The maker of dental supplies says it is investigating its own financial reporting
To account for incentives, businesses generally follow rules on variable consideration, which requires estimating revenue from sales of products and services. Estimates include amounts that aren’t fixed and can be determined by a company’s future performance as well as the future performance of customers, among other factors. That can result in recording sales in incorrect periods and other errors, according to accountants. Companies have found it harder to make more complicated estimates under US revenue-recognition rules that went into effect for public companies in 2018.
“Variable consideration can be one of a company’s most challenging estimates, depending on the availability of accurate historical information on which to base the future estimates,” said Jeffrey Johanns, an associate professor of accounting at the University of Texas at Austin’s McCombs School of Business .
Avanos Medical Inc.
in February broadened its disclosure on its accounting for incentives after the Securities and Exchange Commission told the medical-technology company in December to provide quantitative details about judgments for its estimates. Avanos in its latest annual report said its liability for estimated incentives totaled $10.2 million in 2021, down from $13.6 million the previous year.
US regulators have brought enforcement cases against businesses over how they manage and account for revenue. The SEC in 2019 charged MiMedx Group Inc.
and three of the biotechnology company’s former executives with prematurely revenue from sales to distributors. MiMedx lacked sufficient controls to ensure it appropriately documented sales terms and incentives, the regulator said at the time.
MiMedx agreed to pay $1.5 million to settle the case and a spokeswoman this week said the company has made progress in restoring its financial credibility and reputation since the SEC brought its charges.
Charlotte, NC-based Dentsply on May 10 said it was investigating its use of incentives to sell products to distributors in the second half of 2021 and whether it was properly accounted for the incentives, according to a filing with regulators. The manufacturer of X-ray machines and dental drills released preliminary earnings but said it is unable to file its quarterly report while the investigation, launched in March, continues.
Covid-19 vaccine maker Moderna Inc.
on May 10 ousted its new chief financial officer, Jorge Gomez, after Dentsply disclosed the investigation. He had served as Dentsply’s CFO for nearly three years and left the company on May 6.
Moderna declined to comment beyond its recent statements on Mr. Gomez’s departure. Mr. Gomez didn’t respond to a request for comment.
Dentsply’s specific accounting problems are as yet undisclosed. The company said it uses marketing incentives such as volume discounts, sales rebates and product returns. Dentsply declined to comment beyond its recent disclosure and earnings call.
Recognizing rebates or discounts in the wrong period can lead to mismatches between revenues and expenses, and companies can potentially recognize revenue prematurely if they can’t estimate product returns, Mr. Johanns said.
Improper use of rebates, discounts and returns can be a sign of “channel stuffing,” in which companies ship more products than customers need and record the shipments as sales. That can result in companies having to restate their financial statements or in regulatory scrutiny.
Auditors looking for evidence of channel stuffing try to detect disproportionate returns six to eight weeks after the end of a quarter, said Michael Shaub, an accounting professor at Texas A&M University’s Mays Business School. Based on Dentsply’s disclosures, there is no indication it engaged in this practice, according to Mr. Shaub.
Dentsply last year set aside a much larger amount for potential future rebates to its dealers. The company’s reserve for dealer rebates in 2021 rose by 51.5% to $203 million, compared with the previous year. Its deferred revenue increased to $51 million last year from $41 million in 2020.
The increase in expected rebates raises the question whether Dentsply underestimated its rebate liability in prior years and if there are other rebates for which it didn’t account, said Nerissa Brown, associate professor of accounting at the University of Illinois’ Gies College of Business.
Dentsply in its most recent annual report said it estimates volume discounts by reviewing certain assumptions, such as historical and estimated future product purchases by individual customers. The company said it deducts discounts from its revenue at the time of sale or when it offers discounts, depending on which occurs later.
Dentsply said it estimates future returns of products from customers who then receive credits, based on analysis of past returns.
—Dylan Tokar contributed to this article.
Write to Mark Maurer at [email protected]
Credit: www.wsj.com /