Keeping with this evening’s Halloween spirit, members of Board of Directors and Compensation Committees should be aware of an allegation that is currently floating within the ominous fog – that some executives of publicly-traded issuers are trick-or-treating with “ghost revenue.”  Kidding aside, the allegation (or potential allegation) is that some executive officers are using ghost revenue (i.e., deferred revenue) in order to satisfy otherwise unattainable non-GAAP performance metrics.  A grossly-oversimplified explanation of this issue is addressed in the below portions of this post.


  • Factual Context.  The concept of ghost revenue applies to publicly-traded issuers that are acquisitive in the M&A context, and as an unrelated and separate matter, use non-GAAP performance metrics (e.g., EBITDA, adjusted revenue, adjusted net earnings, etc.) within their performance-based compensation programs for their executive officers.
  • Deferred Revenue.  As a gross over-simplification, a corporation has “deferred revenue” for accounting purposes if it received cash payments in advance of providing reciprocal goods or services.
  • Deferred Revenue Purchase Accounting Adjustment.  In the M&A context, the Buyer Corporation generally assigns a fair value to any deferred revenues of the Target Corporation, and negotiates with the Target Corporation for the latter to fund some or all of such deferred revenue (i.e., which seems fair if the Buyer Corporation has to perform the goods or services after consummation of the M&A deal).  If the fair value of the goods or services that the Buyer Corporation is obligated to perform exceeds the funding from the Target Corporation, then such shortfall is written off for GAAP purposes.  Such write-off is called the “Deferred Revenue Purchase Accounting Adjustment.”

The Issue

  • Potential Allegation of Ghost Revenues.  The allegation (or potential allegation) is that some publicly-traded issuers eliminate the negative impact of Deferred Revenue Purchase Accounting Adjustment when calculating non-GAAP performance metrics, which essentially enables the executives to dip into the “goodie bag” and apply ghost revenues as actual revenue for purposes of determining whether compensatory performance metrics were attained.
  • Articles and Lawsuits.  A few articles have addressed this topic.  For example, on October 29, 2018, Agenda published an article entitled “Should Ghost Revenue Scare Comp Committees?”  On May 17, 2018, Market Watch published an article entitled “Companies including Symantec are using ‘Ghost Revenue’ to calculate bonuses.”  And too, at least one publicly-traded issuer was sued in a class action lawsuit with respect to its use of ghost revenues.

Awareness and Documentation

I am hopeful the concept of ghost revenue fades away, and quickly.  The use of non-GAAP performance metrics is common within a publicly-traded issuer’s compensatory program.  And if adjustments were not made with respect to deferred revenue of a Target Corporation, then query whether such action (or lack of action) would incentivize executives to time the acquisition of a Target Corporation, or in other situations, to walk away from acquiring a Target Corporation because the latter has substantial deferred revenue.

In the end, the decision of whether to use ghost revenue to adjust non-GAAP performance metrics belongs within the business judgment of the Board of Directors or the Compensation Committee (as applicable).  If ghost revenues are used to help executives satisfy non-GAAP compensatory performance metrics, then the Board of Directors or the Compensation Committee (as applicable) should discuss the issue when determining whether the performance metrics were satisfied.  Such discussion should be reflected in the minutes.  And too, a determination should be made as to whether such adjustments will be addressed in the CD&A of the issuer’s proxy statement.