Issues with Shine's business and accounting, page-9

Some good discussion on WIP and the practicalities of what it is and how its calculated.

In simple terms the main part of WIP is revenue that has been recognised but unbilled. WIP starting point is the companies revenue recognition policy. SHJ's revenue recognition is

Assuming everything charged as revenue is billed in that same year (which doesn't happen hence WIP on balance sheet) then very simplistically Revenue = (hrs x charge rate) + (writeup)/- (writeoff) the difference between amount on bill and the (hrs x charge rate) -

Whatever is unbilled at a point in time goes to WIP and is combined with disbursements. WIP is then reviewed separately for recoverability and hopefully the 'writeoff' adjustment i mentioned above happens to WIP in the year the revenue was recognised. SHJ's WIP policy is

Situations from experience that create risk with WIP

External
- cases which will not be won
- cases which are taken over by to another firm
Internal
- cases where the time charged exceeds amount billable or the amount of WIP which should exist given the stage of completion. This could be because of complexity, under quoting or professional staff member arbitrarily charging time (it happens especially where there is performance issues or business is slow)

Given the level of the WIP provision announced their previous WIP policy clearly wasn't robust enough. I find it very hard to believe that the entire, or even a majority, of that $17.5m relates to the current year - its 1.5 months of revenue.

If that 17.5 does relate to FY15 and prior then the revised EBITDA is circa $40m. That's a similar number to FY15 and should, once the market becomes comfortable again, support a valuation significantly higher than current prices. The SP from late November onward appears based on my numbers to have priced in zero growth in earnings and a corresponding drop in multiple. If that WIP adjustment was a one off mainly prior period revenue and SHJ can deliver the revised target no reason why the SP couldn't go back to where it was immediately before the announcement.