Accounting & Tax

Synopsys in the Clear on SAB 108 Probe

Company says it has survived the SEC's scrutiny of its plans to correct errors in share-based compensation using SAB 108.
Stephen Taub and Tim ReasonJune 18, 2007

Synopsys said Monday that the Securities and Exchange Commission has completed its review of the company’s plans to apply Staff Accounting Bulletin (SAB) 108 to correct errors in share-based compensation and has ” no further comments.”

SAB 108 is the method prescribed by the SEC for correcting errors that, while immaterial from reporting period to reporting period, may ultimately add up to a material error. Synopsys, which makes design software for chip makers, disclosed in its 2006 annual report that applying SAB 108 instead of the method it had historically used would result in a correction to errors that had built up in its accounting from 1999 to 2004. It estimated that the total correction, which involved the calculation of share-based compensation and fixed assets, would total $11- to $15-million.

On February 5, 2007, and again on April 11, the SEC’s Division of Corporation Finance sent the company letters inquiring about its plans to apply SAB 108. One of these letters asked the company to provide “a materiality analysis” under SAB 99 with respect to these errors, including both qualitative and quantitative factors.

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“We have responded to the Staff’s comments and reiterated our position that the unbooked errors were immaterial,” the company stated in its most recent quarterly filing. On June 12, the SEC staff sent a letter saying it had completed its review — which typically means that the regulator has found no problems with the company’s planned application of a rule.

Issued in September 2006, SAB 108 required that companies apply two different tests to determine whether an error is material. In the past, companies had used one of the two. Under the so-called rollover approach, also known as the “current period” or “income statement” approach, the error was quantified as the amount by which the current year income statement is misstated. But by relying exclusively on this approach, companies would introduce an error in their balance sheet. Over time, that error can grow so large that correcting it would materially distort their financial statements. It was, in fact, this very quandary that led SEC staff to seek a better solution.

The “iron curtain” approach, also known as the “cumulative” or “balance sheet” approach, quantifies the error as the cumulative amount by which the current year balance sheet is misstated. But, just as the income statement approach can introduce errors into the balance sheet, so the balance sheet approach can cause companies to disregard the impact that correcting a past error might have on their current income statement.

Given the drawbacks of both approaches, the SEC issued SAB 108, which instructs accountants to evaluate whether an error is material based on the higher result of those two approaches.

In its financial filings, Synopsys noted that it had historically used the rollover approach, and that, while it believed it had done so appropriately, applying SAB 108 would resulted in a correction to misstatements of share-based compensation and fixed assets in the year’s 1999 to 2004.

In February, the SEC made a simliar request for information from Adobe Systems about that company’s plans to apply SAB 108 to errors related to option grants.