In IPO filings, Twitter restated revenue policy; Twitter uses estimates to determine some of its revenue

In IPO filings, Twitter restated revenue policy

By Stephen Gandel, senior editor October 14, 2013: 9:16 AM ET

The social media company uses estimates to determine some of its revenue.

FORTUNE — Twitter changed and expanded the description of how it tallies sales from some of its advertising deals in its IPO filings. The first version of its IPO filing, or S-1, which it confidentially filed to the SEC in July but did not initially release to the public, implied Twitter did not have a consistent policy to determine how much it stated on its financial statements it got from some deals. The company said its method was still evolving. In the deals involved, it wasn’t yet clear how much Twitter would be paid from advertisers. In these cases, Twitter said it would use its “best estimate of sales price,” when tallying up figures to compute its quarterly statements. And the way it calculates those estimates could change over time.But by the time Twitter released its public S-1 in early October that section of its so-called revenue recognition policy had changed. Gone was language saying that the company was still trying to determine how to estimate Twitter’s take on these deals. In its place was a more detailed description of the types of deals Twitter was talking about and why revenue would need to be estimated. This time Twitter said it was confident in its estimation abilities. “We believe the use of [best estimate of sales price] results in revenue recognition in a manner consistent with the underlying economics of the transaction,” wrote Twitter in the final draft.

Accounting experts say Twitter wouldn’t have changed the language unless it was flagged by the Securities and Exchange Commission, which polices public corporate filings. Twitter could not be reached for comment. Companies tend not to make public comments after they have filed for an IPO, but before they have completed the deal. Under the JOBS Act, Twitter was able to file the first versions of its S-1 confidentially. It later decided to release them.

How and when companies count sales as revenue has been a growing concern for the SEC, and the accounting profession. The U.S.’s Financial Accounting Standards Board along with international regulators are in the process of setting revenue recognition rules.

“It’s a hot topic,” says Robert Willens, an accounting expert.

Most companies tend to book some sales before they are are actually paid for them. The problem arises when companies book revenue for deals where they might not actually get paid, or revenue for items that are likely to get returned. Many of the most notable accounting problems of the past few years have been related to the way companies count revenue. Groupon, for instance, during its IPO process was forced by the SEC to restate its revenue. Initially, the company had called all the money it got from customers as revenue, including cash that was later paid out to merchants. Groupon (GRPN) was forced to exclude the retailer payouts.

In July, IBM (IBM) disclosed that the SEC was investigating how it reports revenue from its cloud computing business. Tesla (TSLA), the electric car company, stressed that it only booked revenue on cars that had been both sold and delivered to customers.

Twitter has yet to turn a profit. Its sales, though, totaled nearly a quarter of billion dollars in the first half of the year. And they appear to be growing rapidly.

Twitter derives most of its revenue from advertising. Most of the deals it strikes with advertisers are not fixed upfront. Twitter gets paid something when users see advertisers’ tweets. But advertisers pay more when users click on the tweet or retweet it to others, among other situations. As a result, exactly how much an advertiser will pay is often unclear when it signs up with Twitter.

Twitter says that in most instances it only counts the revenue from a deal after the services have been delivered and the company knows how much it will get paid. But it says in some more complicated deals, it resorts to estimating what it might get paid. It’s not clear how often it relies on projections.

Michael Pachter, an analyst at Wedbush Morgan who follows social media companies, guesses Twitter only estimates revenue in long-term advertising deals. And Pachter says he doesn’t believe the company has many of those yet.

“I don’t think it’s a big deal,” says Pachter. “But it is something the company will be questioned about.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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