Revenue recognition blues

Cognos shares have slid nearly 20% in recent weeks as an SEC probe into their accounting continues. The questions raised are in the notoriously tricky area of US GAAP rules, specifically on “VSOE” (or vendor specific objective evidence) which determine how much revenue can be credited for a deal in current figures, and what amount should be deferred. The post-Enron climate has ushered in a much harsher review of software industry practices than was normal in the past, and such esoteric sounding accounting rules can seriously impact a company, as Cognos is now seeing.

Word in the market is that the underlying business is actually quite robust at present, so hopefully this will be a blip for the company rather than anything more serious. Cognos 8 means that there is quite a lot of potential for Cognos to gain revenue as customers upgrade to the new software, which features much better integration between ReportNet and Powerplay, and a complete revamp of Metrics Manager, which is retitled Metrics Studio. These improvements should see Cognos customers steadily upgrading, and so having a positive impact on the company’s already pretty healthy finances. However perhaps some more conservative interpretation of US GAAP on their part would be wise.