Accounting & Tax

FIN 46 Costs Cisco $567 Million

The new accounting rule applies to off-balance-sheet assets.
Stephen TaubFebruary 5, 2004

Cisco Systems Inc., the world’s largest maker of switching and linking equipment for computers, reported a 15 percent rise in second-fiscal-quarter sales, to $5.4 billion, the highest in three years.

The company’s earnings were penalized by $567 million, however, because the company complied with a new accounting rule that applies to off-balance-sheet assets.

After a one-quarter delay, Financial Accounting Standards Board Interpretation No. 46 (FIN 46) went into effect for companies’ first financial reporting period ending after December 15, 2003. FASB issued FIN 46 in January 2003 to prevent companies from using off-balance-sheet partnerships and other special-purpose entities, or SPEs (which the board now calls variable interest entities, or VIEs) to hide debt and inflate profits, as Enron is alleged to have done in particularly aggressive fashion.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Cisco’s charge relates to the estimated value of stock options granted to the 270 employees of Andiamo Systems Inc., the Cisco-funded start-up that makes networking gear to connect corporate data centers. Cisco had treated its entire investment in Andiamo as a research and development cost, as if such expenses constituted the development costs of the company. But under FIN 46, Cisco was required to consolidate Andiamo, and it recorded a non-cash charge of $567 million for compensation and acquisition-related expenses.

Cisco agreed to buy Andiamo in August 2002 and plans to complete the purchase by the end of July.