Historical Costs

["Raimundo Beca" <rbeca@xxxxxxxxxxxxxxx>]

In the tree Public Comments about the ICANN Budget, opened in 2012 and 2013,
I expressed my concerns regarding the treatment given to Historical Costs of
the New gTLD Program.  In complement, at the Public Forums at San José,
Prague and Toronto I highlighted these concerns.

 

My concerns regarding the treatment given to these Historical Costs are
related to the total amount of them which I consider underestimated, on one
hand, and to the opportunity in which they are returned to ICANN which I
consider that should be entirely paid back to ICANN as soon as the new gTLD
Program has recognized sufficient revenues to do it, on the other.
Unfortunately, little progress has been made until now at this respect.

 

However, at Durban, the CFO committed itself to the following two positive
steps regarding both Issues:

 

Step 1, regarding the total amount of Historical Costs: To ask to the
External Auditor of ICANN to certify the real amount of the Historical Costs
instead of the mere estimations of this figure applied until now.
Unfortunately, to my knowledge, the External Auditor of ICANN has not yet
provided this amount.

 

Step 2, regarding the opportunity in which the Historical Costs should be
returned to ICANN: To provide the recommendation given by an expert to ICANN
on the accounting principles that should be followed by ICANN in this case,
according to which these costs are returned in proportion to the number of
non-refundable applications, whose revenues have been recognized.
Effectively, at Durban, the CFO provided, at least to myself, a copy of a
document referred as Revenue/Expense Recognition and Compliance with GAAP
for the New gTLD Program.

 

In fact, the document I received is a 27 pages Memo, with 47 aside comments,
which certainly is hard to analyze.

 

Personally, I have no objection to the recognition principle of revenues
applied by the New gTLD Program, restricted only to the fees of non-
refundable applications.   

 

Notwithstanding, I do have serious objections regarding the recognition of
the Historical Costs. Effectively, to the best of my understanding, in my
honest opinion the first of the two paragraphs of this Memo quoted below is
inconsistent with the second:

 

Paragraph 1: "ICANN Operations incurred start-up costs related to the New
gTLD Program in prior years.  A portion of the total $185,000 application
fee charged by the New gTLD Program is earmarked for recoupment of those
prior period costs.  We refer to guidance from ASC 720-15-25-1 for further
guidance on how to recognize start-up costs. 25-1 Costs of start-up
activities, including organization costs, shall be expensed as incurred."

 

Paragraph 2:  "The Company applied the provisions of ASC 720-15-25-1 and
concluded that all costs incurred in prior periods related to the
development of the gTLD program should remain expensed in the periods in
which they were originally incurred."

 

Effectively, the earmarking of a % of the application fee to recover the
historical costs is an artificial construction, inconsistent with the
recognition of the expenses when they were originally incurred.

 

Even more, the accounting recognition policy described in this memo
identifies a number of other direct fixed costs which are not related to the
evaluation of a particular application, for which it recommends that they
should be recognized as incurred. Specifically, this policy identifies the
following costs not related to a particular application: Initial Evaluation
Costs, Quality Controls Costs, String Contention Costs, Independent Objector
Costs, Pre Delegation Costs and Program Administration Costs. Obviously, it
is difficult to understand why the Historical Cost is the only expense that
needs to wait to be returned until the last application fee has been
recognized in circumstances that it incurred in those historical costs
longtime before the other items. In particular, it is hard to understand why
the Initial Evaluation Costs incurred after January 1 of 2012 not included
in the Historical Costs would have a different treatment than those that are
include among them.  

 

In conclusion, I'm not persuaded that the earmarking of a % of the
application fee to recover the Historical Cost is based in an
internationally accepted accounting principle. Consequently, I insist in my
proposal that all the Historical costs should be returned in FY13. 

 

Raimundo Beca.