Semiconductor equipment industry conforming to new accounting guideline

San Jose, California–The semiconductor equipment industry is moving quickly to conform to a controversial new accounting guideline that changes how public companies book revenue from equipment sales, two executives said this week at Industry Strategy Symposium (ISS) 2001, an industry forecasting conference sponsored by Semiconductor Equipment and Materials International (SEMI).

The two executives, Michael Bradley, CEO of Boston, MA-based Teradyne, and Mercedes Johnson, CFO of Fremont, CA-based Lam Research, presenting at ISS, said the guidelines, issued by the U.S. Securities and Exchange Commission (SEC) in December 1999 in its Staff Accounting Bulletin 101 (SAB 101), would impact SEMI members in varying degrees.

SEC’s original intent with SAB 101 was to provide clarity to investors by requiring companies to recognize revenue only after formal customer acceptance of goods shipped. Historically, semiconductor capital equipment manufacturers have recognized revenue upon shipment.

The SEC action represents a more complex implementation challenge and requires a broad-based understanding of its implications for the semiconductor equipment industry, which has had no history of revenue recognition abuse and no substantive history of product returns, said the speakers.

Early in 2000, SEMI organized a working group of member company CFOs to respond to the SEC action and sought to gain clarity and guidance on the SEC’s interpretations of the new guidelines.

The main concern in these discussions, Bradley and Johnson said, was that contrary to its original intent, SAB 101 could actually provide less clarity for investors as the variability in timing of customer acceptance would distort actual company performance. “If revenue recognition is linked to installation and formal acceptance, then we have revenue unpredictability,” said Johnson.

Working with the SEC and with the U.S. Senate Banking Committee, the SEMI CFOs were able to obtain further guidance from the SEC, which came in the form of an SEC ‘frequently asked questions’ document published in October. While some outstanding issues remain, the SEC moved forward with requiring implementation of SAB 101 in the fourth quarter of FY 2000.

The industry and the SEC were able to agree that revenue recognition on shipment in some, if not most, instances was acceptable under SAB 101 provided that criteria for demonstrating performance had been met. However, revenues from shipments of new products and shipments to new customers in most cases must be deferred until after formal customer acceptance, which is in line with existing industry practice.

Bradley and Johnson said there is likely to be a period of transition as companies and their accounting firms incorporate SAB 101 guidelines and continue to clarify the guidelines for different transactions. They said investors should be aware of the possible effects of the new rules on fourth quarter statements and beyond.

“The SEMI working group demonstrated leadership in working with the SEC to understand SAB 101 and in communicating with the investor community about SAB 101’s impact,” said Stanley T. Myers, president and CEO of SEMI. “SEMI member CFOs, executives and SEMI’s Washington public policy staff are to be commended for their efforts in making sure the concerns of our industry were heard and addressed.”

“Communicating the issues and potential effects of SAB 101 to our members and to the investor community was a key priority throughout the year,” said Vicki Hadfield, SEMI’s vice president of North America Operations. “For the most part we believe that financial analysts have worked the impact of SAB 101 into their reports, however some investors may need additional time to understand the complexities of the new rules and how they affect reported revenues.”

Industry analyst Gunnar T. Miller of Goldman Sachs said, “The bottom line is that we’ll have to pay close attention to the deferred revenue line on the balance sheet starting this reporting season. But SAB 101 won’t be as disruptive as some thought at first last year.”


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