Cerence Understates Net Income 2.5%, Blames Revenue Recognition Trouble

Technology firm reveals three accounting errors resulting in understated sales and profitability over multiple reporting periods.

January 6, 2022

Cerence (CRNC), a builder of AI powered virtual assistants for automobiles, is struggling to accurately account for its performance since being spun off from Nuance Communications in 2019. In its latest 10-K, Cerence revealed three accounting errors that resulted in the inaccurate reporting of revenue, net income and other items in multiple periods:

1. During the first quarter of fiscal 2021, Cerence recognized an immaterial amount of connected services revenue which related to fiscal year 2020
2. During the first quarter of fiscal 2021, the estimated achievement percentage relating to Cerence’s long-term incentive plan increased and the company did not originally record the corresponding cumulative adjustment to stock-based compensation during the three months ended December 31, 2020
3. During the fourth quarter of fiscal 2020, Cerence recorded a restructuring accrual relating to the closure of a facility under ASC 420 Exit or Disposal Cost Obligation when ASC 842 Leases should have been applied. During the three months ended December 31, 2020, a partial true up was recorded to the restructuring accrual

The company says the misstatements are immaterial but revised its financial statements to reflect the revisions. The mistakes resulted, in certain periods, in understated revenue and net income. For example, Cerence short changed itself $328k in revenue in the quarter ending March 31, 2020. After adjusting for the tax impact, Cerence’s revisions resulted in a 2.53% increase to net income or a penny per share versus what was originally reported.

In the annual report Cerence’s management concluded the company’s internal control over financial reporting was effective.

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