Accounting Rule Hurts Software Companies' Revenues
By MELODY PETERSEN
NEW YORK -- A small California computer company announced this month that its revenues fell 30 percent in the latest quarter, not because of slow sales, but because of a new accounting rule that could soon affect the bottom lines of high-technology companies across the nation.
The company, Creative Computer Applications Inc., which is based in Calabasas, Calif., is one of the first to begin applying the rule and said it did so to get the bad news out of the way.
"A lot of companies are sort of pooh-poohing this and saying that it won't have much of an effect," said Steven M. Besbeck, Creative Computer's chief executive officer. "I think they are wrong."
The rule, which has caused a stir in the high-technology industry, requires companies to postpone revenues on certain software sales if all the promised components and services have not yet been provided. In some cases, companies will not record those revenues for many months, if not years.
The rule applies for fiscal years beginning after Dec. 15, 1997. Companies operating on a calendar year had to comply in the first quarter of 1998, and those quarterly results are just coming out. Because its fiscal year begins on Sept. 1, Creative Computer could have waited, but chose to go ahead.
Some software companies, including Microsoft, say they are well prepared for the rule and have been using similar practices. But accountants and corporate financial executives say quite a few companies have been aggressively recording revenues on software sales that are not truly complete. Like Creative Computer, those companies could see sales plunge this year.
Still other companies, including PeopleSoft, say they do not foresee a drag on sales this year but have expressed concern about how the rule will be interpreted in the future.
The new accounting rule requires companies to defer revenue on software contracts if they have not yet provided all the promised services or software components. For example, if a company has delivered 90 percent of the software to a customer, but the system does not work without the remaining 10 percent of the package, the software company probably cannot record any of the sale. Or, if a software package includes system maintenance or employee training, those portions of the software contract cannot be recorded until that work is done.
Under the old accounting rule, software companies had the leeway to record all their revenues and profits when the first part of the software package was delivered.
"Before, there was less guidance on how to record revenue, so on a similar transaction some companies could have quite different accounting," said Mary Pat McCarthy, national director for software and services at the accounting firm of KPMG Peat Marwick. Faced with the new rule, she said, "some software companies are very, very concerned."
Accounting rule makers have largely left software companies out in the Wild West, with few rules to apply and lax ones at that. The accounting rules that work with most other industries were written when a sale was a simple and clear event -- for example, the delivery of a box of sweaters or a sack of potatoes. Such rules do not work for software companies, which may deliver their wares by pushing a button and sending them over the Internet.
In fact, the accounting rule makers cannot keep up with the software companies ever-changing sales practices. "Almost as fast as they write the rules," Ms. McCarthy said, "software companies devise a transaction that does not fit the rules."
The new rule, called Statement of Position 97-2, took a committee of accountants almost five years to write. The committee was created by the American Institute of Certified Public Accountants, which approved the rule last fall.
Jerry R. Masters, Microsoft's senior director of planning and reporting, was one of only four committee members who persevered for the five years. He said the rule would have no effect on Microsoft's revenues.
"We have always recognized revenue when earned," Masters said. "We try to be conservative and to not get ahead of ourselves."
The impact at Creative Computer has been clear. The company reported that its revenue fell in its fiscal second quarter ended Feb. 28 to $1.3 million from $1.8 million in the comparable period a year earlier. Besbeck, the company's chief executive, said he believed sales would recover in about six months. He added that the company had not been aggressive with its accounting and that other companies might be far more affected by the rule.
Alfred J. Castino, vice president for finance at PeopleSoft, based in Pleasanton, Calif., said his company's revenues should not be hurt by the accounting rule this year. But Castino said he was worried about how federal securities regulators would later interpret the rule because it still gave companies some reporting flexibility and many companies were unsure how to apply it to their myriad sales methods.
In last year's annual report, PeopleSoft said that the future interpretations of the rule could materially affect revenues. It also said it could change how the company conducts business and could even put the company at a disadvantage with its foreign competitors.
"I can't tell you it won't have a material impact," Castino said. "But it will have an even bigger impact on our competitors who have not been as conservative."
|
