Uber Loses, Amazon Wins Under New Financial Rules

An upcoming change to accounting rules regarding the reporting of revenues and expenses is expected to have big impacts on the technology industry, the Financial Times reports. The upshot may be to spawn great confusion among investors, leading to much higher trading volatility. Among headline-grabbing companies, ride hailing service Uber Technologies Inc. is expected to be a big loser, seeing more than half its revenues cut pursuant to the change. Meanwhile, e-commerce giant Amazon.com Inc. (AMZN) and software colossus Microsoft Corp. (MSFT), both of which are also leading players in the fast-growing cloud-computing market, should be among the high profile winners.

The Timetable

The new rules, which are supposed to align Generally Accepted Accounting Principles (GAAP) in the U.S. more closely with International Financial Reporting Standards (IFRS), must be adopted by all public companies in the U.S. by the start of 2018, the FT says. Private companies, such as ride booking services Uber and Lyft, have until 2019.

Principal or Agent?

One issue highlighted by the FT affects Uber and its competitor Lyft. Both act as agents, matching riders with drivers who are non-employee, independent contractors who own the cars that they drive. The drivers are the principals who actually provide the core service, the rides themselves. (For more, see also: Scandal-Ridden Uber Loses Its President and Key Engineer.)

On regular rides, both companies recognize as revenues just the agency commissions paid to them by drivers who use their apps, per the FT. However, on the growing category of carpool or shared rides (called uberPOOL and Lyft Line, respectively), Uber and Lyft claim to be the principals actually providing the service, and count as revenue the full fare paid. Since these shared rides actually are provided by non-employee drivers and non-company-owned cars, they will be reclassified under the new rules as agency transactions on which only commission revenue can be booked by Uber and Lyft. The impact on Uber is very large: its first quarter revenues would fall from $3.4 billion to $1.5 billion under the revised accounting standards, per the FT. (For more, see also: The Story of Uber.)

Impact on Software Companies

Under so-called "ramp" deals, the annual license fees for software increase in the later years of a contract. According to the FT, license fees will have to be spread evenly over the life of a contract, meaning that the software vendor will recognize more revenue earlier on. Microsoft indicates that this will have a material impact for them, the FT says. Additionally, if hardware is bundled with software under a contract, the revenues for the full bundle will have to be recognized evenly over the life of the contract, the FT adds.

Cloud-computing companies, which include Amazon.com and Microsoft, will benefit from new rules that push the recognition of expenses further into the future, when the revenues generated by these expenditures actually start to materialize. In particular, the FT notes that software-as-a-service (SaaS) companies, especially those that are growing rapidly, have marketing and sales costs that can reach 50% or more of their revenues, and will benefit greatly from being able to defer them. SaaS companies host applications on their own computers, which subscribers then access over the internet. Under the new rules, Workday Inc. (WDAY), which offers enterprise cloud applications in human resources and finance, saw its pro-forma operating profit margin rise from 1.9% to 3.3% for its most recent fiscal year, per the FT.

In other matters, the FT reports that Amazon.com will be able to speed up the recognition of revenue from unused gift cards, as well as from sales of its Kindle e-reader, and other devices, through third parties.

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