Revenue Recognition Practices (2).
Sales on a bill and hold basis involve selling products but not delivering those products until a later date.42 Sales on this basis have the effect of accelerating sales into an earlier reporting period. The following is a case in point. In its Form 10K filed 6 March 1998, for fiscal year ended 28 December 1997, Sunbeam Corporation listed the following footnote:
1. Operations and Signijicant Accounting Policies Revenue RecognitionThe Company recognizes revenues from product sales principally at the time of shipment to customers. In limited circumstances, at the customer’s request the Company may sell seasonal product on a bill and hold basis provided that the goods are completed, packaged and ready for shipment, such goods are segregated and the risks of ownership and legal title have passed to the customer. The amount of such bill and hold sales at
29 December 1997 was approximately 3 percent of consolidated revenues. Net sales are comprised of gross sales less provisions for expected customer returns, discounts, promotional allowances and cooperative advertising.
After internal and SEC investigations, the company restated its financial results, including a restated revenue recognition policy:
Revenue RecognitionThe Company recognizes sales and related cost of goods sold from product sales when title passes to the customers which is generally at the time of shipment. Net sales is comprised of gross sales less provisions for estimated customer returns, discounts, promotional allowances, cooperative advertising allowances and costs incurred by the Company to ship product to customers. Reserves for estimated returns are established by the Company concurrently with the recognition of revenue. Reserves are established based on a variety of factors, including historical return rates, estimates of customer inventory levels, the market for the product and projected economic conditions. The Company monitors these reserves and makes adjustment to them when management believes that actual returns or costs to be incurred differ from amounts recorded. In some situations, the Company has shipped product with the right of return where the Company is unable to reasonably estimate the level of returns andlor the sale is contingent upon the resale of the product. In these situations, the Company does not recognize revenue upon product shipment, but rather when it is reasonably expected the product will not be returned.
The company had originally reported revenue of $1,168,182,000 for the fiscal year ended 31 December 1997. After restatement, the company reported revenue of $1,073,000,000 for the same period a more than 8 percent reduction in revenue.
The analyst reading the footnote in the original report would have noted the billand hold practices and reduced revenue by 3 percent. This company engaged in other accounting practices tending to inflate revenue, which did not come to light until the investigation.