A little time traveling today . . . Aspen Technology (NASDAQ:AZPN) announced on Monday that its financial statements for the years ending June 30, 2005 and 2006, along with quarterly filings to date, are unfit for investor consumption, due to problems in its accounting for securitizations of accounts receivable.
It’s an interesting issue because of the messy, rules-structured Statement 140 that’s involved. That standard prescribes the methodology for companies to remove assets like accounts receivable or other loans, place them into a trust, and issue paper with a payout based on the assets in the trust. That process is known as a securitization, and Statement 140 governs when such a transaction results in a sale of such assets, resulting in a gain. If those conditions aren’t met, then the transaction is a borrowing and not a sale.
In Aspen’s case, the sale was initially recognized and proper. Their problem arose later when they licensed more software to customers whose receivables had been placed into a securitization, and their new installment receivables were consolidated with the previously unpaid balance already turned over to the securitization. Unfortunately for Aspen, that gave them control over the assets that were considered isolated for sale purposes - a third rail that must not be touched. Therefore, the company needs to restate its financials to treat the sales as borrowings.
Restatement to occur at a later date. The case illustrates how wrong the accounting can go even after everything’s gone right. When you’ve got a complicated, paint-by-numbers procedure to follow to get an accounting result, you just can’t rely on the auto-pilot.
AZPN 1-yr chart: