Opinion ID: 198674
Heading Depth: 4
Heading Rank: 2

Heading: The CC-OPS Transaction

Text: 107 The CC-OPS allegation concerns a September 29 order for $705,250 of FTP products, which FTP immediately booked as a sale. A letter from FTP's sales director for the Americas apparently accompanied the invoice. The letter stated that it was FTP's policy to allow[] large or frequent customers to return product without contingency within 60 days of receipt of order. Large customers were defined as those generating over $100,000 per year. A copy of the original letter is not present in the invoice file. On November 27, CC-OPS faxed a copy of the letter back to FTP, and FTP extended the right of return from 60 to 90 days. This revised letter is present in the file. Shortly after the return period was lengthened, FTP issued a credit for the full amount of the invoice and authorized the return of the product. On the original invoice is written: Credit per Jack Geraghty. Not recognizable revenue. 17 108 Plaintiffs charge that the initial booking of revenue from this transaction violated GAAP; that the letter indicates that FTP had a policy of granting unlimited return rights to its customers; and that the absence of the original September 29 letter from the file indicates that FTP was attempting to conceal the existence of return rights. However, FAS 48 permits sellers to recognize sales that include a right of return, so long as the required conditions are met and the seller establishes a reasonable reserve for returns. The granting of a right of return in a particular transaction, or even a general policy of granting return rights, does not per se mean that revenue cannot be recognized at the time of sale. Plaintiffs merely make an allegation that FTP failed to adequately reserve and materially overstated FTP's revenues. Without any information on FTP's experience with past return rates, the size of its reserve for returns, or how the reserve changed over time, it is difficult to infer that FTP's revenue recognition decisions were unreasonable enough to violate GAAP, or that they give rise to a strong inference of scienter. 'Generally accepted accounting principles,' . . . tolerate a range of 'reasonable' treatments, leaving the choice among alternatives to management. Thor Power Tool Co. v. Commissioner of Internal Revenue, 439 U.S. 522, 544 (1979). 109