Rule on swaps may spur restatements

Copyright 2002 / Los Angeles Times
Los Angeles Times...08/21/2002
From LexisNexis

Robert Schmidt, Bloomberg News
From CED Broadband Direct, August 21, 2002

The Securities and Exchange Commission might force some telecommunications companies to restate earnings after prohibiting carriers this month from recording revenue from swaps of fiber-optic cable capacity, accountants say.

Companies use the swaps to trade use of their cables. Some have been recognizing revenue on the transactions, a practice that's the subject of SEC, Justice Department and congressional investigations of accounting at Global Crossing Ltd. and Qwest Communications International Inc. SEC staff said some capacity swaps should be treated as asset exchanges, and companies can't record revenue from them, accountants said.

Qwest and Global Crossing have said capacity sales accounted for at least $2.6 billion in revenue in 2000 and 2001. Qwest, which Tuesday said it agreed to sell its directories unit for $7.05 billion, has said it might have to restate earnings related to capacity-swap transactions. Global Crossing is reviewing the way it recorded them, and other companies might be affected as well, accountants and analysts said.

"This is significant," said Scott Cleland, chief executive of the Washington-based Precursor Group, a research firm that focuses on telecommunications issues. "Global Crossing and Qwest didn't just swap with themselves, they were involved with many others."

The SEC notified companies of the new policy in a phone call to the American Institute of Certified Public Accountants, not through a public announcement, said Jay Hartig, a partner at PricewaterhouseCoopers in Florham Park, N.J., and chairman of the SEC regulations committee at the AICPA, a trade organization.

"The SEC has indicated that it expects public companies to make the change by retroactive restatement," Hartig said.

Leslie Overton, an associate chief accountant in the SEC's division of corporation finance, confirmed the change. She declined to comment on the specifics or say which companies the rule applies to.

"It says what it says, and it's all we intended to convey," Overton said.

It's impossible to tell which companies might be affected by the rule, analysts and accountants said.

The SEC's new policy might "apply to any situation where companies are swapping assets that are used in their businesses," said Doug Carmichael, director of the Center for Financial Integrity at Baruch College in New York.

Some energy trading firms also sold the swaps, known as IRUs or Indefeasible Rights to Use, analysts said.

The practice "is utterly unregulated; there is no government entity that has any knowledge about how these companies have done this," said Reed Hundt, former chairman of the Federal Communications Commission and now a telecommunications consultant.