REPOST: IBM stands behind cloud-computing account amid SEC probe

Many companies believe that cloud-computing is the future, and IBM is no exception. This AccountingToday.com article reports that the company is standing behind its cloud-computing accounting methods despite the SEC probe.

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(Bloomberg) International Business Machines Corp., facing a Securities and Exchange Commission investigation into how it reports revenue from offsite cloud services, said it stands by its accounting methods.

IBM is cooperating with the SEC in the probe, which it learned about in May, it said today in a filing. The company books its revenue from cloud services, such as storing customers’ data and software applications remotely, under generally accepted accounting principles, said Ed Barbini, a spokesman for Armonk, New York-based IBM.

“IBM’s reporting of cloud revenue is the result of a rigorous and disciplined process, and we are confident that the information we have provided has been consistently accurate,” Barbini said.

Chief Executive Officer Ginni Rometty has identified cloud computing as one of IBM’s chief sources of growth amid a slowdown in demand for hardware and for consulting services. The investigation at the company, known for consistently meeting analysts’ earnings estimates, underscores confusion about how cloud revenue should be booked, said Michael Cusumano, a management professor at the Massachusetts Institute of Technology’s Sloan School of Management.

“This is a murky area where the rules aren’t really established,” Cusumano said. “Companies treat cloud-computing revenue in different ways.”

About half of publicly traded software companies since 1990 have had to restate revenue because of misclassification of sales and product returns, or because they categorized ongoing payments for tech-support services as a sale of a product license, Cusumano said.

‘Disciplined Process’
While IBM doesn’t disclose its revenue from cloud services, it said the sales rose 70 percent in the first half of 2013 from a year earlier. In its filing today, the company didn’t provide details on what information the SEC was seeking.

“IBM has robust systems and controls to identify and validate what products and services count as cloud revenue,” Barbini said. “IBM accounts for cloud transactions exactly the same way as it would account for those transactions if they were not cloud—in accordance with GAAP.”

Florence Harmon, an SEC spokeswoman, declined to comment.

IBM has beat analysts’ earnings expectations in 32 of the past 33 quarters, according to data compiled by Bloomberg. On the other hand, it has missed sales estimates in seven of the past eight quarters.

More Probes?
The investigation may be the first in a series of probes into companies in the same industry as the SEC tries to clear up confusion and differences in standards, said Jack Ciesielski, owner of investment firm R.G. Associates Inc. in Baltimore and the publisher of the Analyst’s Accounting Observer.

The company has a goal of reaching $7 billion in cloud revenue by 2015, with about $3 billion from new business and the rest from current contracts shifting over to the cloud category.

IBM’s 70 percent growth rate for cloud-computing services in the first six months of 2013 was a slowdown from 80 percent last year. IBM has also said cloud revenue, which is spread across several divisions, tripled in 2011 from 2010.

IBM shares fell 1 percent to $195.04 at the close in New York. The stock has gained 1.8 percent this year.

The disclosure of the probe comes days after IBM won court approval for a $10 million settlement with the SEC for accusations of bribery in China and South Korea. IBM said earlier this year it’s the subject of a U.S. Justice Department bribery investigation related to contracts in Poland, Argentina, Bangladesh and Ukraine.

Autonomy Writedown
Hewlett-Packard Co., IBM’s archrival in the computer-services business, took an $8.8 billion charge last year to write down the value of Autonomy, a software company it acquired, amid allegations of accounting improprieties within the unit. Autonomy, whose products organize corporate customers’ data, had used aggressive tactics to inflate its results, a former executive told Bloomberg News last year.

Earlier this month, IBM acquired SoftLayer Technologies Inc., a cloud-computing storage provider. IBM paid almost $2 billion for Dallas-based SoftLayer, according to a person familiar with the deal.

Market researcher IDC estimates the cloud-computing market may more than double to $105 billion by 2016 from last year. SoftLayer specializes in public clouds—data-center networks that manage computing and software for businesses remotely. IBM is pairing those capabilities with private-cloud operations, building dedicated systems for individual customers.


