Charlie Munger’s Daily Journal will have to restate its earnings for the quarter ending June 30, 2014 after its auditor BDO USA decided that Daily Journal needed to establish a reserve for an ‘uncertain tax position’ related to the acquisition of New Dawn Technologies Inc, according to the company’s SEC filing. Daily Journal also wrote that it wouldn’t be able to file its 10-K form because it’s still working out the size of the reserve, but instead of getting punished its stock price jumped almost 20%.
Daily Journal to setup reserve against potential tax liabilities
“Although [Daily Journal] believes that it had substantial authority for the tax reporting position taken, because of the uncertainty in this area, the Company expects to set up a long-term liability for its uncertain tax position that will likely offset the previously recorded income tax benefit, and which should be recorded in the third quarter of fiscal 2014 when the tax return was prepared. The Company also expects to establish a reserve for accrued interest and penalties,” the company wrote.
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Basically, Daily Journal assumed in its previous filing that its tax treatment of deferred revenues was ‘more likely than not’ to be approved by the IRS, and its auditors disagreed, so now it needs to setup a long-term liability for its uncertain tax position until the matter is settled. We don’t know how serious the impact will be until we see the actual restatement, but it certainly isn’t good news especially after clashing with its previous auditor. Which is why it’s strange that the stock price jumped like that.
Bad news could have simply attracted new investors’ attention
One possibility is that the news item simply brought the companies existence to more people’s attention, and that some investors who had never heard of the company decided to buy in. The 30-day average trade volume is just over 1,300 shares, but the volume on December 31st was 13,000: that’s a huge relative jump, but still tiny compared to high profile companies. For reference, Berkshire Hathaway’s Class B stock has a 30-day average volume of 3.8 million.
If you’re already following Charlie Munger’s career, you know that he has been making a lot of money using the publishing company as a base for other investments, not entirely different from what Warren Buffett did with Berkshire Hathaway (it was a struggling textiles company when he took it over). But if you didn’t know, even finding out due to some disagreements over tax accounting might not be enough to dissuade you from taking a position.