Flu vaccine shortage due to revenue recognition rules?
When I saw the WSJ headline "Death by Accounting" I was skeptical that accounting was somehow responsible for the flu vaccine shortage. The artticle discussed the ramifications of SAB 101 on bill and hold revenue recognition issues. The vaccine industry is an excellent example of a bill and hold situation, vaccine companies receive a lot of money upfront in payment for vaccines that will be sent out later. However the revenue for these prepaid vaccines can not be recognized until the vaccines are "delivered".
I am still skeptical after reading the article. Companies increase value by taking on positive NPV projects not because they recognize revenues this period as oppossed to a later period. In fact some of the quotes in the article are just plain wrong, take for example:
The upshot of this policy is that no matter how much cash the government puts in vaccine-makers' hands for making drugs for the stockpile, they cannot include this money in their official sales until it is actually delivered to doctors when and if there is a disease outbreak. This period can last more than a year. While one part of government is urging manufacturers to have a reserve on hand for a flu outbreak, another is telling them that they won't show any gain on their books for doing so. In fact, companies that contribute to the stockpile will take a paper loss for this part of their business, because the SEC is not about to let them postpone "recognition" of their costs of making the vaccines. And because of other regulations and trial lawyers always eager to pounce on "deceptive" accounting, it is difficult for companies to communicate with investors about this distorted earnings picture.
Is the author really suggesting that if a drug company explained to its shareholders the revenue recognition policy behind the stockpile program and clearly disclosed it in its financial statements that it would be sued for "deceptive" accounting?
I am still skeptical. I imagine what the SEC wants to prevent is a drug company that is not going to meet its earnings number dump a bunch of vaccines into the national stockpile so that it can recognize revenue.
I am still skeptical after reading the article. Companies increase value by taking on positive NPV projects not because they recognize revenues this period as oppossed to a later period. In fact some of the quotes in the article are just plain wrong, take for example:
The upshot of this policy is that no matter how much cash the government puts in vaccine-makers' hands for making drugs for the stockpile, they cannot include this money in their official sales until it is actually delivered to doctors when and if there is a disease outbreak. This period can last more than a year. While one part of government is urging manufacturers to have a reserve on hand for a flu outbreak, another is telling them that they won't show any gain on their books for doing so. In fact, companies that contribute to the stockpile will take a paper loss for this part of their business, because the SEC is not about to let them postpone "recognition" of their costs of making the vaccines. And because of other regulations and trial lawyers always eager to pounce on "deceptive" accounting, it is difficult for companies to communicate with investors about this distorted earnings picture.
Is the author really suggesting that if a drug company explained to its shareholders the revenue recognition policy behind the stockpile program and clearly disclosed it in its financial statements that it would be sued for "deceptive" accounting?
I am still skeptical. I imagine what the SEC wants to prevent is a drug company that is not going to meet its earnings number dump a bunch of vaccines into the national stockpile so that it can recognize revenue.
posted by Don Pagach at 1:19 PM
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