There are concerns that many software companies will be taking significant hits against their net profits over the next couple of years as the move to conservative revenue recognition is enforced in the US. Informix Software Inc recently reported a UKP46m year-end loss as it adopted the accountancy practices that prevail in other industries. Following this report there has been speculation that Oracle Corp, not known in the past for revenue recognition approaching the conservative, may stand to take a significant blow to the chin. The change in accountancy practice basically means that companies recognise revenue only upon shipment of product as opposed to when the contract is signed. Mike Musson, director of investor relations at Oracle Corp, maintains that Informix took such a proportionately large knock because most of its revenues come from OEM sales, whereas Oracle earns less than 5% of its revenues through OEM sales. The bulk of Oracle revenues come from direct sales, says Musson, where revenue is usually recognised on shipment. On the occasions where revenue is recognised on the signing of a contract, say when a customer has decided on Oracle but not on the hardware environment, Musson believes that Oracle could get round the problem by shipping a master copy of Oracle on optical disk, which the user would then copy to the chosen hardware. The other area where more conservative revenue recognition may hit Oracle is in its maintenance – customer support is recognised conservatively, but with upgrades, the full contracted amount is recognised at upgrade time. However, Musson believes that upgrades do not constitute a material percentage of Oracle’s revenue. Moreover the American Association of Certified Public Accountants has not come up with its final proposal apropos revenue recognition for software companies and it seems suffice to say that Oracle is lobbying hard and its voice will be heard. Musson says that the company is not planning on changing revenue recognition, but believes that if it has to it will not affect net income by more than 10% and will not appear in Oracle’s figures until fiscal 1993.
