Lincare Synchs Up Revenues

From AAO Weblog

A while ago, I mentioned Apria Healthcare’s
SAB 108 adjustment to retained earnings for getting revenues
recognition (and expense recognition) in line with when revenues are
actually earned.

Not too surprising, then, that a similar company has a similar correction. As noted in their 10-K, Lincare Holdings has
practically the same issue. Slight variation: while the issue is the
timing of revenue recognition – both firms recognized revenues sooner
than they should have – Lincare has an additional factor in their
error. The didn’t record an allowance for sales adjustments (assumed to
be a form of discounting) against the accounts receivable, meaning they
were overstated:

“During the fourth quarter of 2006, the Company adopted the provisions of SAB 108 effective as of January 1, 2006. During 2006, the Company identified prior year misstatements related to recognition of deferred revenues associated with rental arrangements and the recording of an allowance for sales adjustments against accounts receivable. The Company assessed the materiality for each of the years impacted by these misstatements, using the permitted rollover method, and determined that the effect on the financial statements, taken as a whole, was not material. As allowed by SAB 108, the Company elected to not restate prior year financial statements and, instead, as permitted by SAB 108, recorded a cumulative adjustment on January 1, 2006 which increased deferred revenue and allowance for uncollectible accounts by $34.4 million and $10.7 million, respectively, and reduced retained earnings by $27.6 million. Tax adjustments totaling $17.5 million were also recorded as part of the cumulative adjustment.”

Note that the company found the error in 2006. They went back and assessed it according to one method – the rollover method, which is more permissive than applying both rollover and iron curtain assessments – and found that in each of the prior years, the amounts involved were immaterial and thus dodged restatements.

That seems to be the way firms are interpreting SAB 108, but not necessarily the way it was intended to be applied. SAB 108 permits the retained earnings adjustment “if management properly applied its previous approach, either iron curtain or rollover, so long as all relevant qualitative factors were considered.” That makes it sound like the Commission meant if the errors had been assessed all along – not just discovered in 2006 and retroactively assessed the way they would have been had the errors surfaced before.

http://www.accountingobserver.com/blog/