Cash Flow

Time Warner Restates

A 2005 SEC settlement leads to discovery of $584 million in revenue-recognition errors stemming from advertising transactions with 15 other companies.
Stephen TaubAugust 18, 2006

Time Warner has said it will restate its financials going back more than six years to reflect changes in the accounting for certain transactions. The restatement was announced following the completion of a review by an independent examiner as part of the company’s prior settlement with the Securities and Exchange Commission, according to the company.

The March 2005 settlement required Time Warner to appoint an independent examiner who was to review accounting treatments for select transactions Time Warner made with 17 other companies, mostly involving online advertising. The transactions took place between June 1, 2000, and December 31, 2001, and included three cable programming affiliation agreements with related online advertising elements. The total advertising revenue recognized by the company under these transactions was roughly $584 million.

Under the terms of its SEC settlement, Time Warner is required to restate any transactions that the independent examiner determines were accounted for improperly. According to company filings, the independent examiner concluded that certain transactions under review with 15 companies, including the three cable programming affiliation agreements, had been accounted for improperly because the historical accounting did not reflect the substance of the arrangements.

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As a result, Time Warner will restate its results for the six-year period ended 2005, and for the six months ended June 30, 2006. In addition to reversing the recognition of revenue, the company is required to record corresponding reductions in the cost of the products or services that were acquired, and in investments that were made at the same time as the execution of the advertising agreements.

The independent examiner also concluded that certain marketing expenses were not recognized in the appropriate accounting period.

The effect of adjusting the accounting treatment is a net income reduction of about $1 million in 2000, and about $161 million in 2001. In addition, net income will be increased by approximately $62 million in 2002, $18 million in 2003, $30 million in 2004, $16 million in 2005, and roughly $15 million for the first six months of 2006.

Time Warner earned $2.9 billion in 2005, and nearly $3.4 billion the previous year.