From AAO Weblog
Finally, a “normal” sort of SAB 108 adjustment… normal, at least, in the context of what you’d expect.
Home healthcare provider Apria Healthcare Group went the cumulative-adjustment group in their 10-K filing for 2006, with their correction of revenue recognition. It’s exactly the kind of error you’d expect to see corrected a la SAB 108: a known error for years, immaterial when viewed one way – the rollover method, in this case – but material when you look at it in the context of the iron curtain.
(If the terms “rollover” and “iron curtain” leave you scratching your head, click here for some help.)
Apria’s issue: they bill customers monthly for the use of equipment. That monthly bill is actually a prepayment on the part of the customer for the right to use the equipment for a month – but unless that billing takes place on the first day of the month, a portion of the billing is for revenue to be recognized in a subsequent month. Apria recognized revenue based on the billing, instead of the period in which the service was actually provided. The expense associated with those revenues also get recognized out of synch with the period in which the service is actually rendered, too. Net effect: early revenue and expense recognition.
To correct it, Apria established a deferred revenue account for $32.3 million and a deferred expense account for $22.7 million, implying about a 30% gross profit on such services. The after-tax effect hitting retained earnings: a charge of about $5.5 million. While any one year’s error might have been immaterial, catching up those all of the errors would have been material to any one year’s earnings.
A pretty basic principle – match revenues/expenses with the periods in which they’re earned and incurred – now being applied properly because of the amnesty provided by SAB 108. One wonders what would kind of scenario would instigate corrections everywhere if SAB 108 hadn’t come along.
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