signatures is last.

  8. Michael: Thank you for reminding me of that nuisance, the blank in the introductory clause. Regarding language establishing when the agreement is effective, see this blog post. Ken

  9. IRT Dating of agreements/documents I have come across an instance where there is only one signatory required based on a Declaration of Trust document for an LLC whereby the signing party is the nominee of and the trustee for and on behalf of another individual:
    1) In this example is it fine to introduce (in the introductory paragraph) the effective date or state “this Document is dated . . . “, or would you simply date the document the way you have suggested in this post using singular terms? I find that one of the reasons the date is even included at all in the introductory paragraph is for the purpose of introducing the name of the document and defining it a little easier as “this document” or “this agreement” more than anything else – especially when you don’t have more than one signatory or party to the agreement. I’m looking for a little feedback in this matter.
    2) Would it be advisable on such a document to require a witness signature as well, whereby one would assume that the signatures are of the same date, otherwise there wouldn’t really be a true witness of signatures – would there?
    How does the dating of the documents affect these two instances?


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