The questions regarding potential slight of hand accounting at Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) continue after the firm posted monster first half earnings but the stock fell over 10 percent, as previously reported in ValueWalk. The reason the stock fell on better than expected earnings was essentially trust issues over the quality of the earnings report, ValueWalk reported.
Concern in Quindell’s accounting treatment
Now more of these earnings concerns are clarified.
An article in the Financial Times points out two major areas of concern in their accounting treatment of certain forward looking revenue assumptions. The most noticeable of these assumptions is accrual of future revenue of a class action legal case that has yet to be formally decided, but perhaps the more interesting accounting maneuver is an increase in the value of a Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) investment based on a subsequent investment Quindell made at a higher price.
The accounting for the investment in Himex highlights the type of accounting issues that plague Quindell. The company had previously purchased 66 percent of the firm for £23m in cash and then laid down nearly twice that amount using its stock as currency.
The important point is that after making the initial investment, Quindell made a second, much smaller investment during the first half reporting period, upping their stake in Himex to 85 percent, and paying a higher price in the process. For accounting purposes Quindell then determined the value in Himex to have increased based primarily on its second investment.
Quindel’s Himex investment break down
When Quindell PLC (LON:QPP) (OTCMKTS:QUPPF) broke down the Himex investment, the carrying value of Himex assets was listed at just £18m, yet the “goodwill” that was derived from the acquisition was accounted for the lion’s share of the company value, £81m.
Then comes the apparent obfuscation in the accounting report that describes the transaction. Instead of using clear language, the report said:
The resultant goodwill of £81.2 million represents the value to the Group that can be driven from these underlying assets over the life of the acquired business and comprises the value of expected synergies arising from the acquisition together with the workforce, which is not separately recognized.
Aside from increasing the value in an investment based on another subsequent smaller investment and then accounting for a significant portion of the acquisition based mostly on the company’s involvement, another issue the FT pointed out was booking forward revenue on a class action legal claim that has yet to be determined in court.
Quindell PLC (LON:QPP) (OTCMKTS:QUPPF), a plaintiff’s law firm at heart, is representing clients in an industrial deafness case. No settlement agreement has been formally reached with the insurer nor has the case been ruled upon in court, but Quindell has booked as revenue a massive amount on the balance sheet. While the insurance company has set aside a portion of capital to pay the claims, no agreement has been reached.
It appears the wild west accounting at Quindell might best be described as “book revenue first, ask questions later.”
Read the full FT article here.