In a bid to stop Internet companies from overstating their numbers, the Securities and Exchange Commission has asked U.S. accounting rule makers to tighten standards governing the way Internet companies book their revenue.
For some time now, agency officials have been growing increasingly worried that Internet companies in particular, many of which are operating at a loss, are playing fast and loose with the rules.
Specifically, the SEC has found dot-com companies juicing up their numbers by including in their revenue figures the total revenues for product sales even when they merely are distributing products on behalf of other companies. Instead, the companies should be reporting in their revenue only the distribution fees they get for distributing the products.
In addition, the agency has found Internet companies booking revenue for the "free" services they provide customers. And finally, the SEC has found Internet companies wrongfully booking revenue for barter transactions in which they exchange advertising with another Internet company. In such transactions, an Internet company typically reports revenue for one ad and a marketing expense for the bartered ad, an accounting abuse the SEC wants stopped.
However, it's unclear what tightening the Financial Accounting Standards Board will do, as the FASB Wednesday postponed addressing these issues, a spokesman said. The SEC had asked the FASB's so-called emerging issues task force to look at the problems.
Even so, SEC chief accountant Lynn Turner has said that while revenue recognition represents the biggest item on the financial statement, it has the smallest amount of accounting rules governing it, so it's widely expected the FASB will make some changes.
Those changes "could lead to reductions in reported revenues for these [Internet] companies," James Marks and Lise Buyer, Internet analysts for Credit Suisse First Boston, said in a report.