Financial Accounting Standards Board (FASB) requires all public companies to disclose the following information: • Accounting procedures used in preparing statements • Commitments and contingencies • Important events taking place after the statement date
Maybe, Think most of the exposed accounting was FASB clean. The real issue was whether execs believed in the sustainable sales growth they were touting. Much of the pre-Q2 sales growth depended on gimmicks like expanding contract lengths and accelerating bookings (EDA cards) rather than on expanding actual tool usage within customers. Cadence management shared relevant info on "turns" business, factoring, but analysts, etc. didn't seem to see any apparent risk.
What's interesting is that some analysts continue wish for "2007 levels of business" seemingly without reflecting on how they were snowed by the unsustainable level of business in 2007, even though the evidence of revenue acceleration was right under their nose:
In a report to its clients Wednesday, J.P. Morgan said replacing Fister was in the company's best interest.
"We think this was a necessary step to show employees, customers and investors how serious the board is on making sweeping changes to bring Cadence back to the levels of business it was generating" in early 2007, it concluded.
Paragraph 83 of FASB Concepts Statement 5 states that revenue is not recognized until earned. Revenue is considered earned when the entity has substantially completed what it must do to be entitled to the benefits represented by the revenue.
Selling EDA cards and recognizing them as revenue before they were used is not in compliance with GAAP. It is fine to add the proceeds to cash balance but they should be recognized as unearned revenue till they are actually used. Even Apple does not recognize the iPhone revenue at the time of sale.
The question that should be asked is whether or not the management clearly stated the new accounting procedure (Consistency) and its impact on the current and future income statements and balance sheets in their annual report to stockholders. If they have not, they kept relevant information (Materiality) from stockholders, which can be considered a violation.
I am sure it will become a big issue particularly if the golden parachutes are big.