A recent filing by medical device maker CareFusion should cause any company that recognizes revenue by leasing equipment to its customers to sit up and take notice. CareFusion is delaying the filing of its 10-K as it checks with the Securities and Exchange Commission on whether it needs to adjust its longstanding accounting policy around revenue recognition tied to the leasing of a particular product line.

CareFusion filed Form 12b-25 with the SEC to indicate it needs more time to file its annual report for its fiscal year ended June 30. The company is using the 15-day extension to consult with the SEC about an accounting policy it has followed for 10 years related to the sales-type lease agreements it reaches with customers for a medication and supply dispensing system. The company says in a press release that in connection with its year-end audit, it “was made aware of a potential alternative application” of the relevant accounting rules. The company's auditor is Ernst & Young.

During a conference call for investors and analysts, CareFusion CFO Jim Hinrichs said the issue did not arise as a result of a disagreement with auditors, and there's been no significant change in audit personnel that might have led to discussion of an alternate approach. “We continue to believe our accounting for leases is in accordance with (Generally Accepted Accounting Principles),” he said.  “They (the auditors) concur with the position that we've presented to the SEC.” He offered no further insight into how or why auditors flagged the accounting.

Hinrichs explained that the accounting question being taken to the SEC relates to the timing and amount of revenue that is recognized when the company installs its Pyxis-brand dispensing equipment, and the timing and amounts recognized as financing income over the life of the lease. The company's most recent annual report says it typically leases equipment to customers for periods of three to five years.

When the company leases the dispensing equipment to customers, said Hinrichs, it accounts for lease payments by breaking them into three separate revenue streams related to service, interest, and capital equipment. The service and interest streams are recognized over the life of the lease, while the capital portion is discounted to arrive at a present value for future cash flows. The alternative approach that the auditors have suggested the company consider would involve “movement between the interest income stream and the capital revenue stream,” he said.

Under the company's current accounting policy compared with the alternative approach, the company currently recognizes slightly less revenue upfront and slightly more over the life of the lease as interest income, Hinrichs said. If the SEC were to prefer the alternative approach that has just come to light, “it would be to recognize a little less revenue over the life of the lease and a little more currently as capital revenue,” he said.

If the SEC decides it likes the alternative method better, “we would make a change to our prior period financials and then evaluate the impact,” Hinrichs said. “If the impact is material, we would restate prior period financials.” The CFO believes a change in the accounting policy likely would result in a modest increase in cumulative historical revenue and earnings, although the exact effect in each period probably would vary. “In addition, it also likely would result in an increase in the company's investment in sale-type leases on the balance sheet,” he said.

Under the extension, the company's 10-K is due to the SEC on Sept. 13.