The SEC and the company are now investigating an employee’s complaint about the practice of adding back millions in deferred revenue to calculate bonuses
BloombergGreg Clark, chief executive officer of Symantec Corp.DMAMBMCMDMEMGPREVIEWZGZQZRZSZTZU
Companies like Broadcom Ltd. and Norwegian Cruise Line Holdings Ltd. are adding back millions in “ghost revenue” — deferred revenue that accounting standards force them to write off after an acquisition — when calculating executive bonuses, an issue that is taking on new resonance after a former Symantec Corp. employee complained about the practice internally and prompted an audit committee investigation.
Last week, Symantec (SYMC) stock was hammered after it revealed it had started an investigation, and on Monday, the company said the probe had to do with “the company’s public disclosures including commentary on historical financial results, its reporting of certain non-GAAP measures including those that could impact executive compensation programs, certain forward-looking statements, stock trading plans and retaliation.”
Read:Symantec discloses more about internal investigation after stock recovers
A spokeswoman for Symantec declined to elaborate.
Acquiring companies often assign a fair value to deferred revenues—revenues that are collected in advance of actually earning them—added to their books that are less than the amount reported on the acquired companies’ balance sheets when purchasing another company. Those writedowns are called “deferred revenue purchase accounting adjustments” and are required by Generally Accepted Accounting Principles or GAAP.
The write-downs become “ghost revenues” for the acquiring company that Symantec and some others are adding back into GAAP revenue numbers to create adjusted revenue metrics that are reported to investors.
Companies say the write-downs affect comparability and result in numbers that are not representative of what they would have produced if GAAP rules didn’t make them eliminate the revenue.
SEC Deputy Chief Accountant Wesley Bricker has warned companies that any non-GAAP metrics that adjust revenue would likely receive a comment letter from SEC staff. Companies’ rationale for these adjustments would be scrutinized “closely, and skeptically,” Bricker told an audience in New York on May 5, 2016, right after the SEC’s new non-GAAP guidelines were published.
“Revenue adjustments do more than just adjust from GAAP: they change the very starting point from which other performance analyses flow,” said Bricker.
Read: SEC is once again ‘guiding’ companies on their use of non-GAAP numbers
See:From a wrist slap to jail time: how the SEC deals with dodgy accounting
Last November, MarketWatch reviewed 14 companies, including Symantec, that disclosed acquisition-related deferred revenue adjustments that always increased official revenue numbers reported according to GAAP, the standards all public companies must follow.
Other companies where non-GAAP revenue metrics have been used to calculate executive compensation include: Tyler Technologies (TYL) , Norwegian Cruise Line Holdings (NCLH) , ResMed (RMD) , Roper Technologies (ROP) , Broadcom (AVGO) , Willis Towers Watson (WLTW) and Anysys (ANSS) .
None of these companies responded immediately to a request for comment.
“Non-GAAP adjustments or reconciliations to GAAP income typically adjust reported earnings for one-time or non-recurring items that show an ‘improved’ version of company performance,” said Paul Chaney, the E. Bronson Ingram Professor of Accounting at Vanderbilt University, in an interview with MarketWatch.
Symantec said in its last annual report for the fiscal year ended March 2017 that accounting rules forced it to write down a total of $144 million of deferred revenues acquired with the purchase of Blue Coat and LifeLock.
Blue Coat was acquired in August of 2016 and LifeLock in February 2017. On the date of the acquisitions Symantec attributed $220 million of the purchase price for both companies to deferred revenues. Symantec determined that it was required to write-off $144 million of this revenue, because the cost to fulfill the service contracts and actually earn the revenue was estimated to be greater than the amount already collected.
However, Symantec has been adding back some of the written-off revenue each period since the acquisitions. In its first fiscal 2018 quarter the company adjusted revenue upward by a total of $53 million. In the quarter ended September 29, 2017, Symantec increased GAAP revenue by $36 million of these deferred revenues that had already been written off.
In its most recent earnings release, on May 10, for its fourth quarter ending March 30, Symantec said it believes that “eliminating the impact of this adjustment improves the comparability of revenues between periods” even though “the adjustment amounts will never be recognized in our U.S. GAAP financial statements.”
It also said that it had completed the acquisition of LifeLock on February 9, 2017. It also noted that, “Deferred revenue adjustments include deferred revenue acquired during the period and the change in deferred revenue related to Veritas discontinued operations.”
That gives Symantec a “cookie jar” that can be used to boost the adjusted revenue metric that drives incentive compensation, Chaney said.
Chaney says companies have one year from the acquisition to adjust the amount of the purchase price allocated to various financial statement lines like deferred revenue. For Blue Lock, that one year expired September 30, 2017. For LifeLock, the company can decide to allocate more to deferred revenue, as well as decide to write off any or all of the remaining $76 million of deferred revenue for both companies.
“Every dollar they write down can at least be put to good use as an adjustment to GAAP revenue that increases incentive awards,” Chaney told MarketWatch.
Francine McKenna is a MarketWatch reporter based in Washington, covering financial regulation and legislation from a transparency perspective. She has written about accounting, audit, fraud and corporate governance for publications including Forbes, the Financial Times, Accountancy and the American Banker. McKenna had 30 years of experience at banks and professional-services firms, including at PwC and KPMG, before becoming a full-time writer.
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