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REPOST: New IRS data: Rich got richer, but paid lower tax rate as stocks gained

The groundbreaking study from the Internal Revenue Service shows that the richest Americans pay lower taxes despite their high income. Find out the reason why in this Forbes.com article.

Image Source: forbes.com

The Internal Revenue Service today released a new report showing that in 2010, as the nation’s stock markets recovered, the richest Americans saw their share of all national income rise and their effective federal income tax rate fall.

In 2008 and 2009, the wealthy saw their share of national income decline and their tax rates rise, in large part because their more lightly taxed capital gains fell. But in 2010, the top 1% (the 1.35 million families with adjusted gross income above $369,691), reported 18.87% of all AGI, up from 17.21% in 2009. Meanwhile their average tax bill (as a percentage of AGI) fell to 23.39% in 2010, from 24.05% in 2009. The trends were even more favorable for the top 0.1% (the 135,000 households with income above $1.6 million), who captured the lion’s share of the 1%’s income gains, garnering 9.24% of all AGI, up from 7.94% in 2009. The tax rate paid by the top 0.1% fell to 22.84% in 2010 from 24.28% in 2009, meaning they paid a lower rate than their less rich fellow 1 per-centers. As a result, while the share of all income taxes paid by the top 0.1% also rose—to 17.88%, from 16.91% in 2010—it rose by less than the increase in their share of total national income.

The IRS report also shows that in 2010, 10,666 families reporting AGI of more than $10 million realized 5.5% of the nation’s taxable income, but a stunning 41% of all long term capital gains and corporate dividends taxed at the special low 15% rate; that 41% share equals $152.4 billion in such income, almost double the $77.9 billion in such long term gains and dividends reported by families with AGI above $10 million in 2009. The IRS hasn’t yet released its analysis of how the richest 400 fared in 2010, but it seems likely that their income share rose and their tax rate fell, since they’re even more dependent on lightly taxed capital gains. (In 2009, the richest 400 saw their income fall 25%, while their tax rate rose to 19.9%.)

Even more than a recovering economy, a surging stock market pads the reported incomes of the rich. After falling 38.5% in 2008, the S&P 500 rose 23.5% in 2009 and another 12.8% in 2010—meaning more investors finally had gains to realize. The S&P was flat in 2011 and up 13.4% in 2012, which was likely a huge year for capital gains realizations by the rich, as they took gains in advance of an expected increase in the tax rate for 2013. As part of the fiscal cliff tax deal, the capital gains rate was raised from 15% to 20% on taxable income above $400,000 for a single or $450,000 for a couple. In addition, as part of ObamaCare, a new 3.8% Medicare surtax applies to capital gains and investment income, to the extent a single filer has AGI above $200,000, or a couple has AGI above $250,000.

The IRS’ Statistics of Income division also published today preliminary estimates for 2011, which are less detailed by income level and don’t include tax returns filed after September 30th 2012, even though rich folks with the sort of extensive investments and partnership interests Mitt Romney has (a preliminary version of his 2011 return was 379 pages), often apply for extensions which allow them to delay filing until October 15th. Still, the IRS’ preliminary 2011 numbers—when compared directly with the IRS’ 2010 preliminary release—suggest the better off may have continued to increase their share of the national pie during 2011 too. While capital gains were down a tad, 23.4% of income in the 2011 preliminary numbers was reported by those with AGI above $250,000, up from 22.9% in 2010.

The 2011 preliminary report shows AGI on all tax returns (a total of 145.6 million were filed) increased by 3.1% to $8.3 trillion, with wages and pensions and annuities both rising 4% and corporate dividends rising 9%. But with the Federal Reserve keeping interest rates low, taxable interest fell 17%, a big hit to retirees who rely on interest from bank CDs or taxable bonds. Meanwhile, taxable distributions from IRAs rose 12%. The number of tax returns reporting taxable unemployment compensation declined 12%, while the amount of taxable unemployment benefits reported fell 23%.

Just 31.8% of the nation’s taxpayers claimed itemized deductions in 2011, down from the 32.6% of taxpayers who itemized in 2010. The falling share who itemize could be a factor as Congress considers whether to limit itemized tax deductions as part of a tax reform.

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