Wireless re accounting change in quarterly revenues
Yes during the third quarter of last year, IDCC changed the accounting methodology as to when they reported recurring royalty and earned royalty associated with prepayments from licensees. IDCC switched from the quarter actually earned to the quarter that the licensee's sales report is received. This in essence caused a delay of one quarter between when the royalties are actually earned by the licensees, and when they are recorded as earned royalty by IDCC.
However, this change in accounting was due to the shorter quarterly reporting requirements of the SEC, and not in anticipation of an arb win. Others within the industry, like Qualcomm, also switched to the sales report receipt date rather than actual earned date. A little more detail on this accounting change from the following reposts:
Posted by: rmarchma
In reply to: Desert dweller who wrote msg# 82442 Date:10/26/2004 7:01:52 AM
Post #of 117588
Ddweller re ACCOUNTING CHANGE in quarterly revenue recognition
I completely agree with your post. There is no CHANGE at all in the underlying revenue fundamentals, only a quarter delay in reporting the earned recurring per unit royalties from licensees due to narrowing time constraints being imposed by the SEC for quarterly reports. All IDCC is doing is changing to reflect recurring royalty revenue in the quarter reported by the licensee to IDCC, as opposed to the quarter in which the licensee actually made the royalty-bearing sales. Qualcomm is making this same CHANGE, no big deal at all. A repost on this matter as follows:
Posted by: rmarchma
In reply to: texb who wrote msg# 79606
Date:9/17/2004 11:10:53 AM
Post #of 82452
Texb re IDCC's quarterly royalty ACCOUNTING
IDCC currently records royalty revenue in the quarter earned for its major licensees, as opposed to the quarter reported by major licensees. IDCC usually delays its quarterly reports long enough to get the major licensee's actual quarterly reports, before IDCC issues its own quarterly report. Qualcomm reports its quarterly earnings much earlier than IDCC, and thus has to estimate a lot of revenues, because they have not yet received many of their licensees' quarterly reports.
A major licensee like NEC would report its royalty for a quarter usually within thirty days in the month following the end of the quarter. IDCC has enough time to incorporate NEC's actual quarterly royalties into its royalty revenues for that quarter. For example IDCC probably received NEC's second quarter royalty report for March through June before July 31. Since IDCC did not report its quarterly earnings until August 9, they had enough time to incorporate NEC's actual second quarter royalties into IDCC's second quarter earnings. However, IDCC might try to estimate some minor licensees, who are semiannual reporters or later filers.
From the latest 10K as follows:
"We generally recognize revenue related to Current Royalty Payments in the period in which the sales of each licensee's products occurred.
Licensees that either owe us Current Royalty Payments or have prepayment balances provide us with quarterly or semi-annual royalty reports that summarize their sales of covered products and their related royalty obligations to us. We typically receive these royalty reports subsequent to the period in which our licensees' underlying sales occurred, but prior to the issuance of our financial statements for that period. In such cases, we recognize the related revenue in the period the sales occurred.
When we do not receive the royalty reports prior to the issuance of our financial statements, we accrue the related royalty revenue if reasonable estimates of such amounts can be made. These estimates are based on the historical royalty data of the licensees involved, currently available third party forecasts of royalty related product sales in the applicable market and, if available, information provided by the licensee. When our licensees formally report royalties for which we accrued revenues based on estimates, or when they report updates to prior royalty reports, we adjust revenue in the period in which the final reports are received. In cases where we receive objective, verifiable evidence that a licensee has discontinued sales of covered products, we recognize any remaining deferred revenue balance related to unexhausted Prepayments in the period that we receive such evidence."
Posted by: rmarchma
In reply to: None
Date:10/26/2004 3:46:54 PM
Post #of 117590
Some observations on today's Conference Call
Overall I thought Fagan did a good job on this CC. The tone was more of reassurance, rather than trying to explain all the nitty-gritty technical stuff involved. I think this approach was wise; I would have hated to hear Fagan get bogged down in trying to explain tremendously complex income tax rules. Some specific things that I thought interesting from the CC as follows:
(1) Made it clear that the three items (recurring royalty CHANGE, partial reversal of the income tax valuation allowance, and income taxes associated with non-qualifying stock options) were all one-time nonrecurring events and did not affect cash whatsoever.
(2) Clearly explained the reasoning behind the CHANGE in ACCOUNTING for recurring royalty was due to time constraints imposed by recent SEC CHANGEs. Reassured that other technology companies such as Rambus and ARM had already CHANGEd to the "as reported" ACCOUNTING method that IDCC is adopting, and that Qualcomm will be changing to the as reported method also. Thus IDCC’s CHANGE in recurring royalty ACCOUNTING is just part of the industry CHANGE.
(3) Stated that the partial income tax reversal had been actively discussed for some time. The reversal amount was determined after participatory discussions with IDCC’s independent outside auditing firm of Pricewaterhouse. Thus the outside auditors reached the same conclusion as IDCC that at least part of the income tax valuation allowance needed to be reversed, and helped IDCC determine the amount of this year’s reversal.
(4) Made it clear that the $4.5m to $5m addition to income tax expense for exercising non-qualified stock options was also a one-time nonrecurring item. This was not made clear in the press release. I think it is good to go ahead a get this extra noncash tax expense taken care of all at one time, along with the other income tax CHANGE. Clears the deck so to speak, so that this item of income tax will not impact future quarters.
(4) Reassured Mike Walkley that none of these CHANGEs involved Restating any prior ACCOUNTING numbers. ACCOUNTING restatements strike fear, because they are indicative that things have been wrongly reported in past ACCOUNTING reports. That is not the case with these IDCC CHANGEs.
(5) Indicated that IDCC’s future quarterly guidance would be greatly enhanced. Said that the guidance would probably be given after the quarterly CC, and after all licensee reports had been gathered and analyzed. If IDCC doesn’t give future guidance in the quarterly earnings CC, then I wonder if they will give future guidance in a press release. The guidance for the next quarter should be very accurate though, since IDCC would have the actual licensee royalty reports in hand. No need for me to do much predicting of quarterly earnings anymore.
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