IRUs

Indefeasible Rights of Use

At the heart of the telecom controversy is a standard industry practice in which telecoms plug gaps in their fibre-optic networks by leasing capacity from other providers. These long-term leases have a funny name - indefeasible rights of use, or IRUs - and companies often buy and sell them in what are essentially barter deals. There is nothing wrong with this. It's just that the accounting gets a little tricky.

Some experts believe that if the swapped IRUs have the same value, no revenue should be recognised by either party. That's not what telecoms like Qwest, Global Crossing, and 360Networks did; they recorded the IRUs they sold as revenue. Meanwhile, they considered the IRUs they purchased as a capital expenditure, allowing them to amortise the cost gradually over the life of the lease. That not only boosts revenues but also inflates profits. 'If you are capitalizing the expense, then you should treat the revenue as deferred and recognise it over the life of the lease', says Stephen Ryan, an accounting professor at New York University's Stern School of Business.

Worse, there are suspicions that telecom companies, including Global Crossing, engaged in these transactions not because they genuinely needed the capacity but because it was an easy way to manufacture revenue at a time when real customers were scarce and an oversupply of fibre had caused the price of bandwidth to plummet. The effects are huge: In the first nine months of 2001, IRU swaps accounted for $660 million of Qwest's $15 billion in revenues - and most of its reported sales growth. By the second quarter of last year - before analysts began questioning the IRU swaps - nearly 20% of Global Crossing's $3.2 billion in revenue came from the deals.