Revenue Recognition Issues in Telecom Industry Essay

1663 Words Jan 12th, 2011 7 Pages
Wrong Number: Telecom Tricks
The telecommunications industry had its own bizarre take on revenue recognition during the boom. From 1997 to 2000, Global Crossing took on over $7 billion of debt to lay 1.7 million miles of fiber-optic cable to transport data via the Internet. When completed in summer 2001, the network spanned 27 countries and 200 major cities around the globe. The company’s debt load didn’t seem to faze investors—Global Crossing’s market capitalization reached $40 billion in 1999. But then other carriers entered the market, worldwide economic growth began to slow, and Internet usage, while growing fast, was not taking off quite as fast as company management had expected.
As a result, demand for Global Crossing’s
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Compounding the deception, Global Crossing, Qwest, and other telecom companies would record the sale of capacity as revenue without recording the offsetting purchase of capacity as an expense. Instead, the purchase was capitalized. Rather than being posted on the income statement as an expense, deductible immediately from earnings, it was listed on the company’s balance sheet as a capital investment, its value being gradually reduced, or amortized, over several years. The maneuver increased reported profits by completely mischaracterizing the transaction, treating the payment of cash for capacity as if it were an investment instead of an expense.
The telecoms can no longer disguise the fact that they already have more than enough fiber-optic capacity, and so do all their competitors. They can no longer pretend that swaps of this useless, unwanted commodity have any real value, any more than they can pretend that the fiber-optic capacity they own is still worth what they paid for it. They must acknowledge the reduced value—or impaired value, as accountants say—by reducing their earnings by an amount equal to the decline in value of their fiber-optic assets. And since the SEC ruled fiber-optic swaps invalid in 2002, the telecoms must also restate previous revenue and earnings reports pumped up by swap transactions. For example, Qwest was required to reverse $950 million of revenue

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