Financial Accounting Blog

Tuesday, November 25, 2003

In, Oracle Digs Deeper, Oracle charges PeopleSoft with improperly recognizing revenue in order to make themselves look less attractive for takeover. Interesting...

Below are some excerpts from the article:
Oracle, taking its hostile bid for PeopleSoft up a notch, said PeopleSoft may have improperly recognized revenue for its September quarter, thereby inflating its sales to make it a less attractive target to Oracle.

At issue is a program PeopleSoft put in place over the summer, which promises to pay customers two to five times the cost of their software licensing fees if PeopleSoft is acquired and certain conditions, such as updates and support, are not met by the acquiring company. The company later amended the plan, saying that refunds could be triggered only by a change in minority control of the company.

The plan prompted about $156 million in incremental sales in the September quarter and heaped more than $800 million in potential liability onto PeopleSoft, which would theoretically be transferred to Oracle in the event of an acquisition. Oracle is questioning whether PeopleSoft violated an accounting rule which states a company can't recognize revenue until all contingencies are removed from the sale of the license.

That's a hard question to answer, and one that can't really be known unless PeopleSoft's contracts with its customers are examined. That is unlikely.

"PeopleSoft and their auditors have seen the documents, and the auditors are comfortable with it," says Charles DiBona, analyst at Sanford Bernstein. "But it's a legitimate issue to be raised and people should be aware of it. In my mind, it does affect the value" of PeopleSoft.