Did Palm Fudge Last Quarter's Sales Numbers?

According to The Street, Palm Inc. may have used an accountant's trick to make last quarter's earnings look better than they really were. The accounting involved is a bit murky and not all experts agree that what Palm did was unusual.

In summary, Palm put the reduction in its revenue from offering a rebate on the Palm IIIxe into its third quarter earnings, not its second quarter when the devices were shipped to distributors. This made revenues in Palm's most-watched quarter look better than they would with the rebate factored in.

Like many companies, Palm credits revenue on a unit once it's shipped to distributors, not when it's purchased by the end user. Therefore, revenue for all units shipped during the second quarter, which lasted from September 1 to December 1, were booked in the second quarter, including units that were actually purchased by consumers in the fiscal third quarter during the holiday shopping season.

Jim Kroeker, a fellow at the Financial Accounting Standards Board (FASB), says "if an agreement was made with distributors in the second quarter to plan a rebate in the third quarter, then [the cost of the rebate program] should be recognized in the second quarter." FASB is the private sector organization that establishes standards of financial accounting and reporting.

Palm didn't announce the rebate until the fiscal third quarter, and that's why it says the rebate must be accounted for in that period. GAAP guidelines say the reduction must occur in the quarter in which the rebate is offered to end users, or consumers, says Bruner.

"A rebate is a normal part of doing business," says Chief Financial Officer Judy Bruner. "It's surprising that it's the topic of a story."

In an effort to stamp out further criticism, Palm issued a press release this morning pointing out that it was following approved accounting practices. It says, "Palm records distributor rebates when the related revenues are recognized. However, the rebate program discussed in this article was not a distributor rebate program, but rather a coupon offer made available to end user customers".