Money get back
I’m all right Jack
Keep your hands off my stack…
Pink Floyd – Money.
Previously, I have presented evidence taken from submitted accounts that appear to show an investment by SISU into Sky Blues Sport & Leisure Ltd (SBSL), the ultimate parent company of Coventry City Football Club, of around £30 million. When taking over the club, almost £55 million of debt which was due to be paid from CCFC Holdings Ltd was renegotiated and re-valued to just £8.6 million, and then transferred into the accounts of SBSL Ltd. The debt does not appear to have been treated in the same way across the group of companies and is still showing as outstanding in both CCFC Ltd and CCFC Holdings Ltd, part of the group of companies. This raises questions for both the directors of the companies and also for the auditors, as to why records do not reflect the actual position of the companies as going concerns moving forward. The directors have also stated in the accounts that SBSL Ltd owe SISU Capital, and its associated companies, around £29.6 at the end of May 2011. This amount would be to cover the losses that the group of companies continue to make, but what exactly are the losses made up of, and how big are they?
Losses incurred to May 2011
The losses, as reported in the accounts submitted from the time of acquisition of the club in 2008 to May 2011 for SBSL Ltd total £33,997,356. Not all of this is the result of transactions that have an effect on cash flowing in and out of the club. It is an accepted accounting principle to make allowances for expenses which do not incur a cash transaction, but are essentially ‘paper losses’. Items such as a reduction to the value of fixed assets or the loss incurred when selling a fixed asset under the value previously reported are common in company accounts and acceptable. Of the £34 million losses, the accounts for SBSL Ltd show a total of £14,801,002 for such transactions. These include the amortisations of players contracts that total £6.8 million, amortisation of goodwill of £4.3 million over the period and a one-off £6.4 million goodwill impairment charge. Amortisation is essentially a term used by auditors to describe depreciation or a reduction of the value of the asset.
The amortisation of contracts is relatively straightforward. As a contract nears its end, it has less value than a contract with a couple of years to run. For example, a player can essentially leave for free on a ‘Bosman’ once the contract has ended. So for example, a contract that was initially valued at £4 million when the player joins a club and lasts for 4 years, it is reasonable to devalue the contract by £1 million per year. Whilst fair to re-evaluate, the costs do not result in cash being paid out at that time. The cash transaction occurs when the player is purchased, and that value is added to the fixed assets of the company and shows on the balance sheet. The club has been successful in selling players over and above their value to the tune of £5,546,670, which actually reduced the total value of the write-offs. The £14.8 million would be nearer £20.3 million without them.
The Company Balance Sheet.
When purchasing the club, the debts were reconfigured to £8.6 million, as discussed. When purchasing a company, any investment is usually cal split between share capital and goodwill both then added to the Balance Sheet. The share capital in SBSL Ltd was initially £1,100 in May 2008, rising to £13,698 by 2009, where it now remains unchanged. The remainder should be showing as Goodwill, which was initially stated on the balance Sheet as £9,533,152. The cashflow statements in the accounts show that in the first three months of trading in 2008, only £832,563 was introduced in cash by SISU, which was followed by an additional £95,960 in the following financial year. The notes to the accounts show that creditors were paid from normal operating activity, not from an additional injection of funds by the owners. How was the remaining £8.7 million of goodwill paid for, if in deed it was ever actually paid? The accounts to May 2012 shows a one-off charge for ‘goodwill impairment’ of £6,415,343, which may well relate to a payment due to former shareholder and chairman, Geoffrey Robinson, which would become due should the club have returned to the premier league within a stipulated time period. The club didn’t, and so the debt was written off in the accounts. So, from renegotiating the debts down to £8.6 million, it appears that £6.5 million of that was never even paid, hence the adjustment in the later set of accounts.
The stated losses of £33.9 million include £14.8 million of paper expenses, revealing actual cash losses of £19,196,354. The majority of this will have been funded in part by loans from SISU but there are other considerations that need to be taken into account to gain a fairer view of the actual cash required to fund the business. The accounts show other cash transactions which can either increase or reduce the need for hard cash to be introduced into the business in order to continue trading. These payments going in and out are for income and expenses that would be shown on the Balance Sheet, that do not form part of the profit and loss account but are still required to help with the day to day running of the company. A club has to buy and sell players for example and these transactions are not included in the Profit and Loss sheets but need to be funded and included for analysis here. Cash received from the sale of players contracts is £6,276,112 since taking over, although this is balanced out by the purchase of new players, costing £6,216,809. There are other amounts that come into play, see figure 1, but it appears from the accounts that SISU would have needed to only invest £21,731,499 to cover these losses that result in cash transactions. So, where has the other £8 million gone? Why does SBSL Ltd owe SISU £29.6 million if the actual cash required to cover these losses are so much lower?
When taking control of the club, SISU through SBSL Ltd, the balance sheet shows a separate investment of £1 million being made, which also appears on the cash flow statement as a payment being made. This is likely to be for on an option taken out with the view to buying the shares in the stadium lease owned by Arena Coventry Ltd, ACL, and held by the charity, The Alan Higgs Trust. The cashflow statement in SBSL Ltd accounts clearly show the cash being paid out in the accounts to May 2008. However, the accounts for the charity, and a company set up to hold investments on behalf of the charity named Football Investors Ltd, do not show a corresponding amount being received. Where did this payment go? Furthermore, the ‘investment’ by SBSL Ltd was then written off in the accounts to May 2011, in full. If the payment was never made to either of the parties we would expect to have received it, where or who was it paid to?
Using the calculations in figure 1, it appears that the club actually has required funding in cash terms of £21.7 million rather than the £29,679,942 that is currently showing as outstanding from SBSL ltd to SISU and its associated investors. If we deduct the cash at bank figure from the last set of accounts, SISU have ‘injected’ over £7.2 million over and above the requirement to keep the company afloat. As these are showing as loans due, any future investor and shareholder would be expected to repay the full amount as recorded. Furthermore, if we add together all of the loans received throughout the period to May 2011 from the cashflow statement, these total £38,509,063 and yet on the balance sheet at May 2011, the loans due to be repaid to SISU and its associated companies is only £29.7 million. How and where did the £8.8 million get repaid, as this does not appear to be shown anywhere in the accounts or cashflow statements.
Directors are responsible for the preparation of financial statements and must be satisfied that the reports give a true and fair view of the activities of the company. Part of these responsibilities is to ensure that accounting policies are selected and applied consistently across the group, as going concerns. The auditors have a similar responsibility and must seek out explanations and information to ensure that the accounts satisfy general accounting practices and comply with requirements set down in the Companies Act 2006. The inconsistencies highlighted here should have been addressed before the accounts were signed off and submitted. The last set of accounts does not contain any notes that raised any concerns. This begs the question, was this process completed correctly when there are clear discrepancies that can be picked out?