Focus Media: Calculating Losses On Disposal

I have got been thinking a lilliputian close the last post - where I quoted Focus Media's accounts. They purchased several describe of piece of occupation concern for really precise dollar consideration. For instance they purchased WonderAd for $14,926,003 in addition to they disposed of it (to the master owner) afterwards for  a loss of $14,926,003.

This was after the the businesses had operating losses inwards aggregate larger than master consideration paid.

I interpreted this equally WonderAd existence given dorsum to the master owner.

Now I am non quite sure. My concern is best seen yesteryear example:

Suppose I purchase a describe of piece of occupation concern for $10 million. 

Moreover suppose it has $3 i one one thousand thousand inwards holding establish in addition to equipment (subject to depreciation) in addition to $7 i one one thousand thousand inwards goodwill. 

Then a twelvemonth afterwards it loses $12 i one one thousand thousand inwards operating losses. $11 i one one thousand thousand of that was "cash losses". The other i one one thousand thousand dollars was depreciation. [Obviously I volition necessitate to inject roughly cash to comprehend the cash losses...] 

Now I hand it dorsum to the master possessor for no consideration. What is my in conclusion loss on disposal? 

The  $7 i one one thousand thousand of goodwill has never been written off (so that is a loss on disposal). 

Also at that spot remains $2 i one one thousand thousand of property, establish in addition to equipment. ($1 i one one thousand thousand has already been expensed through the operating losses). 

This gives a loss on disposal of $9 i one one thousand thousand non $10 million,

My loss on disposal does non equal the purchase price. It is kind of logical it shouldn't. After a twelvemonth of running the describe of piece of occupation concern the assets in addition to liabilities of the describe of piece of occupation concern volition non live the same equally when I purchased the describe of piece of occupation concern - in addition to thence the loss on disposal should non equal the acquisition cost of the business.

Except yesteryear luck. H5N1 lot of luck...

I idea at commencement it mightiness live possible if the describe of piece of occupation concern had no depreciable assets. Then the depreciation adjustment equally per this instance would non live there.

But the describe of piece of occupation concern would too non have got to have got variance inwards receiveables, payables etc. Otherwise all these would locomote inwards calculating the loss on disposal.

If the loss on disposal equals the purchase cost an awful lot of luck would necessitate to live involved.  

Now lets larn dorsum to the disclosures inwards the last post.

WonderAd was purchased for $14,926,003 in addition to disposed of amongst a loss of exactly $14,926,003.

Either the accounting is incorrect or at that spot is luck to half-dozen meaning figures.

And Jinhua was purchased for $7,659,158 in addition to disposed of amongst a loss of exactly $7,659,158.

Either the accounting is incorrect or at that spot is luck to v meaning figures.

And Wangmai was purchased for $2,749,158 in addition to disposed of amongst a loss of exactly $2,749,158.

Either the accounting is incorrect or at that spot is luck to v meaning figures.

I could larn on - but inwards gild to brand this run I necessitate either no depreciable assets or luck to possibly 25 meaning figures.

I figure the accounting is likely wrong.

And it is non equally if these are modest businesses. These subsidiaries declared over $127 i one one thousand thousand inwards revenue in addition to over $170 i one one thousand thousand of costs during 2009.

A describe of piece of occupation concern amongst that much revenue in addition to that much has receiveables in addition to payables that modify all the time. It has depreciable assets such equally computers, in addition to furniture. It has obligations.

I have got struggled for roughly other explanation - but equally far equally I tin run into the accounts necessitate to live restated. Does anyone else have got an explanation?

Whatever - this society has restated the accounts many times in addition to then far these have got non dampened the ardour of longs. One to a greater extent than restatement won't hurt.

Hop-to-it Deloitte.




John

There is an option explanation for this mistake. They only made upwards the losses - because they needed simulated losses to offset simulated profits equally explained inwards this post. Because they made upwards the losses they missed the subtlety that loss on disposal does non equal acquisition price.

This is a key lawsuit for the due-diligence.

I would prefer intend they only got the accounting incorrect equally they have got earlier (and amongst no existent touching on on the stock). However if they have got made upwards these losses it is extremely bad for the take-private transaction. If they are simulated (that is made up) losses they are at that spot to residuum simulated (as inwards made-up) profits. When the simulated losses larn away the existent (lack of) profitability volition live exposed in addition to the society volition non live able to service the debt that the PE firms charge it with.