Observations on the annual report

Hi, I’m a financial reporting specialist at one of the big 4 firms (not the one involved with Big and I have no inside knowledge). I used to work in Australia, but now in Europe.  I hadn’t heard of Big until the suspension and the AFR article, but I’m now intrigued by the company.  So I thought I’d look into their Fy17 accounts and cast my critical eye over them.  I’ve tried to stay clear of the whole FCC thing, that’s probably been covered enough, but hopefully it will give you some idea why its taking so long to get the next set of accounts out.  Their new accountants will be having to correct everything in the past before they can release reliable interims.

As I don’t own any Big shares, I’ll probably be accused of “downramping”. But I don’t own any shares in any company, and no intention of buying any. You never know when a company might become a client of my firm and I find its best to avoid any conflicts by not owning any shares in the first place.

Here goes (order as they appear in the financial statements, not relative importance):

1. Income statement - Its not clear what the “cost of services sold” is. For Big's business I thought this would primarily be amortisation of the recording equipment and staff costs. But both are separately shown in the income statement. If there are staff costs in the cost of services sold, then the amount should be separately disclosed. If not, then what’s there?
2. Income statement - Very large “other costs” balance in the income statement. It’s nearly 15% of revenue and always a red flag to someone like me. Would expect better disclosure of what’s here
3. Income statement - Diluted EPS is wrong. If loss making all potentially dilutive shares are anti-dilutive (they just spread the loss round more shares) and diluted EPS should equal basic EPS
4. Balance sheet - The Loan Share Plan receivable in the balance sheet shouldn’t be there. It’s a limited recourse loan to acquire shares, meaning its actually a share-based payment arrangement (don’t recognise the debtor + have additional SBP expense).  They will never receive $405k in cash.
5. SOCIE - They don’t have any Share-based payments in the SOCIE! Can’t work out why not. They say they’ve recognised over $1m expenses
6. Note 1 - Revenue recognition policy says they recognise revenue immediately if the client pays upfront and they’ve completed all the work. But the work is an ongoing membership service, so they will never complete all the work upfront.
7. Note 3 – R&D tax incentive is not revenue.
8. Note 6 – The FV assigned to the share consideration should not be based on the share price when it was agreed. It should be the date control was transferred.
9. Note 6 – They have not identified any intangible assets in the business combination. Very unusual.
10. Note 7 – Unusual to not have operating segments. Do they not separately monitor overseas operations? If I was a shareholder I’d want to see information on the overseas segments.
11. Note 8 – Additional potential ordinary shares are more than the options at the year end, so what else is there? Plus, the treasury stock method doesn’t appear to have been applied for the diluted EPS.
12. Note 8 – Weighted average number of ordinary shares (222m) is significantly more than the number of ordinary shares issued (133m, per note 16) or the number in the shareholder information (127m)
13. Note 10 – No maturity/credit risk analysis of the very significant trade receivables.
14. Note 13 – No impairment review of the goodwill!!
15. Note 16 – No disclosures on the timing and consideration for the multiple new share issues.
16. Note 16 – Given all the payment’s in shares, significantly lacking disclosure on the share-based payments o/s
17. Note 18D – Incorrectly believing deferred income is a financial liability (well actually in this case it might be, it’s not for a normal company!)
18. Note 22 – No disclosure of the amount of the leases.
19. Note 25 – Parent company issued capital significantly in excess of the group.
20. Note 25 – Foreign subs, which presumably don’t have AUD functional currency, but no translation to presentational currency FX in the financial statements.
21. Note 25 – Wayfarer and Big Intermedia listed as subsidiaries not JVs (can happen if Big controls despite 50/50 ownership), but missing disclosures on the non-controlling interest and the results of the subs with significant NCI. If actually JVs, don’t appear to be using the equity method and missing disclosures of the JVs results.

Some of these probably aren’t material and they might be able to get away with some others, but I’d say the quality is probably the worst for any published accounts for a listed company I’ve seen, I certainly don’t recall any worse. If it was one of our audit client’s who’d published that, the audit partner would be getting a call from the head of risk management in the morning.

And that’s just the issues I can spot from a quick review of the accounts, from the FCC thing there are certainly more issues that they’re working through. The Big 4 firm will want them all corrected now; they won’t want their name associated with another poor set of financials from Big. So everything has to be corrected now and they can’t wait to the year end. Hence its taking so long. DYOR