SAN MATEO (07/31/2000) - The U.S. Securities and Exchange Commission (SEC) on Thursday will wrap up its investigation of Priceline.com Inc.'s accounting methods, giving the online broker of everything from airline tickets to home loans the green light to continue with business as usual.
The SEC's Emerging Issues Task Force was investigating Priceline's practice of recording an online sale as revenue rather than the more typical travel industry practice of recording only the commission.
"In airlines, we take possession [of the tickets] then resell," said Brian Ek, a Priceline spokesperson, in Norwalk, Conn., by way of explaining why the sale of the item is included as revenue.
The variation in how revenue is accounted for by e-commerce companies can be confusing to investors, according to Jane Kirkland, a vice president at Pittsburgh-based FreeMarkets Inc., a company that runs business-to-business marketplaces for raw materials, commodities, and services among others.
While some online auction companies count gross volume as revenue, the more conservative methodology is to report market volume but not to count it as revenue, Kirkland said.
However, traditionally retailers count sales as revenue, said one industry analyst.
"This is not atypical for brick-and-mortar companies," said Rob Enderle, senior analyst for Giga Information Group Inc., in San Jose, Calif.
The potential for a problem with such accounting exists because a certain percentage of customers back out of their purchases, making gross-revenue numbers an inaccurate reflection of real sales.
"If you don't want to mislead investors, you want to take an adequate reserve [reduce the amount of revenue a company takes in]. If you were always floating the returns you would be carrying an inflated revenue and that could be a problem," Enderle said.
Another pure-play online company, CarsDirect.com Inc. in Culver City, Calif., also recognizes as revenue the price paid by the customer for a vehicle and does also establish a reserve against estimated customer returns, according to their most recent SEC filing.
According to Ek, if Priceline were forced to change its methodology it would simply mean that the company would change from one that appears to have higher revenues and lower margins to one that has lower revenue and higher margins.
"We would go from looking like an Amazon to looking like an eBay," Ek said.