We proudly present various projects which we have delivered and some key lessons learned. These highlight the range of services delivered and the complexities involved with these transactions and events.
A publicly traded health care services company was in process of significant organizational and business changes. The Company had made executive management changes and executed two significant acquisitions, including an internationally domiciled business. This taxed existing finance and accounting resources as fiscal year end approached.
We provided the Company with a variety of assistance to supplement existing resources, including: documenting the process and key controls related to recording of the two acquisitions; assisting with certain acquisition accounting and IFRS-to-US GAAP conversion adjustments; performing and documenting annual goodwill impairment tests, including computing step 2 impairment charges; reviewing cash flow statements reflecting the acquisitions; and, designing and creating earnings release support binders for executive management.
As accounting standards continue to evolve from a historical cost to fair value model, use of fair value measurements involve more management estimates and judgment. Auditors rely heavily on their own specialists in auditing fair value measurements. Use of specialists in the audit generally impacts the timing of the audit process and may result in differences in opinion in the methodologies and estimates used in determining fair value. Early communication with the auditors around methods and estimates may help to prevent issues arising near an earnings release date or filing deadline. Additionally, as goodwill impairment testing rules allow for annual testing to occur on dates other than a fiscal year end, this is an election which should be strongly considered. Moving this requirement outside of year end may eliminate a significant accounting exercise to a time period in which resources may be more flexible.
Company entered into an agreement to dispose of a non-core subsidiary. To fund the acquisition and further acquisitions, the buyer planned to raise capital on the Toronto Stock Exchange. The stock exchange rules required the buyer to present the client’s audited financial statements prepared under IFRS. The company had not historically prepared separate financial statements of the business for a number of years. As a result of a compressed timeline and a lack of IFRS knowledge, we were engaged to assist the company through this challenging conversion exercise.
We assisted in creating stand-alone, carve-out financial statements prepared under IFRS. We identified and assisted the company in identifying US GAAP to IFRS differences and developed methodologies for quantifying adjustments. We drafted whitepapers which documented the company’s process for converting the subsidiary’s financial statements to IFRS. We reviewed both annual and interim carve-out financial statements and disclosures and assisted the company in drafting additional disclosures as needed. We worked with the auditors throughout the audit process including interfacing with the Big 4 firm’s national office.
Converting financial statements from US GAAP to IFRS is a significant and time consuming undertaking regardless of what may be perceived as an absence of significant differences. A realistic timeline to complete this type of project is essential. The company must demonstrate to its auditors how it diligently executed the conversion to IFRS. IFRS adoption is largely retrospective except for certain accommodations afforded to first-time adopters. This can create significant challenges in locating underlying records which may support an existing balance which was recorded many years in the past. Additionally, the local audit engagement team may have limited IFRS experience and firms likely have a process in place which require national firm experts to be involved in the review process before an audit opinion can be issued. This process takes time.
Educational SAAS company, subsidiary of a Turkish-based parent, was restructuring its operations and seeking a part-time CFO/Controller resource to fill the opened position.
We provide a part-time CFO/Controller resource to work directly with the CEO in managing all financial aspects of the business including monthly reporting to the parent, cash management, budgeting and planning, and employee benefits. We assist in reviewing the work of the Accounting Manager and responding to the financial needs of business operators. We have designed and implemented certain internal controls over cash and converted the position from a full-time, salaried position to approximately 20-30 hours a month. Additionally, as the parent reports under IFRS, we are able to offer guidance on how the company’s accounting may be reflected under IFRS.
While finance and accounting is integral to any successful business, a start-up or small business may benefit by using a temporary resource as compared to hiring a full-time employee. A company may save by not paying for fringe benefits for a part time, independent contractor. Additionally, a company may see benefit by having a qualified temporary resource take a fresh look at process and procedures and accounting policies. The end result could be an upgrade to the position.
Casino owner and operator with properties throughout the United States emerged from Chapter 11 bankruptcy and qualified for "fresh start" accounting. The bankruptcy process resulted in a state gaming commission seizing control of a flagship property and orchestrating a stocking horse auction process for the operating assets. This unique regulatory transaction as well as the plan of reorganization resulted in the restructure of the company's capital structure, issuance of compound financial instruments and warrants.
We provided overall project management and coordinated the activities of management, auditors, and valuation specialists. We drafted accounting memos that documented the company's positions for: fresh start accounting, convenience date conventions used for the emergence date, and, accounting for compounded financial instruments and warrants. We created a bridge model to record new fixed asset values derived by valuation specialists into the company's fixed asset sub-ledgers.
