Considering the lengths that some companies go to manipulate massage their revenue, this passage from […]
Tag: Revenue Recognition
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IASB, FASB Trying to Get Everyone in the Ballpark on Revenue Recognition
The aim is for companies across the world to recognise revenue consistently as part of wider efforts to forge a single set of global acccounting rules to help investors. The core principle that a company must recognise income from contracts when it transfers the goods or services to the customer remains unchanged. But the proposal has been simplified in parts and contains more guidance after several sectors like construction and telecoms raised concerns. “Our proposals will give analysts and investors the confidence that revenue is being presented on a consistent basis, across industries and continents,” IASB Chairman Hans Hoogervorst said in a statement. “We plan to conduct additional outreach with interested parties during the comment period to help people understand the proposed guidance and to listen to any remaining concerns,” said FASB Chairman Leslie Seidman. [Reuters]
FASB, IASB Making Damn Sure They Don’t Mess Up Their Revenue Recognition Proposals
Because, god, wouldn’t that be awkward?
The International Accounting Standards Board (IASB) and the US-based Financial Accounting Standards Board (FASB) agreed today to re-expose their revised proposals for a common revenue recognition standard. Re-exposing the revised proposals will provide interested parties with an opportunity to comment on revisions the boards have undertaken since the publication of an exposure draft on revenue recognition in June 2010.
It was the unanimous view of the boards that while there was no formal due process requirement to re-expose the proposals it was appropriate to go beyond established due process given the importance of the revenue number to all companies and the need to take all possible steps to avoid unintended consequences.
Sir David Tweedie admits that, “It is important that we get this right, first time,” and “the boards and staff have undertaken an unprecedented level of outreach to get us to this point, and why we are keen to treble-check that our conclusions are robust and can be implemented with minimal disruption.”
Maybe I’m reading too much into that statement but it sounds as though the Boards may be trying to stave off more nasty letters.
[via FAF/IFRS Foundation]
Green Mountain Coffee Roasters: Gosh, We Ended Up Having Way More Accounting Errors Than We Thought
Back in September, Vermont-based Green Mountain Coffee Roasters put the world on notice that the SEC was asking some questions about their revenue recognitions policies. Despite the SEC Q&A, analysts we’re cool with the company and the GAAP the crunchy accounting group was putting out.
Also at that time, the company disclosed that there were some immaterial accounting errors that were NBD. That was until they dropped a little 8-K on everyone last Friday!
Turns out, there was a whole mess of accounting booboos and the company will be restating “previously issued financial statements, including the quarterly data for fiscal years 2009 and 2010 and its selected financial data for the relevant periods.”
From the aforementioned 8-K with all the bad news:
The Company has discovered the following errors:
• A $7.6 million overstatement of pre-tax income, cumulative over the restated periods, due to the K-Cup inventory adjustment error previously reported in the Company’s Form 8-K filed on September 28, 2010. This error is the result of applying an incorrect standard cost to intercompany K-Cup inventory balances in consolidation. This error resulted in an overstatement of the consolidated inventory and an understatement of the cost of sales. Rather than correcting the cumulative amount of the error in the quarter ended September 25, 2010, as disclosed in the September 28, 2010 Form 8-K, the effect of this error will be recorded in the applicable restated periods.
• A $1.4 million overstatement of pre-tax income, cumulative over the restated periods, due to the under-accrual of certain marketing and customer incentive program expenses. The Company also has corrected the classification of certain of these amounts as reductions to net sales instead of selling and operating expenses. These programs include, but are not limited to, brewer mark-down support and funds for promotional and marketing activities. Management has determined that miscommunication between the sales and accounting departments resulted in expenses for certain of these programs being recorded in the wrong fiscal periods.
• A $1.0 million overstatement of pre-tax income, cumulative over the restated periods, due to changes in the timing and classification of the Company’s historical revenue recognition of royalties from third party licensed roasters. Because royalties were recognized upon shipment of K-Cups by roasters pursuant to the terms and conditions of the licensing agreements with these roasters, Keurig historically recognized these royalties at the time Keurig purchased the K-Cups from the licensed roasters and classified this royalty in net sales. Management has determined to recognize this royalty as a reduction to the carrying cost of the related inventory. The gross margin benefit of the royalty will then be realized upon the ultimate sale of the product to a third party customer. Due to the Company’s completed and, when consummated, pending acquisitions of third party licensed roasters, these purchases and the associated royalties have become less of a factor, since the post-acquisition royalties from these wholly-owned roasters are not included in the Company’s consolidated financial statements.
• An $800,000 overstatement of pre-tax income, cumulative over the restated periods, due to applying an incorrect standard cost to intercompany brewer inventory balances in consolidation. This error was identified during the preparation of the fiscal year 2010 financial statements and resulted in an overstatement of the consolidated inventory and an understatement of the cost of sales.
• A $700,000 understatement of pre-tax income for the Specialty Coffee business unit, due primarily to a failure to reverse an accrual related to certain customer incentive programs in the second fiscal quarter of 2010. The over-accrual was not identified and corrected until the fourth fiscal quarter of 2010.
