Well, as my mad mutterings have elicited some impassioned feedback from the peanut gallery, I might as well invite you further into the dark demesne of my thoughts on this issue.
There seems to be two main arguments which you guys have come up with.
a) It's illegal, against the SEC, not GAAP, etc. Fellow sophisticates, are you guys really gonna play boy scout here? Come on, get real. *Every* company tweaks the grey areas of GAAP to some degree. Look at the perfect quarterly earnings for GE, which increases by EXACTLY 13% over the year-ago quarter, EVERY SINGLE QUARTER FOR AT LEAST THE PAST 5 YEARS. Or look at Microsoft, which keeps a kitty of deferred revenue for a rainy day. Now these are the bluest of the blue chips, here. It gets exponentially more egregious as you move down the quality scale. Remember the big hubbub a while ago when AOL was amortizing their customer acquisition costs? There are plenty of ways to skin a cat, and all could be considered GAAP, although sometimes I wonder.
b) They wouldn't get IBM (or whomever) to agree to it, because IBM's earnings will take a hit. This is just plain false. Let's not forget who I'm accusing (i.e. libeling) of aggressive accounting here, HTCH, not IBM. They needn't account for the transaction identically. If the economic reality is that IBM ends up paying a certain average price over the life of a program, but pays a bunch upfront, it can be easily justified (indeed, it is proper, conservative GAAP) for IBM to amortize the payments.
This may sound too far-fetched, so I'll offer an example. I'm doing this by memory, so the details may be slightly sketchy, but I'm sure I have the gist of it correct. Netscape is analogous to IBM, Excite to Hutch.
Middle of last year, Excite and Netscape made a deal to place Excite in Netscape's Netcenter portal. The deal was for $70 million, payable upfront, and for a couple years or something like that. However, here's where it gets interesting. Netscape guarantees a certain level of profitability and PAYS BACK Excite over the life of the deal. What kind of fool transaction is this? Did an economic transaction even take place? It sounds more like a loan! In any case, Netscape explained that they'll recognize both the revenue and the liability over the life of the deal, conservative GAAP treatment for a company that has, at other times, taken huge liberties with their accounting. Contrarily, Excite wrote-off the $70 million right away (hey, no biggie, it's a one-time charge), and will recognize the Netscape payback in revenue over the life of the deal. Magic earnings thus appear out of thin air. Of course, this was so obvious and egregious, the SEC made them amortize it instead.
Did Hutch do something similar, but somewhat less obviously egregious? Probably not, but I wouldn't put it past them. |
