Did Palm Fudge Last Quarter's Sales Numbers?

Posted By: Ed Thursday, February 15, 2001 9:40:30 AM

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".

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Not a big deal.....

Los @ 2/15/2001 1:28:32 PM #

Palm is just doing what FASB and GAAP say. As a CPA, this doesn't strike me as unusual in any way. Carry on, Palm.

RE: Not a big deal.....

I.M. Anonymous @ 2/15/2001 4:52:35 PM #

Your obviously a member of Palm's PR Team. We don't care what you have to say. If Palm did fudge on its numbers, then it is a seriousl offense.

Doing a little damage control are we?

RE: Not a big deal.....

I.M. Anonymous @ 2/15/2001 5:43:24 PM #

I don't understand. Why is it that anyone who takes a position that agrees with Palm's suddenly labeled as a member of their "PR team"? The gentleman above is correct. It's not any different that what goes on with ALL companies. Earnings numbers must always be taken in a grain of salt. Unfortunately, no system is perfect.

RE: Not a big deal.....

I.M. Anonymous @ 2/15/2001 7:02:46 PM #

at least they didn't give away the product to kill competition like MSFT did with IE...

RE: Not a big deal.....

I.M. Anonymous @ 2/16/2001 12:37:28 AM #

Why do some people always bring Microsoft into the perspective? It is Palm we are talking about here. So what if Microsoft gave IE away? It's free and if you think it is not a good product, use Netscape.

RE: Not a big deal.....

I.M. Anonymous @ 2/16/2001 3:29:21 AM #

Palm's (alleged) slight of hand with the accounts is not an issue. Quarterly figures are always dubious. Serious users of financial statements (eg, analysts, bankers, etc) almost invariably make adjustments to deal with such "window dressing".

This sort of thing is really just a symptom of how arbitrary GAAP has become. Auditors often say that the accounts must show the "economic substance", but they often differ in what that means. To borrow an old joke: ask three bean-counters a question and you will get four different answers. (And the more they argue, the more fees they can charge for their so-called "advice".)

RE: Not a big deal.....

I.M. Anonymous @ 2/16/2001 1:57:49 PM #

As a matter of fact, sir - no, I am not a member of Palm's "PR team" as you put it. I am a privately practicing Certified Public Accountant in the state of Louisiana. I would, however, like to educate you a bit on Generally Accepted Accounting Priciples.

Revenue, as you may already know, is recorded in the period in which it is earned, not when it is realized. No problem here. Rebates, however, are treated as a contra account (contra-revenue, if you will) in the period IN WHICH IT IS DECLARED. If Palm already closed last period's numbers, IT IS AGAINST GAAP to go back and alter the prior period's revenue. It must be taken as a discount in the present period. Yet another reason they could not take it in the prior period is because, by nature, Palm does not know exactly how many rebates they will receive. It is up to the end user to go through the motions and actually send in the rebate. So, in a nutshell, Palm is and has always been in accordance with GAAP with respect to this issue.

Los

RE: Not a big deal.....

I.M. Anonymous @ 2/16/2001 10:46:56 PM #

OK. I was wrong, your not a Palm PR member....,but at the least, you are a Palm investor! :)

Handspring

I.M. Anonymous @ 2/16/2001 10:30:18 PM #

I stand firm on one point, if the creator of the Handspring line hadn't sold the rights to the operating system to 3com when he was there, the Palm name wouldn't be here. Why? One simple reason, THE HADSPRING IS A BETTER PDA.