• In addition to the errors described above, the Company also will include in the restated financial statements certain other immaterial errors, including previously unrecorded immaterial adjustments identified in audits of prior years’ financial statements.
So naturally you shouldn’t rely on anything out there. Despite the discovery and disclosure of this massive fuckup and warnings from Sam Antar including some possible insider trading (it’s a theme today) and disclosure violations, an analyst at Bank of America Merrill Lynch thought it would be rad to upgrade the stock which has sent the price soaring. Why not, right?
In directly related news, anyone on the PwC audit team shouldn’t make any Thanksgiving plans.
Analysts Aren’t Concerned About SEC Probe of Vermont Hippies’ Revenue Recognition Policies
Somewhat related: It’s National Coffee Day. Does the SEC have no sense of timing?
Shares of Green Mountain Coffee Roasters Inc (GMCR.O) fell as much as 18 percent on Wednesday, a day after it said U.S. regulators made an inquiry into some of its revenue recognition practices and its relationship with a vendor, which analysts said was M.Block & Sons.
However, most analysts believe Green Mountain’s accounting policies are sound.
“We are comfortable with Green Mountain’s revenue recognition policy, the fact that it does not have control over M. Block & Sons, unquestioned management integrity and strong auditors (PricewaterhouseCoopers),” Janney Montgomery Scott analyst Mitchell Pinheiro said.
At least this analyst knows the name of the auditors. We’re looking straight you, Dick Bové.
Green Mountain roasted on SEC probe; analysts unfazed [Reuters]
Imagine a Future Free of Questions on Revenue Recognition
“It is an important step towards a single global principle-based standard that would make it absolutely clear when revenue is recognised-and why.”
~ Sir David Tweedie is pretty happy with how the converged revenue recognition standard turned out.
In Non-iPad Apple News, A Look at Earnings Under New Accounting Rules
Editor’s note: This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for corporate finance executives.
Yes, yes. There’s plenty of iPad talk going on out there but we’ll resist the urge and focus on the numbers here.
Ron Fink wrote back in September about concerns over new accounting rules for revenue recognition doing little more than providing more areas of confusion for investors.
Under the new rules, companies can book revenue based on estimated sales prices for all the components of “bundled deliverables” all at once instead of on their current fair value. The expectation is that the rule will boost upfront earnings for tech companies whose products combine hardware and software.
Well, on Monday night, Apple made its first quarterly earnings report under the new rules and they certainly gave the tech darling a boost, but it’s unclear whether it will ultimately confuse investors. Indeed, they were likely distracted by Apple raking in $3.4 billion in net income for the quarter ended Dec. 26, up 50 percent from a year earlier.
Apple went to great lengths to explain the effect of the rules on its financial statements. The company revised its financial statements for each quarter from fiscal 2007 through fiscal 2009, the period it’s been selling both the iPhone and Apple TV, which it had previously used subscription accounting for because it periodically provides free software upgrades and features for them.
Under subscription accounting, revenue and associated product cost of sales for iPhone and Apple TV were deferred at the time of sale and recognized on a straight-line basis over each product’s estimated economic life of 24 months. This resulted in the deferral of significant amounts of revenue and cost of sales related to iPhone and Apple TV. The changes had the effect of slimming the company’s balance sheet considerably. Assets at the end of its fiscal year 2009 were reduced by $6.4 billion and liabilities were cut by $10.2 billion, giving a $3.8 billion boost to shareholders’ equity.
And in reconciling its first quarter 2009 to the new accounting standard, Apple showed net sales got a nearly 17 percent boost, while its cost of sales went up just 11 percent. That had the effect of stretching gross margins from 34.7 percent to 37.9 percent.
Apple, which wasn’t required to adopt the new rule until the first quarter of its fiscal 2011, certainly is not objecting to the change. In its earnings conference call Monday, CFO Peter Oppenheimer said, “We are very pleased by the FASB ratification of the new accounting principles as we believe they will better enable us to reflect the underlying economics and performance of our business and therefore we will no longer be providing non-GAAP financial measures.”
Why Do the FASB and IASB Always Insist on Mission Impossible?
Can anyone explain why accounting regulators have the annoying tendency to see a HUGE problem and insist on fixing it when the logistics are seemingly impossible to overcome? It’s commendable to try and solve big problems but it seems that the geeky egos of accountants often get in the way of reality.
CFO.com has a story about the FASB and IASB’s “dream” to get accounting standards down to one model for revenue recognition. ONE!
According to the article, the FASB’s revenue recognition rules are currently spread among 100 standards, so obviously there’s room for improvement but shrinking all that down to one model? Talk about herding cats.
We’re not hating on the standard setters (well, let’s face it, maybe a little) for considering this task but these dweebs can’t even get on the same page re: convergence timing so we’ll be taking the overs on the number of years when this single model pipe dream actually gets off the ground.
Revenue Recognition: Will a Single Model Fly? [CFO.com]