Company Background: Computer Associates

1583 Words Sep 27th, 2009 7 Pages
BACKGROUND
Computer Associates (CA) is an independent software company. They provide network software, PC software, database and banking applications. Under a typical licensing arrangement, customers agree to pay a license fee to CA for the right to use software for a period of time. Under the old business model it was a period of three to ten years. Under the new model it is a time frame of one month to a maximum of three years. Under the old plan, licenses fees were reported as revenue once a customer signed a contract. So if a customer signed a ten-year contract then CA would report all the revenue from the license fee in that first year. Under the new plan the license fee is spread over the term of the contract. Maintenance fees in
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2. How does the change in accounting fit with the new business model?
Under the new model they were also trying to provide more accurate Financial Statements, so CA changed its method of reporting revenues. In the past they would record revenue at the time of the contract, no matter how long the contract all the revenue would be booked in that quarter. Under the new plan the revenues would be recognized ratably over the life of the contract. The risk with presenting a new way of accounting is it is difficult to compare the past and the future. Also with such huge differences in revenue it raises suspension if things were done right in the past. One of the biggest discrepancies was that in 2000, before the change, CA reported a profit of $696 million; now after the change in 2001 the company reported a loss of $591 million. CA’s reasoning for the change was that it related to the change in reporting the license-fees revenues. But this reasoning was still not acceptable with some shareholders and it raised suspicion.
3. Do you agree with the company’s decision to produce pro forma earnings numbers?
I think by CA 'S decision to produce pro forma earnings numbers they were just opening the door to tons of critism and accusations. Pro forma earnings numbers have no real rules; the company can essentially pick and choose what they want to be in those Financial Statements. The SEC is

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