Accounting & Tax

SEC Digs Into Agco’s Accounting

Revenue recognition, sales returns and allowances are among the concerns at the maker of farm equipment.
Stephen TaubFebruary 6, 2004

Farm equipment company Agco announced that the Securities and Exchange Commission has launched an informal inquiry into its accounting practices.

The probe will examine Agco’s policies for revenue recognition, sales returns and allowances, plant and facility closing costs and reserves, and personal use of corporate aircraft, the company elaborated.

Agco stated that in some instances it recognizes revenue when equipment remains on its premises after having been invoiced to the dealer. These transactions occur at a dealer’s request, added Agco, usually so the dealer can arrange for its own transportation of the equipment.

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At the end of 2003 and 2002, Agco said it had recorded sales (before discounts and allowances) of about $32.8 million and $29.9 million, respectively, where equipment was invoiced but remained on Agco’s premises.

In 2003, if Agco had recognized revenue only upon shipment of equipment, sales would have increased about $29.9 million in the first quarter of 2003 and decreased roughly $32.8 million in the fourth quarter, Agco pointed out. The impact on prior years would be similar, added the company, although the amounts would depend on the level of bill-and-hold transactions at year-end.

Agco also said it does not generally permit returns other than during annual parts-return programs or upon a dealer’s termination where applicable law requires Agco to accept the returns. The company said it provides for sales-incentive and parts-return allowances at the time of sale or at the time the program is put in place.

Addressing the issue of plant and facility closing costs and reserves, the company explained that it incurs costs and has established reserves in connection with these facility closures. These costs are reflected as “restructuring and other infrequent expenses” in the consolidated statements of operations, and the related reserve activity is disclosed in the footnotes of the consolidated financial statements.

As for the aircraft issue, the company said it permits personal use of corporate aircraft in accordance with a policy authorized by its board of directors in 1999. This use is reported to the Internal Revenue Service as compensation to the executive in accordance with IRS regulations and is taken into account — at the IRS amounts — in determining perquisites for purposes of proxy statement disclosure.

Agco added it has responded to the SEC’s inquiry and intends to cooperate fully with the investigation. In response to Agco’s announcement, Standard & Poor’s said that “based on available information, [we believe] that any potential restatement of financial statements will not be material or weaken the company’s liquidity position or ability to access capital markets.”