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A Fair Trade

Find out how to barter the right way--and avoid the practices that will land you in hot water.

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This story appears in the October 2003 issue of Entrepreneur. Subscribe »

It wouldn't be the first time a telecom company's accounting chicanery made headlines, but the ongoing tussle between Qwest Communications International Inc. and the SEC brought a common industry practice under the microscope-and may have businesses thinking twice about certain strategic agreements. At least some of Qwest's trouble is about reportedly recognizing some $2 billion in revenue from "swap" sales dating back to 1999. The fact that the Denver-based telephone company swapped fiber-optic capacity with other telecommunications firms was hardly an anomaly; telecom companies had been trading capacity for years, seeing that as a cost-efficient alternative to each company building its own network in a particular area.

But rather than simply exchanging services, companies like Qwest began getting the idea to construct two separate transactions, with each side writing a check to the other. "That's where the accounting trick comes in," says Mark DeFond, professor of accounting at the University of Southern California's Leventhal School of Accounting in Los Angeles. "When I receive a check from you, I book that as revenue, but when I write a check to you, I don't book it as an expense." Rather, the expense is amortized over a period of time, while the revenue is booked upfront.

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