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By Tom Winnifrith | Tuesday 5 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.
As you know, the folks round at the Financial Reporting Council are the one watchdog that is prepared to bare its teeth when it comes to wrongdoing on the AIM Casino and are also good pals of mine, truly appreciative of my work. And thus I have written to them about the holocuast denying fraudsters at MySquar (MYSQ) requesting that it launch a formal investigation into how it cooks its books.
To the FRC Re AIM listed MySquar
cc Marcus Stuttard at AIM Regulation
AIM listed MySquar may well be on the radar of your friends at the FCA after doing a major placing on July 31 2017 while not informing investors that revenues had fallen off a cliff after June 30th 2017 - having boasted several times (July 4 for instance) of how sales were soaring up to late June. That is clearly securities fraud so maybe the FCA are having a butchers already. However MySquar has also breached accounting rules in presenting its annual report for the year to June 30 2017 and it is this that I ask you to invbestigate. I believe a material restatement is called for. Let me explain.
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. I hope that you will force it to do so while also publicly censuring both the company and its auditor for what has gone on.
I remain, as ever,
Your obedient servant
The Sheriff of AIM
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