What Use Are Accounts?

Companies in UK must file accounts at Companies House, on public record.  Every company must also state the Persons of Significant Control, who are the ultimate controllers of the company.  Accounts are generally a lot more pages than they were 20 years ago so they must provide a lot more information.  We also have credit rating agencies such as CreditsafeUK who offer reports and credit ratings, with suggested credit limits, so there is a lot of information available for companies who want to check whether they should give credit to a potential customer.  Or is there?

The Malvern Group is a good example as it has just been in the Press after the Late Rooms and Super Break collapse hit 42,000 holidaymakers (Times newspaper 3^rd August 2019).  Until 23 July 2019, CreditsafeUK gave them a credit rating of 62 out of 100 and a £285,000 credit limit and £11.5m contract limit.  It has now been suspended.  In November 2018, BDO signed off a clean audit report on the March 2018 accounts.

You cannot blame CreditsafeUK; their credit rating reflected the accounts, which were given a clean audit report.  The accounts and audit report for the year ended 31 March 2018 are 46 pages long and available on public record.  Lots of information?  Only two or three pages are needed.

• Turnover was £90m with a £2m loss. The previous year was a £100m turnover and £5m loss.
• The net assets of the group are £5m made up of £13m share capital less £8m losses.
• Of the £5m, £32 million is intangible assets. £16m of this is something called CGUs or Cash Generating Units.  I accept that, for example, Starbucks is a brand which is valuable and generates cash, but it would not be worth anything if you did not have the money to stock coffee beans.  Which brings us on to the cash position.
• Cash of £2.7m. Against £90m turnover, that is equivalent to 11 days sales or against outgoings of £92m, less than 11 days operating costs.
• Loans and borrowings to be repaid of £27m of which £4m due within one year. To be paid out of the £2.7m loss?  Where will this money come from?
• Buried in the pages of notes is £11.75m owed to the group by “related parties”. Who are these related parties?  The accounts say these are recoverable and the auditors must have seen evidence to support this.  Have these debts been paid I wonder?

So here is the real credit report.

1. Enough cash to pay suppliers for just 11 days with average supplier balances 31 days old.
2. Assets of £32m which are intangible and of no cash value when needing to pay bills
3. Debts due from related parties of £11.75m on which there is no further information in the 46 pages of accounts. They might be due within one year (per statutory accounts disclosure requirements) but what we really need to know is if they will actually be paid within one year.  There is a huge difference but there is no requirement to disclose likelihood of repayment.
4. Borrowings of £27m with no profit being generated for the last two year to repay those debts nor to fund the £2m of interest on the loans.

Would you like to give them £285,000 credit?

Our financial reporting regime is governed by the Companies Act 2006, which was the longest Act in history with 1,300 sections and 700 pages.  Then there is Financial Reporting Standard 102 which is 404 pages.  Then there are 31 UK accounting standards, 41 International accounting standards, 17 International Financial Reporting Standards, 33 statements from the SIC (Standards Interpretation Committee and 23 statements from the IFRIC (International Financial Reporting Interpretations Committee).  The UITF (Urgent Issues Task Force) have issued 48 statements.

All of these rules allow companies to base their financial credibility on intangible assets which are not ever, realistically, readily convertible to cash and debts due in, which are due within one year but not necessarily repayable within one year.

At GSI we do tailored credit reviews.  Let us know if you want us to review a company before you give them credit.  For insolvency practitioners we have a list of your next potential clients.