Lesson 2 of 8
Revenue that is not there yet
Under Armour pulled 408 million dollars of orders forward over six quarters. The SEC order made no finding that the revenue broke GAAP, and that is the lesson.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- In a settled order dated 3 May 2021, the Commission found that Under Armour pulled forward roughly 408 million dollars of existing orders across six quarters and did not disclose the effect.
- The order records, in a footnote, that it makes no finding that the revenue was recorded contrary to GAAP. The violation was disclosure, not recognition.
- The same shape appears in a settled 2019 order against Marvell Technology Group, where accelerated shipments closed the gap to published guidance.
The most common revenue case in the enforcement record is not invented sales. It is real sales moved forward in time, which borrows from the quarter after and leaves a hole there.
Under Armour, as the order describes it
- 2010 to 2016Twenty-six quartersFrom the second quarter of 2010, reported year-on-year revenue growth exceeded 20 percent for twenty-six consecutive quarters, a streak the company highlighted on earnings calls and in releases.
- 2015 to 2016Six quarters of pull forwardsFrom the third quarter of 2015 to the fourth quarter of 2016, approximately 408 million dollars of orders already placed for future quarters were shipped early. Without them, the order states, analysts' revenue estimates would have been missed throughout.
- 31 January 2017The quarter it stoppedOn the day a miss for the fourth quarter and full year 2016 was announced, the share price fell by approximately 23 percent.
What the company did, exactly
Customers had placed orders for delivery in a later quarter. The company asked them to accept shipment of some of those products in the current quarter instead. The goods moved, title moved, and the revenue was recognised in the earlier period.
Nothing about that sequence is unusual in itself. Businesses ask customers to take delivery early all the time. What made it a Commission matter was the size relative to the gap being closed, and the fact that public statements about the growth rate and its causes did not mention it.
The footnote that carries the lesson
The order contains a footnote stating that it makes no finding that revenue from these sales was recorded outside generally accepted accounting principles. Read that twice. The accounting may have been correct at every step.
What the order found was a failure to disclose the effect of the practice on the reported growth rate, and a failure to disclose that the sales pulled forward were no longer available in the later quarter. The charge is under the disclosure provisions, not the books and records ones, and the company consented to a cease-and-desist order and a civil penalty of nine million dollars without admitting or denying the findings.
For a reader this is the important half. You will not find this by testing whether revenue was recognised correctly, because it was. You find it by asking whether the growth rate has been explained by something the company told you about.
The same shape, two years earlier
In a settled order dated 16 September 2019, the Commission found that Marvell Technology Group accelerated, or pulled in, sales originally scheduled for later quarters, from approximately January to July 2015, to close the gap between actual revenue and its published guidance for the fourth quarter of its fiscal 2015 and the first quarter of fiscal 2016. As with Under Armour, the finding is that the effect on reported results was not disclosed, and that the practice made later guidance harder to meet.
The disclosure that would have shown it
Three things, in order. Receivable days, because shipping early usually means collecting later relative to revenue. The revenue note's description of when control transfers under ASC 606, because shipping terms decide the timing. And the management discussion, which has to explain the change in revenue and is where an unexplained growth rate becomes visible as an absence.
Check yourself
What did the Under Armour order say about whether the revenue complied with GAAP?
- That it did not comply, in every quarter
- That the order makes no finding that the revenue was recorded contrary to GAAP
- That the question was referred to the auditor
Show the answer
Answer: B.
A footnote to the order states it makes no such finding. The matter was about failing to disclose the effect of the practice, not about the recognition itself.Approximately how much in orders did the order describe as pulled forward, and over how long?
- 40 million dollars over two quarters
- About 408 million dollars over six consecutive quarters, from the third quarter of 2015 to the fourth quarter of 2016
- Four billion dollars over three years
Show the answer
Answer: B.
The order states approximately 408 million dollars across those six quarters, and that without the pull forwards the revenue estimates would have been missed throughout.Which pattern in reported results is the signature of a pull forward?
- A steadily rising gross margin
- A strong quarter followed by a weak one with no operating explanation, repeated
- Rising inventory alongside falling revenue
Show the answer
Answer: B.
Moving a sale forward adds to one period and removes from the next. The two-period total is unchanged, so the tell is the alternation rather than the level.Sources
- SEC, In the Matter of Under Armour, Inc., Securities Act Release No. 10940, Exchange Act Release No. 91741, Accounting and Auditing Enforcement Release No. 4220, 3 May 2021. Settled: the respondent consented without admitting or denying the findings, to a cease-and-desist order and a nine million dollar civil penalty.
- SEC, In the Matter of Marvell Technology Group, Ltd., Securities Act Release No. 10684, Exchange Act Release No. 86971, Accounting and Auditing Enforcement Release No. 4076, 16 September 2019. Settled on the same basis.
- ASC 606, Revenue from Contracts with Customers: when revenue is recognised, and whether a company reports gross as principal or net as agent.
What this leaves out
- Both matters were settled. In each, the respondent consented to the order without admitting or denying the findings, and the findings are not binding on any other person or entity.
- Everything stated here comes from the two orders. Neither company's later conduct is described, and nothing here is said about any company not named in an action.
- The worked example uses invented round units and is labelled illustrative.
- Nothing here is advice about any security.