In 2016, Carillion employed 43,000 people, had sales of £5.2bn in 2016 and was valued at just under £1bn. Last week it was worth £61m. Today it is worth nothing - Further challenge to Carillion accounting approach.
The corporate analytics agency says that reverse factoring - a famous method of providing finance associated with the supply of products - is growing popular with every passing day. Nevertheless, in the dearth of a definite accounting necessity, hardly any companies make explicit disclosure of agreements with stockists, banks and suppliers etc. The very existence of these arrangements is very confidential and can only be discovered by the analysis of the amounts reported as trade payables and other creditors.
'Carillion's approach to its reverse factoring arrangement had two key shortcomings: the scale of the liability to banks was not evident from the balance sheet, and a key source of the cash generated by the business was not clear from the cash flow statement,'says Trevor Pijper, a Moody's vice president and author of the report,
The analysis clearly points out that Carillion’s balance sheet of 2016 failed utterly to give a clear picture of the full scale of its legal responsibility to banks. Although the balance sheet said the group's bank loans and overdrafts totalled to £148m, an extra sum, possibly as much as a whooping £498m, was payable to banks under the reverse factoring arrangement which was initiated in 2013.
Apparently, this additional sum was reported within ‘other creditors’ and as a result, was excluded from borrowings.
Carillion reported group operating profit (excluding disposal gains) totalling £501m for the period from 2013 to 2016, an outcome apparently corroborated by the cash flow statement, which showed cash generated from operations of £509m during the same time.
However the fact that the cash inflow contained bridging finance supplied by Carillion's banks under the reverse factoring arrangement, remained confidential. This would have contributed £498m (98%) of the £509m cash inflow if the facility had been completely utilised till the end of 2016.
In the provisional accounts to 30 June 2017, Carillion declared the write-down of contract receivables totalling £600m, more than wiping out the group operating revenue of £501m reported for 2013-16.