According to Statement of Financial Accounting Concepts No.

5, revenue is
recognized when the transaction is both realized (or realizable) and earned.
Revenue is realized (or realizable) when products are exchanged for cash or for
assets that are readily convertible to cash. Revenue is earned when the seller has
substantially fulfilled all requirements necessary to receive the benefits associated
with the revenue. In transactions in which a right of return exists--such as the case of
the December Program--SFAS No. 48, Revenue Recognition When Right of Return
Exits, requires that revenue be recognized at the time of sale only if all of the
following six criteria have been met:

The seller's price to the buyer is substantially fixed or determinable at the date
of sale.
The buyer has paid the seller, or the buyer is obligated to pay the seller and
the obligation is not contingent on resale of the product.
The buyer's obligation to the seller would not be changed in the event of theft
or physical destruction or damage of the product.
The buyer acquiring the product for resale has economic substance apart
from that provided by the seller.
The seller does not have significant obligations for future performance to
directly bring about resale of the product by the buyer.
The amount of future returns can be reasonably estimated.

Clearly, B&L did not meet all of the above conditions when it recognized revenues
from its 1993 sales promotions. For example, many distributors alerted B&L that,
despite the liberal credit terms, they would be unable to pay for the lenses until the
lenses were resold. The obligation to pay the seller (B&L) appeared to be contingent
upon selling the inventory.
Additionally, many distributors refused to sign promissory notes and thus failed to
obligate themselves for the inventory assigned to them. Cooperative dealers and
distributors were given assurances they could return unsold inventory and
renegotiate payment terms. Given these circumstances, the buyers were not
obligated to pay the seller. In substance, many of the December Program
transactions were consignment sales, rather than bona fide sales.
B&L also recognized revenue on sales of inventory that was not received by
"buyers." The CLD arranged freight forwarders and warehouse facilities--in some
cases at the CLD expense--to hold inventories until distributors would accept
delivery. In other cases, the CLD offered storage and delayed shipping to secure
distributors' participation in the December Program. B&L would have had difficulty in
forcing buyers to pay for undeliverable goods when the company actually held the
inventory.
B&L apparently had obligations for future performances with regard to these sales.
To encourage distributors to participate in its scheme, the CLD offered to provide
optical practitioners with incentives to buy traditional lenses from distributors. This
plan purportedly would help distributors resell excessive inventory.
The requirement that future returns be reasonably estimated was not met.
Distributors obtained written or oral assurances from the CLD representatives that

they could return unsold traditional lenses for credit. In many cases, distributors
made purchases when they may have had no intention of reselling the inventory
because of the return policy. Returns were not estimable in such cases, and it is
possible the sales were, in fact, buy-back arrangements.
The SEC Settlement
As a result of the questionable transactions of the CLD and the APD divisions, B&L
overstated revenue and net income for 1993 by a total of $42.1 million and $17.6
million respectively. In the first quarter of 1996, B&L amended its Form 10-K for 1993
and 1994 to restate the financial statements to account for these corrections.
Of the several forms of resolutions that can be reached between the SEC and a
registrant, two types of settlements were reached in the B&L case. In administrative
proceedings, Bausch and Lomb, the president of the CLD, the controller and vicepresident of finance of the CLD, and the CLD's director of distributor sales agreed to
a cease-and-desist order. Without admitting or denying the findings, the respondents
agreed to the entry of the order. A second settlement involved a litigation release
and the issuance of an injunction against the former regional sales director in the
CLD.