Abstract
In 1990, the CEO of Oracle Systems Corporation is facing increasing pressure from analysts about the aggressive revenue-recognition policy. As a result, the stock price is plumbed and the CEO is worried about the cost of new equity capital to finance future growth and the firm may become a takeover candidate. We answer to several questions in order to understand the revenue-recognition method and the consequences of change. Oracle underlies aggressive revenue-recognition policy for licence fees: the firm recognizes revenue when the contract has been signed and not when the shipment of the product has been occurred. The accounting treatment for the revenue recognition of a product should be at the delivery and not at the agreement. Moreover, the collectibility of licence fees is questionable because the day's receivable substantially exceeds the average of the sector (160 days against 62 days). The reasonable amount of day's receivables should be at or slightly over the industry's average because a lower day's receivable decreases the default payment of customer, reduces the working capital but improves the company's financing cost and increases the value of operating cash flow.
