Informix Revenue Recognition
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Re: Group 2 - Case 2.1 “Software Revenue Recognition: Informix Corporation”
Companies following GAAP can manage earnings by simply altering its accounting policy to select those accounting principles that benefit them the most. Entities have a host of reasons for selecting those principles that will paint the rosiest financial picture. Some would argue that the market demands it, as reflected by the stock price punishment for companies that differ by as little as one penny per share from prior estimates. External market pressures to “meet the numbers” conflicts with market pressure for transparency in financial reporting.
Most fraudulent financial reporting schemes involve “earnings management” techniques, which inflate earnings, create an improved financial picture, or conversely, mask a deteriorating one. Premature revenue recognition is one of the most common forms of fraudulent earnings management and the case of Informix Software Inc. unfortunately illustrates closely this practice.
The analysis of this case will shed light on issues like:
v Informix’s revenue recognition policy prior to 1990 and its compliance with FASB Concept #5, FASB Statement #86, GAAP protocols.
v Informix’s reactions to AICPA SOP in changing the revenue recognition procedures and Informix’s reason to prematurely and voluntarily implement the new policy
v The changes that took place at Informix and the financial results reported during 1990
Furthermore, we will also evaluate the software industry practices and the regulations in place at that time. We conclude with lessons learnt and recommendations towards identifying and discouraging non-GAAP revenue recognition practices.
1986-1990 Revenue Recognition Policy at Informix Corporation
REVENUE RECOGNITION POLICY BEFORE THE PROPOSED AICPA SOP
Prior to 1990 the software industry had the FASB Statement of Financial Accounting Concept No.5 and the FASB Statement No. 86 to provide guidance in the revenue recognition concepts. The Accounting Research Bulletin (ARB) No. 45 which discussed long-term construction type contract was also available but did not specify application for the software industry and so it was ignored.
Before 1990 (refer exhibit 1) Informix recognized ...
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...nbsp; ($1,503.00) ($327.00)
Net Income(Losses) $0.00 ($10,311.00) ($11,146.00) ($1,503.00) ($327.00)
Income per Share Before Extraordinary Items $0.00 ($0.80) ($1.00) ($0.13) ($0.05)
Net Income (Loss) per Share (Fully Diluted) $0.00 ($0.80) ($0.94) ($0.12) ($0.03)
Total Assets $0.00 ($32,102.00) ($17,173.00) ($3,411.00) ($573.00)
Long-Term Obligations $0.00 $0.00 $0.00 $0.00 $0.00
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