The WSJ stated that deferred revenue reserves were not the focus of the SEC investigation.
The entire article (on which the CNBC report was based) is at online.wsj.com
A key point is that in most companies, many types of reserves are created in addition to deferred revenue. They note: In general, companies are allowed under accounting rules to set aside funds to cover potential expenses such as returned products, excessive inventory or bad debts. By changing estimates of such expenses, companies are able to increase or decrease the amount of earnings they report to shareholders. Such estimates are adjusted behind the scenes, out of view of investors.
(I would add to this all sorts of reserves that are created for restructuring, mergers, purchases and the like. Many companies have used those quite extensively in recent years. None of these are related to deferred revenue.)
It goes on to note that: Some reserves are more visible, such as the chunks of "unearned," or deferred, revenue Microsoft accumulates each quarter from sales of some of its core products. In accordance with SEC rules, Microsoft defers some core-product sales to future quarters, recognizing only a portion of sales upfront and the rest over the products' life cycle. The SEC's investigation doesn't appear to focus on this specific reserve practice, a person familiar with the matter said.
This is hardly surprising. The practice of life-cycle accounting is quite well established, and deferred earnings are broken out in financial statements in a way that is easily understandable to most investors. I'm quite familiar with the way Microsoft does it and seriously doubt there is ANY problem there at all.
Elsewhere they note that: The Microsoft case comes amid efforts by the SEC to crack down on companies that it believes have used a so-called cookie-jar approach in their financial reporting, adding to the jar through the use of accounting tricks when times are good and dipping into it when business turns down.
And then: an e-mail sent from former Microsoft Chief Financial Officer Mike Brown to Mr. Gates, then chief executive officer, that alluded to the "smoothing" issue. "I believe we should do all we can to smooth our earnings and keep a steady state earnings model," Mr. Brown wrote.
And I'm sorry, I have a problem with that. I don't want a company with "lumpy" income trying to represent itself as having "smooth" income. Each is appropriate to a different class of investor, and investors have a right to see the true state of affairs without the benefit of a forensic accountant. Microsoft's historic earnings model is anything but "steady state." It's cyclical, based on their upgrade cycle. They should represent themselves as such. I'll make my investment decisions on the merits.
If that means that companies can no longer find ways to "beat the street" by exactly a penny every quarter, or to always show year-over-year growth, then that's OK with me too. Life and business are not perfect. The sooner we admit it, deal with it and appropriately price it in, the sooner people will feel comfortable getting back into stocks.
Until then, the grind down continues.
mg |
