Because their pure-digital business models let them do things traditional companies couldn't do, categorizing some of their activities can be difficult. For investors, it's important to read the footnotes to the financial statements, especially when comparing two dot-coms, because accounting standards can vary. Perhaps the most crucial accounting issue facing dot-coms is that of revenue recognition. Revenue recognition is the set of procedures a company follows when deciding how to count the top line. This is so important to dot-coms because revenue is sometimes the only positive number to look at when examining the company.
Revenue recognition can vary wildly between dot-coms.
Some, for instance, may subtract the value of discounts and coupons from revenue, while others may put that value in revenue but take it out of costs. CDNow, an early retailer of music CDs that has since been acquired, was a classic example of a company that padded revenue by including the value of coupons in the top line and then taking it out in the expense section of its income statement. This ruling, called SAB 101, makes it harder for a firm to book revenue in the early stages of a project until it has clearly earned that revenue and meets tougher guidelines, says George Neble, partner of the e-commerce accounting practice of Arthur Andersen. Neble says the fallout from this ruling on many technology companies will be widespread. Another area of accounting concern is in the accounting of gross profit.