Due to the nature of the business, a significant part of the company's assets consisted of gaming equipment, and other fixed assets. Valuation specialists typically are only concerned deriving new fair values and not how values are recorded into sub-ledger records. This process is critical as it impacts ongoing book depreciation as well as deferred tax calculations. Because of our significant experience in this area, at the outset we worked with the valuation specialists and developed a bridge model to push new fair values into the fixed asset sub-ledgers, and provided an audit trail and reconciliation for the company's auditors. We also reviewed remaining useful live estimates recorded in the fixed asset sub-ledgers.
Our private equity client was interested in acquiring a closely-held industrial enterprise with less than 20 employees.
We assisted our client by performing due diligence procedures on the target enterprise which included quality of earnings analysis, identification of potential post-combination and purchase accounting issues, and areas of improvement for operational and internal controls over financial reporting. Our findings were documented in a formal due diligence report to client management.
In lean operations, it is important to balance the need for strong internal controls with creating burdens to effectively running the business. One of the most significant challenge is to devise segregation of duty controls over various processes. Some strong automated internal controls can be implemented through use of built-in controls in ERP systems.
Our private equity client was interested in acquiring a closely-held industrial enterprise.
We assisted our client by participating in due diligence accounting and finance meetings. We provided our client with real-time feedback on potential issues which impacted quality of earnings, deal price, and post-combination accounting.
In owner-operated enterprises, it is very common for management to represent that books and records comply with general accepted accounting principles when in fact the books and records are maintained on a tax-basis. It is also common for an owner’s personal transactions to be commingled with those of the business and for there to be related party transactions between the business and other interests owned by principal stakeholders. It is important in due diligence to identify these matters which may likely result in historical earnings/trend changes and adjustments to the deal price.
Telestial satellite communications company was acquired by a Special Purpose Acquisition Company (SPAC) and effectively went public through the SPAC’s acquisition of the company. The company’s financial statements were presented in the SPAC’s registration statement. Because the company’s key assets were orbiting satellites, there were unique valuation issue in determining fair value of such assets.
We assisted the company in preparing pro forma financial statements to reflect the SPAC’s acquisition of the company. We provided project management for the registration statement filing, reviewed the company’s financial statements, and assisted the company in preparing Management’s Discussion & Analysis (MD&A) presented in the filing. We prepared accounting whitepapers documenting the company’s position on the accounting acquirer determination as well as for certain share-based awards in which vesting accelerated with the change in control. We worked closely with valuation specialists especially due to the fact that negative goodwill was present in this acquisition. We also assisted the company in responding to the SPAC’s SEC comment letter related to the registration statement.
As the SPAC generally has no substantive operations and management of the acquired business generally continues on after the acquisition, the acquired operating entity needs to develop a comprehensive plan outlining processes and activities required for a listed entity. A SPAC acquisition is akin to an IPO as the private enterprise effectively becomes public. The company will shortly after close of the acquisition be filing interim reports with the SEC and releasing earnings to stakeholders. This planning needs to be completed concurrent with the acquisition.
A publicly traded technology company adopted the new revenue recognition standard. The company had lost personnel in its accounting and finance organization and needed additional support to effectively adopt the new standard.
We provided the company with technical accounting expertise related to the adoption of the revenue standard. The company created a cross functional project team which consisted both of internal resources and consultants. In conjunction with the company's revenue accounting group, we evaluated the company's business against the requirements of the new standard. We assisted in creating a document analyzing and concluding on major issues of applying the standard. We presented the conclusions to the company's CFO as well as an accounting analysis document to the company's auditors.
While there were a number of issues to analyze, the time required to complete the accounting analysis was not as significant as other matters. The company was required to change the way it recognized revenue. This change was not material to the company, but it did have a significant impact to its information technology processes. The company engaged information technology consultants and dedicated significant internal resources to build a solution which allowed for system generated revenue calculations. It was also important that the final solution supported foreign subsidiary statutory reporting requirements.
Besides the significant impact to information technology systems, the other lesson learned was the effort required to evaluate non-core revenue streams. The company had a number of different non-core revenue streams in which its auditors required analysis under the new standard regardless of the relative size.
The financial statement impact of adopting the new revenue standard was not material, but it is important to not underestimate the time required to properly execute an implementation project. The project extended close to two years with most of the work taking place in the last nine months. There will also be post implementation efforts required to ensure that processes are stable and operating effectively.
A private equity owned transportation business was planning for an IPO as part of an overall liquidity event for its private-equity investors. As permitted for private companies, the Company had its auditors prepare the annual tax provision and related financial statement disclosures for a number of years. This also included tax entries related to various acquisitions which the Company executed during the year.
