Question

Global Crossing is a large provider of telecommunications pipelines between countries. These pipelines carry internet traffic from one country to another around the world. In one of the footnotes, you see that Global Crossing notes that it purchased 10 years of capacity on the pipeline of NTT, a Japanese telecom provider for $500 million. The note states that this purchase price will be amortized over the life of the agreement.

You also recall reading in the Wall Street Journal last month an article announing that Global Vrossing had sold telecommunications capacity to NTT on a 10-year agreement. The CEO was quoted in the article as saying that this agreement would increase Global Crossing's revenue by $500 million for the year.

1. Why do you think Global Crossing accounted for the two transactions the way they did? do you approve of their accounting treatment?

Answer 1

Global Crossing tried to do this transaction in order to inflate their sales. This appears to be a sale and lease back transaction. While the sale is accounted as revenue in the year of agreement, the cost is being amortized over a period of 10 years. This is wrong in accordance with matching principle and also IFRS 15 revenue recognition. The correct revenue recognition method would be to recognize the revenue over the period of 10 years matching with cost. It is also worth reading ASC 820 and ASC 842 under US GAAP.. It looks like a financing arrangement than a sale as per US GAAP,