they have a non-traditional inventory

providing seismic data

sells its proprietary information technology to oil and gas companies
seismic data library consists of both two-dimensional (2D) and the more
modern three-dimensional (3D) data which is marketed to major and
independent oil and gas companies under license agreements.

1
2
3
4

QUESTION 1
Operating Strategy
to acquire and provide proprietary seismic data to the oil and gas industry - client financed.
the resale over and over again of those compiled surveys from its data library.
also purchases seismic data for its data library from other companies.
performs regional surverys for clients
Financing Strategy
borrowings, resale of data and presold multi-client surveys.
QUESTION 2
Current Amortization Policy

The Company uses the income-forecast method to amortize the costs of seismic data programs it crea
Under the income-forecast method, seismic data costs are amortized in the proportion that revenue fo
revenues.

Management estimates that 90% of the costs incurred in the creation of seismic data is amortized w
two-dimensional seismic data and within seven years of such data becoming available for re
If anticipated sales fall below the benchmark guidelines, amortization is accelerated.
Depending on actual sales performance, the costs of the Company's seismic data are fully amortized w
The costs of purchased seismic data programs are generally amortized on a straight-line basis

However, the costs of a significant purchase (greater than 5% of the net book value of the seismi
forecast method or ten-year straight-line method.

Change in policy. Why?

Industry practice is to use much shorter amortization periods with higher accelerated early year write

The uncertain nature of the drilling industry and rapid seismic technology advances suggest that cons

EXHIBIT 1: The size of the net data bank carrying amount ($303 million) relative to the Companys net
advisable, since a major correction to the assets carrying amount would have a negative impact on t

In the case of many purchased data libraries, the straight-line amortization schedule can lead to a mis
early years of the amortization schedule and the related investment costs will be spread out over per
A shorter and more accelerated amortization schedule will also improve the quality of earnings - PE ra
The probability of future significant data library impairment write-downs would decrease. Data is more
Managements credibility on other potentially contentious issues, such as revenue recognition, might

QUESTION 3
will have to include these expenditures as operating activities in the Companys statement of ca
reclassification would highlight the fact that on a cash basis the Company has failed to earn a spread

QUESTION 4
Inventory - RM, WIP or FG
Data libraries - not inventory in normal sense. However, it can get old like other assets
But unlike inventory, they can be resold again and again
Also, utility declines with use and age
More like an intangible asset - limited life
Inventory like asset it should be classified as an operating activity
intangible asset it should be classified as an investing activity.
In balance sheet - looks like a current asset

QUESTION 5
use an adjusted earnings figure based on a faster amortization schedule - compare valuation of the co
Earnings per share : how much investors make per stock
Exhibit 1: declining trend
ROE also declined (15% in 1997 to 0.3% to 1999)
1997 = 31557/207273=15%
1998=24360/237587=10.2%
1999(q1)=750/232293=0.3%

Year

Cash flow from Data Library

Operations
Investment

1996

67.3

49.7

Net
17.6

1997
1998

76.2
97.5

1991 (Q1) 29

76.6
119.3

-0.4
-21.8

62.6

-33.6

ION Geophysical, a geoscience

company, provides seismic
solutions

We capitalize the costs we pay to third parties for the acquisition of the seismic
data and our direct internal costs associated with processing and interpreting
the data.
Our method for amortizing the costs associated with a new venture programs
is based on the percentage of actual revenue to the total estimated revenue
multiplied by the total cost of the project (the sales forecast method).
The sales forecast method is our primary method of calculating amortization.
The total amortization period of four years represents the minimum period
over which, benefits from these surveys are expected to be derived. We have
determined the amortization
period of four years based upon our historical experience that indicates that
the majority of our revenues from multi-client surveys are derived during the
acquisition and processing phases and during four years subsequent to survey
completion.