Light Reading
New rules will make it tougher for vendors to count their chickens before they're hatched

SEC Cracks Down on Book Cooking

Light Reading
News Analysis
Light Reading
11/22/2000
50%
50%

What do George W. Bush, Al Gore, and Lucent Technologies Inc. (NYSE: LU) all have in common? Fuzzy math.

Yesterday, Lucent reported a $125 million snafu in its revenue recognition for the last quarter, and it changed its guidance going forward as a result (see Lucent Shares Hammered by $125M Goof).

While Lucent isn’t giving any details regarding how this mistake came about, some experts think that it could have stemmed from Lucent’s practice of counting revenue before products had been shipped and installed in customer networks (see Lucent's Poor ATM Numbers Confirmed).

But a new standard accounting bulletin from the Securities and Exchange Commission, SAB 101, could put an end to some of this creative arithmetic. The new rules, which were adopted last year and will finally go into effect starting in 2001, will require that “revenue should not be recognized until it is realized or realizable and earned.”

What does this mean? In brief, the SEC says there must be persuasive evidence that a purchase agreement actually exists. Delivery must also have occurred, the seller’s price to the buyer must be fixed and determinable, and collectibility must be reasonably assured.

The way companies account for revenue has been an issue for networking equipment vendors for some time, say analysts.

“The big box business is lumpy by nature,” says Max Schuetz, optical networking analyst at Thomas Weisel Partners. “A company could ship a couple million-dollar boxes one quarter and then not ship any to that same customer the next quarter.”

This up-and-down purchasing cycle can be a nightmare for public equipment vendors. “Investors want smooth growth, so companies play with the numbers,” says Schuetz. “ If they are short one quarter they might borrow from the next quarter. But it gets dicey when they don’t have the advanced booking. That means the deficit builds until it blows up in their face. That is pretty much what happened to Lucent.”

Under the new guidelines companies could be more restricted in how they handle revenue. For example, the days of vendors shipping boxes without line cards and recognizing that as revenue on their quarterly statement could be over. Also, vendors won’t be allowed to recognize revenue on products that are still being tested by a customer.

“I think what the SEC was trying to do is just give some guidance on what is acceptable,” says Jim Kroeker, a fellow at the Financial Accounting Standards Board (FASB), a private organization for establishing standards of financial accounting and reporting, recognized by the SEC. “There hasn’t been a lot of formal written guidance for revenue recognition. This should help.” But analysts and industry experts caution that there may still be some wiggle room left in the rules. In fact, the new rules are open to interpretation.

“Someone might look at one piece of the rule and say that makes perfect sense, and another part might be a little less clear,” says Kroeker. “But it is up to the SEC to decide.”

One type of situation that might not be covered under the accounting bulletin has to do with vendor financing. There are still no clear boundaries regarding when revenue can be recognized from products that haven’t been completely paid for. This could be a problem as more vendors begin to offer vendor financing, especially if these vendors are backing unstable service providers that could default on their agreements.

“The problem is that even when carriers deploy a product or promise to deploy it, customers can still have it without paying for it,” says Schuetz. “There are still ways of getting around it.

“The most draconian approach would be to report revenue when you get cash payment from customers. That eliminates a lot of this debate. But if you did that, there would have to be a lot of re-education for investors. Telecom sales come in lumps, and that freaks out investors.”

For the most part, vendors seem to be taking the new rules in stride. During Nortel Networks Corp.’s Webcast yesterday, CFO Frank Dunn, responding to a question, told analysts that the company wasn’t worried about SAB 101.

“We reviewed the SEC proposal in detail in January,” said Dunn. “Going forward, this isn’t an issue; we’ve built it into our plans.”

Lucent said it would not comment directly but had this to say: “We are aware of the staff accounting bulletin and we’re currently evaluating the impact of it on our business,” said a spokesperson. “We will adopt the rules in 2001 as required by the SEC."

