Oracle Systems Corporation Case 6c11x

Group 3: Adriano, Borja, Bual, Manalo, Mendez, Santos TTh, 1-2:30 Case 2: Oracle Systems Corporation BACKGROUND In the year 1977, Larry Ellison and his associates named Oracle Corporation after their project for one of their clients was the "Project Oracle". Larry Ellison, Bob Miner and Ed Oates found Software Development Laboratories. They believe that Oracle means source of wisdom which is really fit for what they want to establish. They established their headquarters in Redwood Shores, California. They are known for developing 100 percent internet-enabled enterprise software across its product line and as the only company capable of implementing complete global e-business solutions. Oracle Corporation became the world's leading supplier of software for information management and the world's second largest independent software company. Along with its increasing revenues are the wide range of products for its customers. They had annual revenues of more than $10.1 billion and served 145 countries around the world. Headquartered in Redwood Shores, California, Oracle is the first software company to develop and deploy 100 percent internet-enabled enterprise software across its entire product line: database, server, enterprise business applications, and application development and decision tools. From the 118 percent compound sales growth from 1982 to 1989, it dropped to 66 percent company share price. This company was known for their aggressive business strategy. During 1990s, Oracle Corporation was the dominant software producer however because of the constant increase and decrease of sales and share price, they sent a bad signal to its shareholders. POINT OF VIEW FOR ANALYSIS: Internal (Financial Department of the Company) INITIAL ANALYSIS After reading the situation and analyzing the company's financial statements, we have observed that the company has a healthy but unrealistic financial position. We have detected that this is due to an overrecognition of revenues, with a large portion of its sales that are unrealizable. It recognizes contract revenues to be received within the year, which have the following effects: (1) high level of s receivable, (2) longer collection period (3) higher default risk (4) overstated income statement. It also recognizes revenues when services are performed without evaluating whether these revenues could actually be realized. With this observation, we are suggesting Oracle to change its revenue recognition methods in order to accurately monitor the financial position of the company and in turn, create better strategies to increase its profit. Here are the strategies we are proposing: 1. adjust to the controller's preference Adjustment of days in s Receivable by knowing whether cash collection is reasonably likely and/or if speeding the collection period will manage the discrepancy between the realization of revenues and the actual receipt of payment. 2. or adjust to industry averages

Adjustment in of industry averages may speed up the collection to the point that sales may go down because contract receivables may fall due to unwillingness of potential and present customers to pay within a shorter period. COMPUTATIONS Controller’s Adjustment TABLE 1.1A/R Adjustment, Controller’s Preference Days 1990 Sales $970, 844 365 1990 A/R A/R Adjustment

$468,071

Sales/Day $2660 A/R Days 176

120

120/176

TABLE 1.2Revenue Recognition Change, Controller’s Preference 1990 A/R $ 468071 Adjustment Factor 120/176 Adjusted A/R 319,139.32 Difference in A/R (Before Adjustment) 206082 Difference in A/R (After Adjustment) 127,440.05 Difference in A/R $78,641.95

1989 $ 261989 120/164 191699

Comparable Revenue Policy TABLE 2.1 A/R Adjustment, Comparable Revenue Policy Days 1990 Sales $970, 844 365 1990 A/R A/R Adjustment

$468,071

Sales/Day $2660 A/R Days 176

62

62/176

TABLE 2.2 Revenue Recognition Change, Comparable Revenue Policy 1990 A/R 468071 Adjustment Factor 62/176 Adjusted A/R 164,888.65 Difference in A/R (Before Adjustment) 206,082 Difference in A/R (After Adjustment) 65,844.03 Difference in A/R $140,237.97

1989 261989 62/176 99,044.62

SYNTHESIS All in all, the proponents decided to choose to follow the controller's preference revenue recognition method to provide a more accurate disclosure of revenues to various stakeholders, that can potentially increase the stock price and improve its position in the market. The simple action and willingness to correct the s can signal investors of the intent of the company to better its system and signal its high concern for stakeholders that in turn will increase the stock price. Moreover, adjusting to controller's preference will provide the company the most conservative estimate of the s receivable to be collected, and will provide the most conservative revenue that they can possibly get. Should they opt to speed up the days in s Receivable further, they are actually facing the risk of greater default versus the receipt of actual cash. Hence, the company must achieve the balance between risk and returns. RECOMMENDATIONS      

With this, the proponents recommend for Oracle to: Implement more accurate ing policies especially on recognition of revenues through the use of the controller's preference method. Find a balance between aggression and accuracy in meeting target sales. Find a fine manageable balance between default risks and high level of revenues. Come up with a better system to contract s receivable. Come up with a better way to stimulate sales without increasing the risk of default and ensuring that customers will pay on the time due