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SEC Taking Harder Look at Qwest Swaps

TSC Staff

The Securities and Exchange Commission has opened an informal inquiry into Qwest's(Q Quote) controversial revenue recognition policies for so-called "indefeasible rights of use" capacity sales, among other things.

In a press release distributed at 3:30 a.m. EST Monday, Qwest said it received the SEC letter Friday and described the issues as "the subject of disclosure by Qwest" that have been "widely reported in the investment community and in the media."

The SEC wants more information on indefeasible rights of use sales of optical transmission capacity, "particularly sales to customers from whom the company agreed to purchase optical capacity." The latter describe the sort of swap that critics contend often involve overpriced assets being shifted around by telecommunications companies to goose earnings and meet analysts' profit targets. The proceeds of such deals usually are recognized as a one-time sale instead of over the duration of the contract, while their costs often are treated as investments rather than traditional expenses. TheStreet.com recently profiled a questionable transaction involving Qwest and Enron.

In its release, the company said: "Qwest has stated, and continues to believe, that its accounting policies, practices and procedures for all periods, including 2000 and 2001, comply with all applicable requirements. There can be no assurance that the SEC will agree."

Qwest said the SEC also wants information on its sales of equipment to customers from which Qwest bought Internet services or to which Qwest contributed equity financing.

Qwest said revenue attributable to its IRUs in 2000 and 2001, including sales to customers from which Qwest also purchased optical capacity, were approximately 2.8% and 5.1% of total reported revenue in those periods, while revenue attributable to sales of Internet equipment to customers from which Qwest bought Internet services were about 0.1% and 0.9% of total reported revenue in 2000 and 2001.

Qwest said it doesn't expect the probe to affect a $1.5 billion note offering it hopes to close Tuesday.