Aspen Technology said it will restate results for several years after realizing that sales contracts signed with repeat customers had inadvertently undermined its ability to treat earlier receivables as part of a securitization sale.
In a mistake that highlights just how fine the accounting line is between securitization and a borrowing, the company announced Wednesday that its mistake essentially turned its securitization into debt, and said that financial statements for fiscal 2005 and 2006 and the first three quarters of this year should not be relied upon.
Securitization is a form of financing in which a company sells the rights to its uncollected receivables to a third party — typically a special purpose entity. This gives the company an immediate upfront cash payment, which the SPE funds through the sale of bonds that are then paid back to investors as the receivables are collected. The company typically continues to collect the receivables and turn them over to the SPE. However, the transaction is not treated as a borrowing because the company is considered to have sold the receivables to the SPE, and has no recourse to them in the event the company goes bankrupt.
In a regulatory filing, Aspen Technology explained that its receivable securitizations are designed to meet this “true sale” criteria for legal and accounting purposes. But the company, which provides software to the process industries, said it inadvertently regained control of the receivables by licensing additional software to customers and consolidating the remaining balance of the older installment receivables into the new contracts. While some of the company’s securitization agreements provided limited leeway to do this, the company said it exceeded the limits. In other cases, it said, it should not have done so at all.
Under SFAS No. 140, regaining control for accounting purposes is accounted for in the same manner as a purchase of the assets in exchange for liabilities assumed, the company explained. As a result, the company conceded it must record the sold installment receivables and an offsetting liability at fair value on the date of the change in control for accounting purposes.
The company’s restatements will result in the creation of two new balance sheet captions, a collateral asset for secured borrowings and a secured borrowing liability, in the following approximate amounts: $70 million as of June 30, 2005; $80 million as of June 30, 2006; and in excess of $200 million as of March 31, 2007. The company said it is working now to finalize the dates and amounts of the assets, and will also recognize interest income and interest expense associated with the receivables.