DD Support Board and Research Team

[OMOLIVES]

? I told you..it is offset with deferred revenue. You don't have to like it..but you have to understand it. Refer to Quest Software's SEC comments...:

https://www.sec.gov/Archives/edgar/data/1088033/000119312509111855/filename1.htm

We note your disclosure on page F-11 where you indicate that there are circumstances for which you are unable to recognize revenue related to sales transactions that have been billed but the related receivable has not been collected. You also indicate that while the receivable represents an enforceable obligation, for balance sheet presentation purposes, you offset the deferred revenue with the related accounts receivable. Please describe further the type of transactions for which you apply this accounting. Also, tell us how you determined that it was appropriate to net the deferred revenue against the related accounts receivable and please provide the authoritative guidance you relied upon when making this determination.



We offset deferred revenue with the associated accounts receivable obligations in connection with our sales of licenses and first year PCS for any contracts which required deferral as of the end of a reporting period under SOP 97-2. For example, with respect to transactions with resellers that are deferred, the deferral of license revenue is the result of the Company’s consideration of the provisions of paragraph .30 of SOP 97-2. The Company believes the terms of these arrangements result in a customer account receivable at the time of delivery of the licensed software that is enforceable and that should be recorded in its consolidated balance sheet. A corresponding amount is recorded at the time of the transaction as a component of deferred revenue. Because the Company has a legally enforceable transaction and the right to bill for products and services provided, the Company believes that its initial recording of an account receivable and a corresponding amount of deferred revenue is appropriate....

....The Ernst &Young SOP 97-2 manual titled Financial Reporting Developments: Software Revenue Recognition, an Interpretation, paragraph 26-5, page 128, indicates net treatment of deferred revenue and accounts receivable is acceptable. The manual states “it is not appropriate to record a receivable, and an offsetting amount of deferred revenue, when fees associated with a software licensing arrangement are not 1) fixed or determinable or 2) collectible.” The manual further states, “As the basic criteria for revenue recognition have not been satisfied and no amounts have been collected from the customer, neither party has completed its obligations pursuant to the arrangement. Accordingly, for accounting purposes the arrangement should be accounted for in a manner similar to any executory contract under which neither party has performed. In such cases, neither a receivable nor a payable should be recorded in the vendor’s financial statements until cash is received or the basic criteria for revenue recognition have been satisfied.”

We note that Statement of Financial Accounting Standards No. 48, Revenue Recognition When Rights of Return Exists (SFAS 48) states in paragraph 6, “Sales revenue and costs of sales revenue and cost of sales that are not recognized at the time of sale because the foregoing conditions are not met shall be recognized either when the return privilege has substantially expired or if those conditions are subsequently met, whichever occurs first.” While Quest’s sales are generally not subject to return, this authoritative literature would effectively result in the deferred revenue for such sales with return

We have also reviewed interpretive guidance published by additional Big Four accounting firms indicating that advance billings should be presented on a net basis, such that no amounts are recorded on the balance sheet.

The Ernst &Young SOP 97-2
Question 4-42 ; page 145



Sorry..the last word was cut off..it says.. "satisfied".

Now refer to FASB 48..and the CCH Revenue Recognition Guide.



So yes...it is GAAP..and if you do not agree with such...take it up with the FASB :)

Accounting is very similar/same to law..if not the same damn thing. It is not necessarily all black and white for it is interpretive.