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MySquar – Assets overstated by 50% and loss understated by 33% due to inappropriate intangible asset capitalisation

By Tom Winnifrith, The Sheriff of AIM | Friday 1 December 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Holocuast denying is the biggest crime of the fraudster vermin who run MySquar (MYSQ) but there is also the matter of some utterly mickey mouse accounting.

In its accounts for the year ended 30 June 2017, Mysquar has decided to retrospectively capitalise some $1.7 million of previously written off development costs. This comprises almost $1.6 million of development costs incurred on MyCHAT over the last three years and approximately $120,000 and $55,000 of costs incurred in the last year in respect of Callhome and Fastsell. I consider that these intangibles should not have been capitalised for the reasons explained below and this would increase the declared loss for the year by some $728,000 and reduce net assets by almost $1.7 million.

Even on the basis described in the Mysquar accounts the treatment looks to be a highly aggressive accounting treatment. A key sentence at the end note 14 on Intangible Assets states:

“None of the revenue generated during the year or in the prior year was in relation to these intangible assets.”
The application MyCHAT which has been in development for three years has not yet generated a cent of turnover let alone profit but future projections of turnover and profit are being used to support the almost $2 million of intangible asset that is being carried in the balance sheet.

You wonder how Joseph Archer of PKF Littlejohn LLP, the auditor, got comfortable with the capitalisation given IAS 38 requires that in order for the costs to be capitalised that:

“The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset. [IAS 38.22]”

I certainly wouldn’t be prepared to consider that the assumption that the business will generate not just revenue but profits in order to support the carrying value from a new product when the existing company is loss making and the product hasn’t generated any revenue as being based on reasonable and supportable assumptions.

However, it gets far worse. Mysquar states that it prepares its accounts under IFRS. It was thus implicitly already required to comply with IAS 38 in prior periods unless the impact of the standard was immaterial (PKF Littlejohn LLP state that materiality in current year is $96,000) so the amounts previously written off were clearly highly material.

Thus historically Mysquar implicitly followed IAS 38 and charged the development expenditure to income. As such it can’t argue that it has changed its accounting policy to IAS 38 because it was already required to and was implicitly following IAS 38.

Given the above fact pattern you wonder how Joseph persuaded himself that he could ignore the following paragraph of IAS 38:

Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a later date, an expenditure that was originally charged to expense. [IAS 38.71]

Mysquar should restate its account to exclude the capitalisation of the intangible asset.

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