Carillion and FRC investigation

I know that some members are taking a very active interest in what went wrong at Carillion. The email below from the FRC contains a link to a document which you may find both useful and interesting to support your own research and in helping to reach some initial conclusions.

“From: FRC
Sent: 29 January 2018 09:54
To: Various
Subject: News Alert – Accounting and reporting framework for the construction and business support services sectors

In the light of the collapse of Carillion, the Financial Reporting Council (FRC) reminds Boards of companies in the construction and business support services sectors of their reporting obligations (PDF).
This guidance will also be relevant to other companies.
https://frc.org.uk/news/january-2018-(1)/accounting-and-reporting-framework-for-the-constru

(ends)”

I found these paras of particular interest:

Cash flow and net debt indicators

As explained in our letter to Audit Committee Chairs and Financial Directors in October 2017, clear information on the levels of debt, cash flows and the conversion (including the processes of conversion, such as invoice discounting and reverse factoring) of operating profits into cash is also important.

Users have an interest in good quality net debt reconciliations that clearly identify cash and non-cash drivers of changes. We draw attention to the amendments to IAS 7 Statement of Cash Flows (effective for periods beginning on or after 1 January 2017) which require an explanation of changes in a company’s financing obligations over the period.

It is sometimes unclear whether operating cash inflows recorded represent cash received from the customer/paid to the supplier or cash received from/paid to the third-party provider of these financial facilities. The new requirements provide an opportunity for companies to improve the clarity of their disclosures, particularly in those areas where investors have voiced disappointment; for example, on the disclosure of financing facilities such as invoice discounting and reverse factoring arrangements.

Lack of disclosure in this area, particularly in non-recourse arrangements where the customer receivables are derecognised, may hide reliance or changes in the reliance that a company has on such facilities. We strongly encourage companies to provide detail about, and explanation of their reliance upon, these facilities.

I also had a quick look at some key ratios for the past 4 years, taking data from the annual reports and working out the ratios:

				Change in		/turnover x 365(days)			As % of turnover
	Turnover	Trade receivables	Trade Payables	Trade receivables	Trade Payables	Trade receivables	Trade Payables	Intangible assets	Intangible assets
2016	4,395	1,664	2,090	393	376	138	174	1,669	38%
2015	3,951	1,271	1,714	(55)	(13)	117	158	1,634	41%
2014	3,494	1,325	1,727	113	139	138	180	1,614	46%
2013	3,333	1,212	1,589			133	174	1,553	47%

The shrinking value of intangible assets (the major part of which is the NPV of future profits on long-term deals), when measured as a % of turnover, shows a problem. It reduced from 47% to 38% in 3 years.

Page 110 of the 2016 annual report (Note 11 Intangible assets) explains the methodology:

The cash flows used to determine the value-in-use calculations are from the latest three-year forecasts approved by management, which are based upon secured and probable orders and the Group’s overall strategic direction. The cash flows are extrapolated from year four, with a terminal value using a growth rate of 2.5 percent. This growth rate does not exceed the long-term industry average and reflects the synergies from acquisitions.

Management has undertaken sensitivity analysis on a number of key assumptions in the value-in-use calculations. Sensitivity analysis on the discount rate shows that the discount rate would have to increase to a minimum of 21.3 percent for Construction services (excluding the Middle East) and to a minimum of 19.0 percent for Support services before an impairment was triggered in any CGU. On the basis of the sensitivity analysis undertaken in relation to cash flows, management concluded that there is a more than adequate amount of headroom in the value-in-use calculations before an impairment would be triggered.

Cliff Weight

Post Date: February 5, 2018

Group description:	SIGnet Taunton is a new group with around 10 keen members at present, with a range of investment styles and experience. We welcome new members.
Meeting Type/Venue:	In person meetings at a golf club near to the centre of Taunton.
Meeting Frequency/Timing:	We meet on the first Monday of every month at a golf club near to the centre of Taunton, 11am until 3pm with a lunch break.

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Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Monday of the month at 7:00pm.

Group description:	An online group for those who already have some experience in investing. Covering topics such as finding companies to invest in, financial statements and ratios, valuation / margin of safety, analysis of companies and investment trusts and exchange traded funds.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Wednesday of the month at 7:00pm.

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Meeting Type/Venue:	Meetings are held online.
Meeting Frequency/Timing:	Meetings are held every 6 weeks on a weekday between 7 and 8:30pm.

Group description:	The Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on all types of income generating financial instruments, from stocks through Trusts and Funds and ETFs to retail bonds. Meetings involve presentations from members, who are also expected to lead discussions from time to time, as well as discussions on what has been bought and sold since the last meeting.
Meeting Type/Venue:	Meetings are in-person in a venue in Central London.
Meeting Frequency/Timing:	Meetings are usually held on the last Thursday of every other month, starting with an informal lunch around 1pm followed by discussions until around 5pm.

Group description:	A welcoming group open to all types of investors. Typical meeting content is to have a deep dive presentation on a topic selected by the participants and a session on buy/ sell/ key lessons learnt last month.
Meeting Type/Venue:	In person at a friendly pub close to Piccadilly Circus
Meeting Frequency/Timing:	Monthly during the evening on the first Wednesday of the month.

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Meeting Frequency/Timing:	The first Tuesday of every month from 7 to 9pm

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Meeting Type/Venue:	We aim to meet on the last Tuesday of each month in a private room at a pub in Playhatch. Start time 7pm with members encouraged to meet up around 6pm for a bite to eat / drink before hand, if their diaries allow.
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Carillion and FRC investigation

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