Ghost of Revenue Past Haunts Issuers, SEC

Ebenezer Scrooge had a hard time reckoning with the ghost of Christmas past. This holiday season, a different but equally vexing demon is haunting public companies and the agency that regulates them. According to a MarketWatch analysis, the SEC is struggling to bring a consistent approach to the ghost of revenue past, as reported by Square and other issuers.

While Scrooge’s questionable accounting practices took place in the 1800s, our ghost story dates back to just 2016, when the SEC updated its Compliance & Disclosure Interpretations on the use of non-GAAP metrics in public company financial reporting. The SEC frowns on such metrics but does not prohibit them entirely. That leaves some room for companies to color outside the GAAP-defined lines. Just how far they can go is the question—one the SEC sought to clear up in a slew of comment letters after the 2016 update. On one matter in particular it seemed to speak clearly. In a 2016 speech, then-SEC Deputy Chief Accountant Wesley Bricker said companies citing an adjusted revenue number “will likely get a comment,” and said SEC staff would “look closely, and skeptically, at the explanation as to why the revenue adjustment is appropriate.”

More than three years later, the SEC continues to police non-GAAP reporting and in particular adjusted revenue. Back in April, it even called out BlackRock for reporting an adjusted revenue number the SEC did not consider kosher. The apparent bar to reporting adjusted revenue has led to certain shenanigans, like issuers withholding their preferred adjusted revenue figures but laying out loaf-sized breadcrumbs so that financial reporters can arrive at them on their own.

But now, MarketWatch is questioning the uniformity of the SEC’s approach to a certain type of adjusted revenue number: those that contain “ghost revenue.” Ghost revenue, it turns out, is just a fun shorthand term for deferred revenue that had once been permanently written off after an acquisition, but lives another day in an adjusted revenue number. (So yes, “zombie revenue” may be more apt, but we won’t quibble.)

Square is one of several companies that has included ghost revenue in an adjusted revenue number. Earlier this month, after receiving a comment letter from the SEC, Square said that it would stop reporting the metric. The comment letter is not yet public, so we can’t be certain that their issue centered on Square’s use of ghost revenue. Still, it would harmonize with the agency’s treatment of Ribbon Communications, which got a comment letter on its use of ghost revenue and agreed to remove it in future reporting.

MarketWatch points out, however, that the SEC closed an inquiry into Black Knight, Inc.’s use of ghost revenue “without asking the company to stop using that adjustment.”

The SEC’s apparent implicit blessing of Black Knight’s use of ghost revenue will be of great interest to other companies that have incorporated it into adjusted revenue numbers. According to MarketWatch, that group has included Symantec (now NortonLifeLock), BlackBerry, Salesforce, and Broadcom, among others. For them, the Black Knight example offers hope that there is not a complete bar on the use of ghost revenue, and, instead, certain conditions under which the SEC can live with it.

These companies will be watching closely this Christmas and beyond to see exactly how the SEC plans to deal with the ghost of revenue past.

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