How Salesforce's Pending Accounting Changes Could Lead To A Large One-Time Gain

Salesforce.com, inc. (NYSE: CRM) is well positioned to realize a large one-time gain from accounting changes, according to Baird's Rob Oliver" who detailed in a research report several accounting changes that are specific to salesforce and how it could impact the company.

Oliver noted many companies, including salesforce, have been active in publicly addressing potential changes to their business from accounting changes while at the same time investor interest in the effect of pending changes has "increased notably" over the past few months.

FASB Update Topic 606

The Financial Accounting Standards Board Update (Topic 66) will require some software companies to recognize incremental subscription revenues up front and also to amortize deferred commission expenses over a longer period. The analyst believes this will impact salesforce as follows:

• Salesforce's management acknowledged that the possibility that revenue from certain contracts could be recognized earlier.
• Salesforce will need to capitalize additional costs and all amounts capitalized will be amortized over a longer time period.
• Prior reporting periods could be restated to better reflect its results as if the change were under effect at that time.

Where The Gains Can Be Found: FASB Update Subtopic 825-10

This FASB update will require companies to measure equity investments at a fair value and recognize periodic changes in FV in net income. This contrasts prior GAAP rules, which permitted companies to record certain equity investments at cost on the balance sheet and allocate realized gains or losses to the income statement only after the equity investment was sold in many cases.

This is where salesforce will see notable benefits:

Salesforce's venture capital arm invested in 150 companies since 2009 with an estimated FV of these securities totaling $758 million, including $232 million in unrealized gains that are not recorded on financial statements.

"Salesforce could potentially recognize a large one-time gain on their income statement and a significant increase in non-marketable securities and strategic investments on their balance sheet as a result of the proposed change," the analyst explained. "However, we do not know what proportion of the $232 million in unrealized gains will ultimately be recognized in net income."

Oliver maintains an Outperform rating on Salesforce's stock with an unchanged $90 price target.

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