Revenue Recognition

SEC Materials

Staff Accounting Bulletin 104 2003

Updating revisions / rescissions to SAB 101
Principal revisions rescind material no longer necessary because of private sector developments in US GAAP
These changes affect "Topic 13" of SAB 103 -- see below

Staff Accounting Bulletin 101 1999

Guidance on recognition, presentation and disclosure of revenue
Interpretive: Did not supersede any prior authoritative literature
SAB 101A 3.24.00 / SAB 101B 6.26.00
Only delayed effective date

Factors cited by SAB 101
Generally, revenue earned when:

Persuasive evidence of an arrangement exists
Delivery has occurred or services have been rendered
Seller's price to the buyer is fixed or determinable; and
Collectibility is reasonably assured

FASB Statements

FASB Project (Current)
To develop a general standard on revenue recognition

FASB web page

FASB 49 Product Financing Arrangements 1981

FASB 48 When Right of Return Exists 1981

FASB 45 Franchise Fee Revenue 1981

Supercedes FASB 9
FASB summary
FASB status

Also see

FASB 66 - Real estate sales
FASB 51 - Cable television
FASB 50 - Record and music industry

SEC FAQs

SAB 101

SEC FAQs re: SAB 101
SEC summary of SAB 101 (from Current issues 8.31.01)
AICPA article 2001

SAB 103

Topic 13 Revenue recognition
Topic 13.A.1 ~ General
Topic 13.A.2 ~ Persuasive evidence of an arrangement
Topic 13.A.4 ~ Fixed or determinable sales price
Topic 13.A.5 ~ Income statement presentation
Topic 13.B Disclosures

Accounting FAQs Mar. 2001

Topic I.G Co-marketing arrangements
Topic I.J Extended warranty plans
Topic I.K Franchise fee revenue

Accounting FAQs Aug. 2001

Topic I.B Revenue recognition guidance
Topic I.I.1 Sunbeam Corp enforcement action
Topic II.C Disclosures about revenues
Topic II.J Cross-payments in strategic partnerships
Topic II.Q Sales commissions paid
Topic II.R.1 R&D - revenue recognition

SEC Fortune 500 Review

SEC's Current accounting issues Mar 2005

Topic II.D Revenue

D.1 Buy/sell arrangements
D.2 Service Contracts and the use of EITF 81-1
D.3 Disclosure

SEC's Current accounting issues Dec 2005

Topic II.F Revenue

II.F.1 Buy/sell arrangements
II.F.2 Service Contracts and the use of EITF 81-1
II.F.3 Disclosure

Specific Issues

Software

SOP 97-2, Software revenue recognition
AICPA FAQs

Gross vs. net basis

Multiple element arrangements

EITF 00-21

"Bill and hold"

AICPA article 10.99

"Barter transactions"

Buy/sell arrangements

SEC disclosure issues 12.01.05

Service Contracts and the use of EITF 81-1

SEC disclosure issues 12.01.05

Disclosure

SEC disclosure issues 12.01.05

Vaccines sold to government

SEC interpretive release 33-8642 12.05.05

SEC Enforcement Actions

2007

Nortel Networks

Pays $35 million to settle financial fraud charges
SEC press release 10.15.07
Litigation release
SEC complaint

Aspen Technology

Settles with SEC
SEC press release 7.31.07
C&D Order

Cardinal Health

SEC sues Cardinal Health for fraudulent earnings and revenue management scheme
SEC press release 7.26.07
Litigation release
SEC complaint

ConAgra Foods

ConAgra agrees to pay $45 million penalty to settle charges
SEC press release 7.25.07
Litigation release
SEC complaint

BISYS

Tenet Healthcare

Nicor

David Stockman - Other Collins & Aikman Executives

DOJ SDNY brings criminal charges

SEC brings civil charges

Charges that Stockman and others inflated revenues to avoid covenant defaults

Stockman and his private equity firm took control of
auto parts supplier in 2001
Company filed for bankruptcy in 2005

Stockman is a prominent figure

Founded Heartland Industrial Partners,
a private equity firm that had a 40% position in C&A
Had been a Senior Managing Director of Blackstone
Was Budget Director in the Reagan administration who was famously "taken to the woodshed" by the President after making remarks to the press about budget deficits
Was also a US Congressman

C&A board had several prominent members
including a US Senator and a Harvard Law dean

2004 proxy statement

Raytheon

Nortel Networks executives

Securities fraud charges against four executives

Including former CEO and CFO

Alleges that revenue was improperly accelerated to meet internal targets and Wall Street expectations
Alleges improper use of reserves to bridge earnings gaps
SEC press release 3.12.07
Litigation release
Complaint

