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Many of the companies that have restated their revenues sold products or services in some combination of the modes listed above under "difficult revenues." In other words, the sales of these companies tended to involve long-term service contracts (making it difficult to determine how much revenue should be counted in the current period when the service is not yet fully performed), complex franchise arrangements, pre-sold memberships or subscriptions, and/or the bundling of multiple products and/or services.
We're not suggesting that you should avoid these companies--to do so would be almost impossible! Rather, the idea is to identify the business model, and if you determine that any risky factors are present, then you should scrutinize the revenue recognition policies carefully.
For example, Robert Mondavi (ticker: MOND) sells most of its wines in the U.S. to distributors under terms called 'FOB Shipping Point'. This means that, once the wines are shipped, the buyers assume most of the risk, which means they generally cannot return the product. Mondavi collects simple revenue: it owns its product and gets paid fairly quickly after delivery, and the product is not subject to overly complex bundling arrangements. Therefore, when it comes to trusting the reported revenues "as reported," a company such as Robert Mondavi poses low risk. If you were analyzing Mondavi, you could spend your time focusing on other aspects of its financial statements.
On the other hand, enterprise software companies such as Oracle or PeopleSoft naturally pose above-average accounting risk. Their products are often bundled with intangible services that are tied to long-term contracts and sold through third-party
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