NEC 1, US Global Competitiveness 0
By: BJ Lawson
A friend forwarded me the following amusing article from CFO.com:
NEC Gives Up over Revenue Recognition
Company says it simply cannot figure out U.S. GAAP revenue-recognition rules, and will stop trying.
Tim Reason, CFO.com
September 24, 2007NEC 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.
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.
How great is that? Take your shares and go home, NEC. We don’t want to invest in your company, and we don’t want you to invest in us, either. Can’t figure out how to calculate revenue? You clearly haven’t found the right accountants yet, or maybe you’re just not paying them enough.
Having been in the software industry, I experienced the magic of revenue recognition and so-called “vendor specific objective evidence” firsthand. To this day, I have a tough time reading financial reports for software companies with a straight face. The system is so capricious and riddled with arbitrary complexity that the only value creation is for auditors and accountants.
Perhaps other companies will follow NEC’s lead. Between GAAP and SOX, why would you want a domestic listing?
September 28th, 2007 at 9:28 am
There are a lot of really stupid/selfish people in government