It’s like the old problem of the tree falling in the forest: if your positive earnings never get reported to the public, did they even make a sound? It’s a dilemma that has faced several companies stymied by SEC Compliance & Disclosure Interpretations that forbid them from reporting “Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP.” Video game maker, Take-Two Interactive Software Inc., is the latest to issuer to be frustrated by the prohibition, and like others before it, is getting creative in finding a workaround.
With the filing of its latest quarterly report, New York-based Take-Two didn’t just let the GAAP numbers in its filing speak for themselves. Instead, the maker of Grand Theft Auto, Red Dead Redemption, and the NBA 2K series, gave the financial reporters covering it something of a cheat code. With its earnings report on August 5, Take-Two also provided journalists with detailed instructions on how to calculate its earnings per share to include deferred revenue.
Take-Two isn’t alone here, although it has taken a more subtle and sophisticated approach than others. MarketWatch has reported, for instance, on incidents involving BlackBerry Ltd. (which took the unabashed approach of including a non-GAAP revenue number right in the headline of its press release) and ADT Inc. (which absorbed a $100K fine for citing non-GAAP numbers before asking the press to calculate them). Take-Two is actually walking in the footsteps of fellow game-maker Activision, which got a warning from the SEC to stop including deferred revenue in its non-GAAP numbers before it relented and drew the media a roadmap instead.
The SEC corresponded with Activision back in 2016, but the issue may be cropping up anew for Take-Two and others because of the overhaul of revenue recognition rules—and the reluctance of issuers and analysts to reckon fully with those changes. The new rev rec rules took effect for issuers at the start of their fiscal years beginning in 2018. Take-Two complied with the new rule only on a “modified retrospective” basis, which means that it “didn’t spend the time or money to recast financial data for periods prior to April 1, 2018, to allow for valid analysis and comparison.”
Our most recent report on the adoption of revenue recognition rules found that almost all other public companies chose the same path. But now, that choice is complicating life for Take-Two, which would like its non-GAAP numbers (including deferred revenue) to be out in the public sphere precisely because analysts have continued to base estimates on its old methodology.
The SEC is showing signs that it has had enough with companies thumbing their noses at GAAP. This summer, the Commission has called out three companies for using potentially misleading non-GAAP earnings: Sleep Number Corp., Fiserv Inc. and Total System Services Inc.
It could be said that the agency has tacitly approved Take-Two’s more creative methodology, which has been used previously by ADT Inc. and Activision. For now, Take-Two is no doubt happy that its reporting hasn’t made too much noise at the SEC.