Back on June 25, I wrote a short post
where I wondered why no one was questioning PeopleSoft's "Customer Assurance Plan" from a revenue recognition perspective. As a tactic against Oracle's takeover bid, PeopleSoft has been writing into new license contracts a contingency that PeopleSoft will rebate two to five times the license cost in the event that PeopleSoft is acquired and support for PeopleSoft products is reduced. But accounting standards generally do not allow you to recognize a sale if the customer has the right to rescind the purchase. At a minimum a company is required to fund a reserve to cover the contingency. So I questioned how PeopleSoft could legitimately recognize 100% of the revenue from new license sales that carried the promise of a rebate.
Now Oracle is raising the same question. And PeopleSoft is refusing to comment on whether the SEC is investigating the matter. CBS Marketwatch
, in analyzing the situation, quotes Parveen Gupta, an accounting professor at Lehigh University, "Conceptually, the rules are simple. It's OK for you to recognize a sale in case there is the possibility of a refund, as long as you estimate and recognize it as a deduction."
On the other hand, PeopleSoft might be on solid ground. The San Jose Mercury News sought out the two accounting experts that Oracle named to substantiate its position and couldn't get them to support Oracle's position
. One declined to be quoted, saying he had not been fully informed of the details of the PeopleSoft's rebate offer. The other, Fin Most, a partner with Ernst & Young, would not comment because Oracle is a client. But his general comment on the accounting treatment of revenue recognition and rebates was somewhat less than a ringing endorsement of Oracle's position: "It is an incredibly complex assessment of what literature to use,'' he said. "And then it's quite subjective and open to interpretation.''