Companies are using ghost revenue to calculate executive bonuses

Companies like Symantec Corp., Broadcom Ltd., and Norwegian Cruise Line Holdings Ltd. are adding back millions in ghost revenue deferred revenue that accounting standards force them to write off after an acquisition when calculating executive bonuses.

Under acquisition accounting rules, the fair value of acquired deferred revenuesrevenues that are collected in advance of actually earning themare often less than the amount reported on the acquired companies balance sheets. The write-downs become ghost revenues for the acquiring company that are added back into revenue numbers according to Generally Accepted Accounting Principles (GAAP) to create adjusted revenue metrics that are reported to investors.

Companies say the write-downs affect comparability and result in numbers that are not representative of what they would have produced if GAAP rules didnt make them eliminate the revenue.

SEC Deputy Chief Accountant Wesley Bricker warned companies more than a year ago that any non-GAAP metrics that adjust revenue would likely receive a comment letter from SEC staff.

Companies rationale for these adjustments would be scrutinized closely, and skeptically, Bricker told an audience in New York on May 5, 2016, right after the SECs new non-GAAP guidelines were published.

In particular, Bricker criticized whats called individually-tailored accounting principles, replacing GAAP with alternate accounting just because its not allowed under the standards.

Revenue adjustments do more than just adjust from GAAP: they change the very starting point from which other performance analyses flow, said Bricker.

Read: SEC is once again guiding companies on their use of non-GAAP numbers

See: From a wrist slap to jail time: how the SEC deals with dodgy accounting

Revenue adjustments do more than just adjust from GAAP: they change the very starting point from which other performance analyses flow. Wesley Bricker, deputy chief accountant, SEC

Using data provided by research firm Audit Analytics, MarketWatch reviewed 14 companies that disclosed acquisition-related deferred revenue adjustments that always increased official revenue numbers reported according to GAAP, the standards all public companies must follow.

In nine cases the adjusted net revenue metric, typically the only adjustment made to revenue, is a non-GAAP metric that is also used when determining financial rewards for executives.

Non-GAAP adjustments or reconciliations to GAAP income typically adjust reported earnings for one-time or non-recurring items that show an improved version of company performance, said Paul Chaney, the E. Bronson Ingram Professor of Accounting at Vanderbilt University, in an interview with MarketWatch.

These companies have taken this one step further, said Chaney.

Company Ticker Permanent or Temporary Adjustment Non-GAAP drives Exec Comp
Tyler Technologies Inc. TYL, +0.50% P Y – Non-GAAP EPS
Norwegian Cruise Line Holdings Ltd. NCLH, -2.92%

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