Why would anyone buy shares of a company where approximately 86% of all fiscal year 2014 revenues could be considered “Barter” revenues? A company whose largest shareholders voluntarily sold the entire company for just $1M to a penny stock company in 2010 and which is now trading at a staggering almost 25X ttm revenue or a fully diluted $50M market capitalization on the heels of share count being up over 100% in the last 12 months and with management paying themselves well over a million dollars a year in cash compensation while almost all of their revenues were non cash? Can’t say you weren’t warned. The recent article, "AudioEye, when things aren't what they seem" laid it out pretty clearly.
BARTER Revenues
"Strong reasons exist for rejecting permissibility of barter transactions as revenue. This paper argues that barter is a poorly measurable, imprudently and carelessly considered management practice that can produce deterioration in the revenue generating cycle. If a seller accepted bartered goods or services and reported this as revenue because it wants to use assets to exchange for a future good or service, receiving payment in anything else similar in fair value other than what is realizable in the money of account and claims to it, the circumstances of the barter exchange breach the earnings cycle for the unforeseeable future. Based on that, barter transactions have failed the revenue test, while also perhaps failing the arms length, arms’ length, fair value assumption on which the public reporting model is based.
The use of and reporting barter transactions as revenue promotes a management notion that it can engage in commerce while ineffectively pricing and, in turn, charging others for the goods and services it provides, meanwhile disserving its stakeholders and non management shareholders. Including barter in revenue further promotes the notion that management can avoid establishing optimal pricing for its goods and services, yet desiring to engage in a commercial environment that functions on cash and readily exchangeable equivalents.
Including barter transactions in revenue fails to complete the revenue cycle with respect to realized-realizable. It is inferior for measurement purposes and fails to produce cash on which the company and employees rely for operating activity and remuneration purposes. Employees, nonmanagement shareholders, and stakeholders of such enterprises are finding that the flawed pricing and costing practices of businesses do not contribute to society in the meaningful way the stakeholders desire. The result becomes a progressive moral hazard, with associated market scams that enrich a few insiders, while fleecing the ordinary investor and the less powerful stakeholders.
When barter reporting issuers participate in the equity markets, as under the deceit of ‘new economy’ companies, their shares tend to attract (pirate) market ownership at the expense of other listed issuers and investors who own shares in more substantial companies that have been harmed partly resulting from the ‘new economy’ propaganda. NASD, NYSE, and the other organized exchanges should not list companies that attempt to sustain themselves by using market liquidity schemes. Such practices should provide a red flag to regulators. To attempt to erode the reporting model, however, so as to give the appearance that such companies are earning sufficient revenue to sustain their operations is a larceny to the ordinary investor, as well as a commercial failure. When virtually the entire dotcom sector practiced barter, the deceit rises to the level of a grand scale fraud to satisfy the self-dealing and self- enrichment interests of a few managements; private equity and venture capital investors, and investment bankers who are looking to cash out in a ‘take-the-money-and-run’, pump-and-dump scheme.
Financial statements under the barter scenario are too subjective for comparison and leaving the company shareholder lawsuits. Use of such practices, and expecting the reporting model to contort accordingly, also presumes that the market is either efficient and the share price of a barter user accurately reflects the company’s worth, or inefficient -- to give them an advantage -- with the latter being more true as market players during the bubble bought anything whether or not management reported GAAP and the stock buyer knew that. Management practicing barter as part of its revenue model assumed the markets were inefficient and opaque because in disingenuously reporting its status, it felt the ‘investor’ would think more highly of their stock and buy it. Meanwhile, there was no logic to most equity buying during the Bubble; management could have reported anything and people still would have bought (shares).
The FASB should end the debate with an effective definition for revenue recognition that excludes from the reporting model barter transactions as components in revenue. Users of accounting statements are looking at far more craven frauds within accrual accounting, where the reporting model itself deceives the user on the true status of the publicly traded enterprise, similar to the dotcoms and Enron using common shares sales to generate cash flow for operating, and as collateral for off-balance sheet activity practiced during, and simultaneously producing the bubble.
As a result, we should reject the use of barter in the revenue recognition model and keep high the 'bar' (that is, the quality of revenue and the recognition and quality of financial reporting). Any method used to report barter revenue permits a lowering of the reporting bar."
