Broadcom Ponders Accounting Changes

Auditor advises chipmaker to deduct value of warrants from revenue.
TheDeal.comMarch 8, 2001

Broadcom Corp. may consider changing how it accounts for performance- based stock warrants issued to customers of acquired companies in the face of canceled customer contracts, Wall Street criticism, regulatory scrutiny and shareholder lawsuits, says TheDeal.com.

The communications chipmaker, defended the warrants as “aggressive marketing practices” as recently as last week, but late Tuesday its outside auditor, Ernst & Young International, advised it to consider a different accounting practice.

While in negotiations with an acquisition target, Broadcom would encourage the target to issue stock warrants to its startup customers as an incentive to continue purchasing products, TheDeal.com says. Broadcom would then assume those warrants and purchase agreements when the merger closed.

Broadcom classified most of these warrants expenses as goodwill, but critics argue that warrants should be offset against revenue instead because they amount to no more than product discounts, the Web site says.

On Tuesday, Broadcom said it was considering taking the value of the earned warrants during each period and treating it as a revenue deduction earned under the purchase agreements for any given quarter.

The company adds that the change of strategy comes on the heels of 3Com Corp. terminating a purchase agreement that involved the warrants and the potential that the current market slowdown will lead more customers backing out.

Ernst & Young is consulting with the SEC on which accounting route Broadcom will take.

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