Revenue-Recognition Problems in the Communications Equipment Industry

2492 WordsNov 6, 201410 Pages
Revenue-Recognition Problems in the Communications Equipment Industry 1) In late 2000, Lucent announced that revenues would be adjusted downwards by $679m as a result of revenue recognition problems. Yet the firm’s market capitalization plummeted by $24.7bn. Why do you think the market reacted so negatively to Lucent’s announcements of the problems? The large drop in market capitalization is probably due to several factors. Historically, Lucent had successfully met analysts’ projections for 15 consecutive quarters before announcing, in January 2000, a major shortfall in profits relative to previous expectations. In June, the quarterly balance sheet reported an operating loss of $301m (for the first time since 1998) while warning…show more content…
However, due to certain revenues and expenses being non-taxable we have opted to discard the average tax rate as a suitable estimate, and assumed a corporate tax rate of 35%. In relation to the Cost of Goods Sold, Lucent faces the problem that some of their goods are tangible (communications equipment) while some are intangible (software licenses, services etc.). We are aware of the fact that Lucent’s intangible assets are subject to different costs as its tangible assets, and therefore have to be restated differently. However, we do not know the costs of neither intangible nor tangible assets due to a lack of information and thus assume a representative cost mix that is proportional to total revenues. Hence, we use the average COGS (69% of revenues in Q4, 2000) when we calculate the restatements. In the balance sheet, we treat the physical goods as “inventory”, and intangible goods as “other current assets”. Balance Sheet Sep-00 In USD millions Assets Cash and cash equivalents Accounts Receivable - net Inventories Contracts in process - net Other current assets - net Total long-term assets Total Assets Liabilities 1.467 9.558 5.677 1.881 2.907 27.302 48.792 Current Liabilities Long-term debt Other long-term liabilities Shareholders ' Equity 10.877 3.076 8.667 26.172 Total Liabilities and Equity 48.792 Balance Sheet Sep-00 - Adjusted In USD millions Assets Cash and cash equivalents Accounts Receivable -
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