Gateway Computers executives

SEC press release 3.08.07

RenaissanceRe

MBIA

2006

RenaissanceRe Holdings

Securities fraud charges against three executives

Including former CEO

Alleges that sham reinsurance transactions were used to smooth earnings
SEC press release 9.27.06
Litigation release
Complaint

Doral Financial

Settled financial fraud charges against NYSE-listed Puerto Rican bank holding company

Involved charges that sales of non-conforming mortgages weren't true sales
SEC press release 9.19.06
Litigation release
Complaint

Tribune Corp

Settled action against a Chinese internet company
Employees created sham transactions to shorten contractual periods to accelerate revenue recognition
SEC press release 5.30.06
C&D order

NetEase.com

Settled action against a Chinese internet company
Employees created sham transactions to shorten contractual periods to accelerate revenue recognition
Litigation release 2.27.06
Complaint

McAfee

"Channel stuffing" through distributors

Company pays $50 million fine
SEC press release 1.04.06
Litigation release

Applix

Improper recognition of software revenue
No fine imposed

2005

NCO Group

Recognition of contingent fee revenue
Recognition of long-term collection contract
C&D order 9.13.05

Bristol-Myers executives

"Channel stuffing" through wholesalers
Also used "cookie jar" reserves
SEC press release 8.22.05
Litigation release
Complaint

Coca-Cola Company

"Channel stuffing" through Japanese subsidiary
Asked bottlers to make additional purchases of concentrate to enable parent to meet earnings targets
SEC press release 4.18.05
C&D order

EasyLink Services

Used barter transactions to inflate advertising revenues
SEC press release 4.07.05
C&D order
SEC Chairman Donaldson was a director
SEC press release 7.02.04

Time Warner

Predecessor company (AOL) used fraudulent round-trip transactions to inflate online advertising revenue
Also inflated number of AOL subscribers
Failed to consolidate AOL Europe joint venture
SEC press release 3.21.05
C&D order
Litigation release
Complaint
$300 million fine

CFO article 3.22.05

Time Warner to restate financials

Qwest Communications

Alleges over $3.8 billion in fraudulent revenue recognition
SEC brings charges against former CEO and other executives
SEC press release 3.15.05
Litigation release 3.15.05
Nacchio complaint
SEC intends to bring action against executives over revenue recognition practices
SEC press release 10.21.04
Litigation release
Complaint
Allegations that Qwest's revenues were inflated by $144 million in 2000 and 2001 in order to meet earnings projections and revenue expectations
Department of Justice criminal indictment

Press release

SEC civil charges:

2004

Peregrine Systems, Inc

Sham deals with channel partners
Including backdated contracts / side agreements
Press release 10.06.04
Litigation release
Complaint

Computer Associates

Manipulated quarter-end cutoff
Prematurely recognized over $3.3 billion in revenue from unexecuted contracts
Press release 9.22.04
Litigation release

Fleming Companies

Used side letters from suppliers to justify improperly accelerating revenue
Suppliers charged for aiding and abetting
Press release 9.14.04
Litigation release

Bristol-Myers Squibb Company

$1.5 billion of "channel stuffing"
Selling excessive amounts to wholesalers ahead of demand
$150 million settlement
Press release 8.04.04
Litigation release
Complaint

Gemstar-TV Guide International

Overstated revenues by $250 million
From expired, disputed, or non-existent agreements
From a long-term agreement on an accelerated basis
From multiple-element transactions
From non-monetary and barter transactions
$10 million civil penalty
Press release 6.23.04
Litigation release 6.23.04
Related action against KPMG:

Press release 10.20.04
SEC C&D Order 10.20.04

i2 Technologies

Misstated $1 billion of software license revenues
Recognized upfront, despite lengthy customization requirements
$10 million civil penalty
Press release 6.09.04
Litigation release
C&D order

General Mills, Inc

SEC intends to bring action against executives over revenue recognition practices
Press release 10.15.03
Press release 2.03.04
Form 10-Q

Pre-2004

IBM 2003

SEC commences formal investigation
re: 2000/2001 revenue recognition
Form 8-K 6.02.03

Homestore, Inc executives 2002

Charges that "round trip" transactions were used
to inflate revenues
Defendants pled guilty in related criminal proceeding
SEC litigation release
SEC complaint

In re MAX Internet Communications, Inc 2001

Charges included improperly recognizing sales upon delivery to foreign subsidiaries and "channel stuffing"
SEC C&D Order 8.01.01

In re Sunbeam Corporation 2001

Charges included "channel stuffing" and "bill and hold" sales
Criticized actions were from last quarter of 1996 until June 1998
-- prior to adoption of SAB 101
SEC C&D Order 5.15.01

Restatements

Nortel Networks