Salesforce.com Inc.’s fraught acquisition of Salesforce.org will force an estimated $200 million profit hit, but the transaction — which also involved another deal for a company Salesforce Ventures invested in — could produce “ghost revenue” the company can use to meet executive bonus targets.
Salesforce CRM, +1.56%[1] the cloud-based customer relationship management, or CRM, software company, announced the deal last week but said little about the charge, which it called a “one-time non-cash accounting charge” estimated at $200 million, with a final amount to be determined and recognized at the closing of the transaction.
The charge is an operating expense for both the company’s standard financial reporting, according to GAAP, and for any non-GAAP results. On a conference call, executives said that it results from the termination of the current reseller agreement between Salesforce and Salesforce.org.
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Salesforce, the for-profit company, provided free or deeply discounted software for the nonprofit and education customers of Salesforce.org via a reseller agreement between the two companies. The Salesforce.org customers also purchased minimum one-year support contracts directly from Salesforce. Salesforce says it will now service the Salesforce.org customers via a new business unit responsible for the sales, marketing and customer service of its software to the nonprofit and education communities.
A company spokeswoman gave MarketWatch the same explanation for the charge as provided in the press release, but also provided a reference to the applicable accounting standard[3], one that addresses how to account for the settlement of preexisting relationships between an acquirer and a target company.
According to that accounting rule, Salesforce must recognize a loss for a preexisting contractual relationship such as the reseller agreement[4], if, from the perspective of Salesforce, the contract is unfavorable when compared with pricing for current market transactions for the same or similar products and services. Salesforce will also consider whether the reseller contract contained any settlement provisions before finalizing the loss it will record when the deal closes.
“According to the accounting standards, the $200 million writedown is a separate transaction from the business combination and will reduce the value assigned to Salesforce.org on the parent company financial statements to $100 million,” Paul Chaney, a professor of accounting at Vanderbilt University told MarketWatch. “The irony is that if the reseller contract termination was not recognized by Salesforce.com, then the $200 million most likely would have ended up as goodwill, a premium paid for Salesforce.org, on the balance sheet. Terminating the contract thus reduces the disclosure of potential goodwill on Salesforce.com’s books.”
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Salesforce.com also said in its news release ...