Accounting & Tax

NEC Gives Up over Revenue Recognition

Company says it simply cannot figure out U.S. GAAP revenue-recognition rules, and will stop trying.
Tim ReasonSeptember 21, 2007

NEC Corp. says it is stumped by U.S. accounting rules for revenue recognition and has given up trying to comply with them.

The Japanese electronics giant says it realizes this will likely lead to the delisting of its ADR shares on Nasdaq. It also says it will not be able to file its 2006 annual report under U.S. GAAP, and that it cannot vouch for its financial statements since 2000.

Under U.S. generally accepted accounting principles, revenue-recognition rules are complicated for software companies whose contracts combine the sale of software with maintenance and service agreements. Under a GAAP standard called SOP 97-2, companies wishing to recognize the software-sales revenue up front must perform an analysis of such contracts that provides “vendor-specific objective evidence” of consistent treatment of sales and service. That analysis, which NEC says it has been unable to complete, is required before portions of revenue from a single contract can be broken out and recognized at different times.

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NEC says it is unable to complete the VSOE analysis for its auditor in time to file its annual report for the March 31, 2006, fiscal year with the Securities and Exchange Commission, and that its failure to file will likely result in its ADRs being delisted from Nasdaq. NEC had previously been warned by Nasdaq and had received an extension to September 25.

The company adds that its financial statements dating back to 2000 should no longer be relied upon; however, it says a restatement “is not practicable” because of the complexities involved in determining the adjustments that would be required. NEC notes that its financial statements under Japanese GAAP are current and are not affected by this announcement. It addition, the company says, it remains in compliance with the disclosure rules of the Tokyo Stock Exchange and the Securities and Exchange Law of Japan.