RESERVES & BOOKING REVENUE (Revised 10/15/97)
Reserves
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When does Topro call it revenue?
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Complete Discussion
Richard S. Schoenstadt Oct 4 1997 7:51AM Reply #3528
Does anyone know how Topro books revenue? Do they book it after the work is done and the invoice goes out? Or do they book it when they are paid? I assume the former, otherwise why would they need a reserve?
Kevin F. Durkin Oct 4 1997 12:51PM Reply #3535
Assume revenue is booked at the time the invoice is prepared. This is the usual accounting practice. The reserve would be set up if payment is not made in a specific number of days. This is usually at the discretion of management. Can be 6 months or more, if payment not made or in dispute. Usually audit firm will go along with managements decision if its to be reserved based on past payment practices of the
invoiced party. In many cases payment is made, this case for TPRO may be paid by insurance, if I understood correctly. Management seemed certain payment would be made. Therefore revenue will reflect payment at the time payment is made. I hope I have not confused you.
Zebra 365 Oct 4 1997 4:09PM Reply #3541
<When does Topro call it revenue?> Answer......
Topro books the revenue when the work is done and it is established that they are owed the money. I cannot quote the source exactly but I have read it in TPRO issued statement, possibly as a footnote to a P&L in an SEC filing. I was specifically looking for that before I started investing in July, as it is a good point, some start up companies
book revenue on contract and then write it down if the contract falls through. Then they have to go back and restate earnings. I have found Topro accounting approaches to be consistantly conservative in this manner. When they say they have revenue, it is actually owed to them. If they might not get paid what they are owed, establishing a reserve for this possibility will prevent them from restating earnings, should the payment not come .
As far a waiting for cash in hand, the IRS does not allow a company to wait until cash is received to put it on the books unless the company is on a cash method of accounting. The cash method is forbidden by the IRS if the company sells any products in addition to services, or if revenues are over a minimum amount. Again, this is fiscal conservatism and a very important attribute in a company in which I invest.
Karl Drobnic Oct 4 1997 5:34PM Reply #3542
Re Reserves: My understanding is that Topro established the reserves because there are disputes about the amounts owed Topro. The disputes are going through a claims process. This is not related to bonding. Bonding would pay TPRO if the other company went out of business without paying (or some similar circumstance). The claims process(es) will determine the amount of the reserves TPRO eventually collects.
We shouldn't expect the bonding to cover the reserves since TPRO may get an adverse ruling from the claims process. So establishing the reserves gets any potential bad news behind us, and puts TPRO in position for pleasant earnings surprises if those reserves are reversed.
From: JDN Oct 5 1997 6:35AM Reply #3559
Dear Karl: I believe that you are absolutely correct. I suspect the TPRO contract went way over original estimates and each side is blaming the other for the cause. It has been my experience in situations like these that there generally is a settlement with each side sharing some of the blame.
From: JDN Oct 5 1997 6:24AM Reply #3558
Dear Richard: They DO NOT book it when paid. That is called the "cash basis" and is generally inappropriate for financial reporting purposes of an SEC registrant. Rather they would book on the Accrual basis-meaning once the company has performed all that is required of it the earnings process is complete. Now as to their base revenue,
very likely they are on a "Percentage of Completion" basis. Meaning they accrue the revenue as they complete the contract. The alternative is the "Completed Process" basis meaning they would not record revenue until the job is completed. This method is generally only acceptable if company has many small contracts with under a years duration. Either method results in receivables which may need to be reserved. As to C/D sales, I presume they will be recorded as they are shipped. Today, there are no simple answers when it comes to accounting, thats why I call it an Art and not a Science. haha.
Richard S. Schoenstadt Oct 5 1997 7:14AM Reply #3560
Re. revenue thanks JDN and others. A further question. Assume Topro is eventually paid on some or all of the disputed accounts. Normally I assume this would show up on the balance sheet as a reduction in receivables and an increase in cash. But doesn't Topro also have the option to reduce the reserve. And wouldn't that show up as income? Does anyone think Topro would do this? Or do you think they will keep the reserve at it's current level in order to buffer the effect of any future disputes?
JDN Oct 6 1997 9:59AM Reply #3593
Generally on public companies receivable reserves are set up either on
operating history or specific identification or even a combination of these (which is what I believe TPRO has done here). Once the underlying receivable is satisfied the specific reserve must be removed. If they can identify other receivables of concern they can always reestablish a reserve on them. When an amount is "material" and we really dont care if it isnt, they will have to justify it to their independent CPA's. Of course they will have more leeway on caution than recklessness but the bottom line is they must have some justification for whatever Reserve balance they have. Using FUTURE receivables is not a justifiable excuse as it doesn't "match" income and related expense.
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