We assisted the Company by preparing the income tax provision and annual tax entries. We also provided tax entries related to acquisitions closed during the fiscal year. We drafted and provided information for income tax financial statement disclosures. We worked with the Company’s auditors and responded to any audit inquiries.
Auditor independence rules are more restrictive for public companies than private companies. Certain permitted services which an auditor may provide to a private company may be prohibited for a company going through an IPO. For example, an auditor may provide a permitted service in a year, but because the service occurred in a period which is included in the registration statement, the auditor’s independence for that period would be impaired. Developing an IPO timeline and understanding the number of audited fiscal years which may be required in a registration statement can be important. Addressing potential auditor independence issues early-on may avoid situations where auditor independence is impaired which would lead to a potential delay to an IPO or would require a period to be audited by another independent firm.
A private equity owned transportation business implemented a profits-in-interest plan in conjunction with the private equity investment. Such a plan is common for limited liability companies as it provided an incentive to recipients as well as tax advantages.
We assisted the Company by drafting a technical whitepaper analyzing the accounting for the issued profit-in-interest units.
The Company’s initial conclusion was that it had issued an equity-based award. However, upon review of the underlying agreements, we determined that appropriate accounting was akin to a cash bonus. This conclusion had significantly different accounting consequences. Analysis of the accounting prior to execution of complex compensation plans may be prudent. This will enable better planning of ongoing financial statements impact and may have impact on agreements (e.g., loan covenants, bonus agreements, etc.).
Medical device and services company had historically reported disaggregated segment information and was seeking to redefine its reportable segments.
We drafted an accounting whitepaper documenting the company’s determination of its operating and reporting segments. We worked with the company’s auditors in responding to questions on the change in segment reporting. In the end, the company was able to support a single reportable segment.
Segment determination is a critical accounting policy which not only impacts segment reporting, reporting units used for goodwill and long-lived asset impairment testing, and the disclosure of sensitive information which could be used by competitors. Segment reporting is intended to provide financial statement users with information which management uses in running the business. While this is an area of SEC scrutiny and a frequent area of SEC comments, it may be appropriate to review segment conclusion.
Company sells routers and other network devices which has embedded firmware. The company also bundled other upgrade rights and services together with the hardware. The company required assistance in adopting new multiple element revenue accounting rules.
We assisted the company in reviewing memorandums documenting accounting positions related to adoption of then new accounting rules related to multiple element revenue standards. In particular, we evaluated company methodologies for determining third party evidence of fair value or estimated selling price in the absence of vendor specific objective evidence. We assisted the company in responding to questions raised by its auditor.
Adopting a new accounting standard often impacts other parts of an organization beyond accounting including financial planning and analysis, legal and information technology. It may be beneficial to restructure customer contracts or necessary to reconfigure systems to capture data in a different manner. Sound planning in adopting new accounting standards may also enable a company to structure arrangements in a manner which best align financial reporting with the economics of an arrangement, as well as, to model key performance indicators and educate stakeholders of upcoming changes.
Publicly traded semiconductor company discovered various accounting errors in previously issued financial statements related to revenue recognition, foreign exchange, income taxes, share based compensation, and other topics. The errors impacted multiple fiscal years and interim periods and required the company to issue a non-reliance notification on such filings. As a result of these errors, various members of management resigned, derivative lawsuits were filed, and the company was subject to delisting proceedings. The process to correct the filings lasted approximately a year and a half.
We provided overall project management and coordinated the activities of management, auditors, valuation and income tax specialists. We drafted accounting memos that documented the company's new positions on various matters and assisted in quantifying restatement adjustments. In some instances, we assisted management in reconstructing balances through examination of source documents. We created a model which bridged previous balances to restated balances by type of restatement adjustment which was integral to disclosures contained in refiled SEC documents. As multiple SEC filings were restated, we assisted in reconstructing and redrafting of financial related aspects of the filings. We developed accounting policies in the areas in which accounting errors were discovered. We also supported forensic accounting investigations and worked with the company's auditors throughout the restatement process.
Restatements can present some very challenging circumstances for a company. While it is common for various parties to quickly move to protect their own self-interests, it is critical to develop a detailed plan which involves at some level all constituents (i.e., regulators, creditors, management, Board of Directors, attorneys, etc.) This is not easy, but the detailed plan must consider the company's fiduciary responsibilities to stakeholders, correcting non-compliance issues with regulators, and repairing damage in the markets. Without such a sound plan, the restatement process can drag on for a significant period of time and drain a company of significant resources while also distracting the business and damaging employee morale.