revenue recognition examples

8/11/2019 Revenue Recognition Examples

1/7

Revenue RecognitionAdditional Reading Material


2/7

Copyright 2011 Deloitte Development LLC. All rights reserved.2 Footer

Copyright 2012 Deloitte Development LLC. All rights reserved.

Revenue Recognition: Computer AssociatesHolding Quarter Open

Computer Associates

Designs, develops, markets, licenses, and supports software productsworldwide

SEC complaint alleged among other things:

CA Prematurely recognized over $3.3 billion in revenue from January1998 through September 2000

o Involved at least 363 software contracts that the company or itscustomers had yet to execute

Delayed the quarter closing and included revenue from subsequent

periodso Known internally as 35-day months

Revenue was overstated by 25%, 53%, 46% and 22% for the 1st, 2nd,3rd and 4th quarters of 2000, respectively


3/7



Revenue Recognition: Computer AssociatesHolding Quarter Open

RESULTS

Agreed to a settlement of $225 million for restitution to shareholders

Corporate governance and financial accounting controls reform

Indictments

Sanjay Kumarformer CEO and Chairman of the Board

Stephen Richardsformer Head of Worldwide Sales

Stephen Woghinformer General Counsel

Pled guilty to securities fraud conspiracy and obstruction ofjustice charges

SOURCES: SEC Litigation Release 18891 and U.S. Department of Justice Press Release, 9/22/2004


4/7



Revenue Recognition: Homestore.com, Inc.Round-Trip Sales

SOURCE: http://www.sec.gov/news/press/2002-141.htm

Excerpt from the SEC Complaint:

Bogus Barter Transactions. Throughout 2000 and 2001, Homestore's sale ofonline advertisements was one of its primary revenue sources. Homestoreengaged in a series of complex round-trip barter transactions to inflate revenuesand meet Wall Street estimates. The essence of these transactions was acircular flow of money by which Homestore recognized its own cash as revenue.Specifically, Homestore paid inflated sums to various vendors for services orproducts; in turn, the vendors used these funds to buy advertising from twomedia companies. The media companies then bought advertising fromHomestore either on their own behalf or as agents for other advertisers.Homestore recorded the funds it received from the media companies as revenuein its financial statements, in violation of applicable accounting principles.


5/7





As a result of a significant revenueshortfall in the first quarter of 2001,the company devised a plan to usea major media company as anintermediary in some round-triptransactions. The overall schemerequired Homestore to "refer"vendors to the media company,and the vendors to purchaseonline advertisements from thatcompany. In return, the majormedia company purchasedonline advertising fromHomestore for which the mediacompany acted as a media buyer.


6/7





Using this structure, Homestore paid a total of $49.8 million to various vendorsin the first two quarters of 2001. These vendors then paid $45.1 million to amajor media company to purchase online advertisements. Homestore, inturn, recorded $36.7 million in revenue from the major media company'srelated purchase of Homestore online advertisements.In short,Homestore recycled its own money to generate revenues. Homestore used

this same general plan with another media company in the second and thirdquarters of 2001 to fraudulently recognize an additional $9.7 million inrevenue.


7/7Copyright 2011 Deloitte Development LLC. All rights reserved.7 FooterCopyright 2012 Deloitte Development LLC All rights reserved

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms,each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure ofDeloitte Touche Tohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globallyconnected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clientssucceed wherever they operate. Deloitte's approximately 170,000 professionals are committed to becoming the standard of excellence.

This publication is for internal distribution and use only among personnel of Deloitte Touche Tohmatsu Limited, its member firms, and their relatedentities (collectively, the Deloitte Network). None of the Deloitte Network shall be responsible for any loss whatsoever su stained by any personwho relies on this publication.

revenue recognition examples

Documents