Less than 2 in 100 registrants reported in the third quarter of calendar 2000 that they had made or expected, at that time, to make an accounting change under SAB 101, the SEC’s new rules governing revenue recognition, said Lynn E. Turner, Chief Accountant of the SEC in a speech on May 31.

In addition, 6 out of 100 registrants indicated that they were evaluating SAB 101 at that time and were not sure of the impact SAB 101 would have, if any. This means 92 percent of companies were not impacted by SAB 101, according to their third quarter disclosures.

“Despite this small percentage of registrants impacted by SAB 101, we are concerned that some companies knew what the impact of following the accounting guidance discussed in SAB 101 would be as of the end of the third quarter of 2000, but failed to provide a meaningful, transparent disclosure of such in their third quarter filing, as required,” he said. “Investors in some of these companies received an unnecessary surprise in the annual financial statements. We also have identified certain disclosures in annual filings that do not clearly explain the impact of SAB 101, or the reason(s) why a change in accounting policy was necessary.”

Turner said his staff recently completed a review of the disclosures in annual filings of companies that were required to implement SAB 101 in the fourth quarter of 2000.

“Specifically, the staff searched the annual SEC filings of over 7,000 registrants that were required to implement SAB 101 as of December 31, 2000 and found only 291 registrants that changed their revenue recognition policy,” Turner elaborated.

“Of the companies that made an accounting change, 207, or approximately 71of these companies, recorded a charge for the cumulative effect of a change in accounting principle, with the average after-tax charge for those companies approximating $14 million, or 0.9 percent of average 2000 revenues and 7.4 percent of average 2000 pretax income,” he added.

Of the remaining 29 percent of the companies, about 20 percent of them reported a change in accounting policy for revenue recognition that was expected to have a material effect on the registrants’ results of operations only on a prospective basis. “For example, some registrants in the telecommunications industry reported that they would be adopting a policy of deferring fees associated with the activation or initiation of certain telecommunications services, while deferring an equal amount of direct, incremental costs,” Turner explained. “Because an equal amount of revenues and expenses are deferred under such policy, there was no cumulative effect from the change in accounting policy to comply with SAB 101. However, the timing of recording certain revenues and expenses for these companies will be impacted on a prospective basis.”

The remaining 9 percent of the companies that made an accounting change retroactively changed certain income statement presentation or classifications, he added. For example, many of these companies changed their policy to present revenues and expenses on a net rather than gross basis.

In general, Turner said these were the most common reasons for changes in companies’ revenue recognition policies to comply with the accounting principles discussed in SAB 101, as disclosed by these companies:

• Deferral of various up-front, or prepaid, fees for which no separate earnings process had been completed in exchange for the up- front, or prepaid, fee.
• Deferral of revenue until certain non-perfunctory seller obligations were completed (such as equipment installation).
• Deferral of revenue on product sales until such products are delivered, and title transfers to the customer, rather than when shipped.
• Deferral of revenue that is contingent on the occurrence of some future event until the future event occurs (such as the achievement by a lessee of certain minimum sales thresholds).
• For the mining industry, deferral of revenue until the mined material is sold/shipped as opposed to when extracted (pursuant to ARB 43).
• Income statement classification issues (primarily gross vs. net income statement classification).

Which industries were most impacted? About 43 percent of the companies that reported a change in accounting policy in light of SAB 101 were manufacturing firms. This was followed by services, 20 percent.

Click here to read the entire speech.

Auditor Named in Raytheon-Washington Group Dispute

Bill Palmer of William J. Palmer & Associates was appointed an independent auditor by Fourth District Judge Deborah Bail in the legal battle between Raytheon and Washington Group International Inc.

Palmer’s job is to determine how much liability Raytheon’s construction division–Raytheon Engineers & Constructors–had when it was sold to the Washington Group 13 months ago.

Washington Group paid $53 million and assumed an estimated $450 million in liabilities. Washington Group claims in its lawsuit that the liabilities amounted to $700 million, which eventually forced it to file for protection from creditors.

Palmer has 30 days to make a determination once balance sheets and comments from both sides are received, according to published accounts.

Today’s Layoff News

• Airborne Inc., the holding company for shipping service provider Airborne Express, said Friday it will lay off 640 employees, or about 2.5 percent of its work force, due to weakening economic conditions.

• Palm Inc., which cut 300 regular and contract workers last month, said it will reduce its staff in its fiscal first quarter of 2002 “to bring its cost structure closer in line with business conditions.”

From the CFO.com “Brief” Case

• Uniforet Inc., a Canadian softwood lumber and wood pulp maker, said on Friday it had obtained an deadline extension from securities regulators for delivery of its financial statements for the quarter ended March 31, 2001. The company, already seeking court protection from its creditors, said it has now until July 30 to present its statements.

PSINet Inc. and 24 of its units have filed for Chapter 11 bankruptcy protection.

• More than 50 unionized drivers and warehouse workers complaining of unfair labor practices at the Dunkin’ Donuts Midlantic Distribution Center walked off the job Thursday night and picketed at the center Friday, protesting alleged unfair practices by the facility’s managers.

• PrintCafe Inc., whose business-to-business e-commerce software automates the printing process, on Friday withdrew its planned $144 million initial public offering, citing market conditions.

• Mobile telephone equipment maker Powerwave Technologies Inc. Friday set a stockholder rights plan with a 15 percent trigger. Under the plan approved by the board, all stockholders of record at the close of business June 18, will receive a distribution of rights to purchase shares of a newly authorized series of preferred stock. The rights become exercisable in the event that a tender offer for the company is announced, or an acquirer purchases at least 15 percent of Powerwave’s common stock.

• Phoenix Home Life Mutual Insurance Co. said on Friday it got clearance from regulators to convert to a publicly traded life insurance company.

• PrintCafe Inc., which provides E-commerce services for the printing industry, withdrew its planned IPO.