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

(0)  | 
Comment  | 
Print  | 
Newest First  |  Oldest First  |  Threaded View
Flash Poll
From The Founder
It's clear to me that the communications industry is divided into two types of people, and only one is living in the real world.
LRTV Huawei Video Resource Center
Building a Secure Telefonica Network With Huawei's High-End Firewall

11|24|14   |   4:37   |   (0) comments


Andrew Davies, IP architect of the Telefonica, a leading digital communications company, discusses the Huawei security gateway solution and putting the solution into the testbed.
LRTV Huawei Video Resource Center
Huawei Partners with Spirent to Verify CE12816's 10GE Port & TRILL Networking Capabilities

11|24|14   |   2:50   |   (0) comments


Spirent Communications is the world's leading supplier for telecom testing appliances and solutions. Spirent has been in a close partnership with Huawei for a long time.
LRTV Huawei Video Resource Center
Saudi Airlines & Its ICT Transformation

11|24|14   |   2:07   |   (0) comments


In this video, Saudi Airlines discusses its network problems and how Huawei's Agile Network is its all-in-one solution.
LRTV Huawei Video Resource Center
Huawei's Agile Switch Benefiting Saudi Arabia's Yamamah Hospital

11|24|14   |   2:40   |   (0) comments


Saudi Arabia's Yamamah Hospital speaks about how Huawei's Agile Switch has improved the medical service's network infrastructure.
LRTV Huawei Video Resource Center
FanPlay & Huawei Build a Wireless Agile Smart Stadium

11|24|14   |   2:13   |   (0) comments


FanPlay is a cloud-based white label service, which is effectively a football fan engagement platform underpinned by mobile payment technology.
LRTV Huawei Video Resource Center
Building an Agile Stadium

11|24|14   |   3:54   |   (0) comments


Stadiums may be thousands of tons of concrete and steel, but they now need to be agile. Being at the stadium may not be as alluring as it once was. Sports franchises and stadium operators discuss how to get fans back.
LRTV Huawei Video Resource Center
Huawei Helps ChinaCache Tackle Challenges in the Internet Industry

11|24|14   |   3:09   |   (0) comments


ChinaCache is China's largest content distribution network supplier. Huawei's CE12800 has provided ChinaCache with very strong support in its establishment of an infrastructure network.
LRTV Huawei Video Resource Center
Cefinity on Managed Security Services & Next-Generation Firewall

11|24|14   |   7:05   |   (0) comments


Cefinity is a cloud management service provider in Southeast Asia. Ivan Zhang, CEO of the company, discusses the implementation of security service management in the cloud era.
LRTV Huawei Video Resource Center
Huawei's Agile Gateway in the Eyes of Cefinity

11|24|14   |   2:11   |   (0) comments


Cefinity is a managed service provider for enterprise networks. The company currently uses Huawei's AR series routers for the most complete range of functions. CEO Ivan Zhang speaks about the advantages of the AR series routers.
LRTV Huawei Video Resource Center
CTO of Bus-Online Talks About Huawei's Agile Gateway

11|24|14   |   2:53   |   (0) comments


Bus-Online covers around 100 million users everyday. In addition to providing mobile TV, and advertising services to the public, Bus-Online has also entered the field of mobile Internet.
LRTV Huawei Video Resource Center
Amsterdam ArenA as an Agile Campus

11|24|14   |   3:31   |   (0) comments


The Amsterdam ArenA, home of the Ajax soccer team, can be a crowded space. ArenA has partnered with Huawei to work on bringing ample bandwidth to 53,000 people at the same time.
LRTV Huawei Video Resource Center
Building a Gigabit Wireless Network

11|24|14   |   3:15   |   (0) comments


3W is dedicated to customer-centric services such as catering, incubator and PR. To do this requires a solid IT structure. In this video, 3W discusses how Huawei has helped to achieve its goals.
Upcoming Live Events
December 2, 2014, New York City
December 3, 2014, New York City
December 8-10, 2014, Reykjavik, Iceland
February 12, 2015, Atlanta, GA
April 14, 2015, New York City, NY
May 6, 2015, McCormick Convention Center, Chicago, IL
May 13-14, 2015, The Westin Peachtree, Atlanta, GA
June 9-10, 2015, Chicago, IL
Infographics
Irish Telecom outlines the rise of VoIP technology, including its adoption within businesses and their perception of its quality.
Hot Topics
Bell Labs Chief Slams 'Toy' Networks
Robert Clark, 11/19/2014
$38.3M: Ain't That a Kik in the SMS
Sarah Reedy, Senior Editor, 11/20/2014
Do You Have a 2020 Vision?
Dennis Mendyk, Vice President of Research, Heavy Reading, 11/21/2014
The New Wave of IP + Optical Integration
Ray Le Maistre, Editor-in-chief, 11/21/2014
$35B+ Spectrum Auction Dings Verizon, Shines Dish
Dan Jones, Mobile Editor, 11/24/2014
Like Us on Facebook
Twitter Feed