Greenberg: Accounting Questions Brewing at Green Mountain

I generally regard company disclosures of SEC investigations as MERELY a headline. Investigations, it appears, have become a commodity with little to show in the end. The good news is that there’s an inquiry; the bad — rarely do they find anything or does any company get severely penalized.

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TheGreen Mountain investigationmay go that same route, but it’s interesting on another level: According to the company, the SEC is focusing on revenue recognition practices with a fulfillment vendor.

The company snuck out the disclosure in an 8-K filing without a formal press release.

The fulfillment vendor, as disclosed in the company’s 10-K, appears to be M-Block & Sons. In its 10-K, Green Mountain says, “We sell a significant number of brewer and K-Cups to this third party fulfillment company for re-sale to certain vendors.” This is a change from the prior year’s 10-K, in which Green Mountain said its Keurig brewer unit “relies on an order fulfillment company to process” most of its orders.

That sounds like M-Block has gone from an order processor to becoming a customer.

Given the revised definition, what’s the difference between a fulfillment vendor and a distributor? According to a spokeswoman, the “sale” in the case of a fulfillment company is for technical accounting purposes only; the actual transaction, she said, is more like a “pass-through” transaction because M-Block does not hold inventory. It merely adds K-Cups to packages of brewers and delivers them (and packages of K-Cups) to retailers.

Still — and this may be a bit thick — Green Mountain claims that receivables from M-Block accounted for 51% of Green Mountain’s receivables. Put another way, even though this supposedly is a sale for accounting purposes, M-Block is billed for the products it receives from Green Mountain.

And just to make this a bit more confusing: The Green Mountain spokeswoman says the “trigger” for Green Mountain recording the sale is M-Block’s sale of product to the retailer. And it all happens “simultaneously in the system” — even as the receivables are being created.

To further complicate matters, the spokeswoman says that Green Mountain owns the receivable from M-Block, while M-Block owns the receivable from the retailer.

Confused? So am I.

My take: While on one level this may actually make sense, it’s way too convoluted for comfort.

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