Fixed-price accuracy behind EDS loss

EDS New Zealand's $53 million loss for the year appears entirely attributable to a change in accounting practices to account more accurately for the revenue and profit relating to progress on certain fixed-price work.

EDS New Zealand’s $53 million loss for the year appears entirely attributable to a change in accounting practices to account more accurately for the revenue and profit relating to progress on certain fixed-price work.

EDS NZ’s statement of financial performance, as filed at the Companies Office on June 26, shows an “unbilled revenue adjustment” for the year ended December 31, 2002 of over $56 million. No equivalent amount appears in the previous year.

A note to the accounts explains: “During 2002, the company revised certain revenue and cost estimates in accounting models of certain fixed-price contracts recognising revenue using percentage-of-completion accounting. These revisions resulted in reductions of unbilled revenue receivables and associated operating revenue of $NZ56.464 million.”

Percentage-of-completion accounting is a method of more accurately reflecting the money actually earned in terms of the progress of a fixed-price job towards completion. Standard accrual accounting sets the actual costs on a job to date against the actual progress payments received from the client, and may overestimate revenue and profit on the partly completed job.

For interested readers not familiar with the approach, a worked example, using the building of a house, is here.

So depending on which accounting method is seen as standard, EDS’s revenue and profit may have been underestimated for 2002 or overestimated for 2001 and previous years.

The company’s operating revenues before subtracting the anomalous amount have slightly fallen, from about $349.2 million in 2001 to $307.1 million in 2002, but operating expenses have also dropped, from $319.1 million to $290.2 million. This leaves an operating surplus of $16.9 million, still down markedly from 2001’s $30.1 million.

EDS had not further explained the reason for the change in accounting policy by deadline, nor identified the fixed-price contract or contracts concerned.

Inquiries to EDS NZ head Rick Ellis were redirected, company spokeswoman Joanna Clarke saying she doubted whether an explanation would be forthcoming, even given more time. It is “in accordance with global [EDS] policy” not to answer such questions, she said last week.

The loss comes just weeks after the launch of a development and support centre in Auckland that was launched with a controversial $1.5 million grant from the government.

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