Revenue recognition and Expense realization for IT services contract

Well understanding the accounting treatment for large IT outsourcing contract is giving me sleepless nights now! God how I wish I get a cure for obsessive compulsive disorder when I hit upon something I dont know about and ought to be knowing!

I read the valuation book from Krishna Palepu (The same author who was Independent Director of Sathyam :-)...) where he has written so well on revenue recognition principles and Expense realization...

Revenue recognition is done under 2 key principles:
1. When the service or product is sold, and
2, There is a reasonable sound estimate of probability in realizing the revenue

Expense incurring for a deal is done under 2 key principle
1. Clear cause-effect relation exist between revenue and the incurred expense, where the expense is recorded as expensed in the year when the revenue is recognized and
2. Expense is incurred in the year when the resources are expended productively toward comletion of service or product

Now the above principles are really put to a test in a real life scenario where it leads to applying the above principles consistently. A good case in point is in the IT services space where the client is not willing to pay for the transition cost of the engagement. This is due to the fact that paying upfront for the transition is a balloning cash flow problem for the client due to 2 reasons:
a. It pays for the incumben t services while transition is going on
b. it pays additionaly for new resources for their high payroll and expenses during the transition period

In such troubled times when cash is the king this has a huge bearing on organizations cash-flows to pay transition fees upfront or pay them at all.

Now how the service provider accounts for this is even more interesting based on whether the transition cost leads to economic or normal margins or not and accordingly recognize the appropriate revenue or defer it...

I've now realized how this accounting treatment can be made either to the benefit or detrimant of the shareholder..It seems here the brilliant mind and foolish mins can think alike based...one by knowing well and the other without knowing....:-)...I dont know where Satyams CFO and CEO would fall if they encounter similar scenario....

having understood this a little bit more I can now get back to my normal routine..Gosh, I'm amazed at how open the interpretation of accounting policy can be....wish there is more consistency and predictability of the numbers posted out there by all IT services companies.....