Accounting cosmetic or how to relift EBITDA after Corona?

New “EBITDAC”

It seems that some companies want to show figures before Coronavirus. Analysts are skeptical as “earnings before coronavirus” flatter company books. Groups have always strived to present their best financial results in the most flattering light. But we have noticed that some MNC’s go a step further using a new metric: “EBITDAC” which stands for earnings before interest, taxes, depreciation, amortization, and coronavirus. A German company Schenck Process manufacturing group added back 5,4m EUR back to its first quarter profits to reflect situation in case of no lockdown period. It is an adjusted EBITDA 20% higher a year ago at the same period. The Azek company in the US did the same before raising junk bonds in early May. They talked about “lost earnings” due to Covid 19. It is an accounting fiction not ideal. It is dangerous to add back revenue under the pretext of reflecting real situation without Covid and without knowing whether other factors could have affected, altered, or impacted the EBITDA too. Window dressing has always been tempting but is not recommended and appreciated by analysts and rating agencies. Who knows what the outcome would have been without this virus? Better or worse. It would be more recommended to mention in a roadshow that without such a virus results could have been much better by X% and how the company plans to be back on good tracks and when.

Providing users with comfort or fear?

It is important for preparers to present figures according to market standards, IFRS rules and users’ expectations. Accounting purpose is to bring more comfort to users and not additional fear. Statements are somehow artificial if preparers can adjust to circumstances. Adding “C” to “EBITDA” to get coronavirus charges seems weird. They try to estimate likely profits if the pandemic had not occurred. But tweaking earning numbers would be justified to reflect a one-shot effect or impact. Here who knows if it is one-shot and what will be the after-COVID situation. Not the same as before, whatever the sector. Do you think H&M results post-COVID will return to normal in a month or a quarter? Come on! They won’t. Do you think people will go back to boat cruise on Carnival or Costa this Fall? This artificial adjustment should not become the norm for preparers of IFRS accounts. Today, it is COVID, tomorrow a hurricane, El Nino, Katerina storm or guess what. Accounting is not an art of painting in light what is obviously dark. Of course any CFO tries to present his/her statements in the best possible form and shape. Accounting watchdogs already discuss intensively and debate on the varying calculations of EBIT, EBITA and EBITDA or on interpret rules and define IFRICS. In the past, we would have presented a pro-forma version to explain that without the COVID crisis, results would have been better by X percent. In my opinion, everything resides in the way you present and disclose your results. If your disclosures and narratives are comprehensive and clear, users will understand the situation and be able to assess their inherent risks. That’s their job. If you try to distort the image or photoshop your financial statements it will always be back to you as a boomerang. It can hurt CFO pitchers if wrongly manipulated. Don’t you think users have already enough complexities to manage in terms of new accounting IFRS rules (e.g. IFRS 9, IFRS 16, IFRS 15, etc…) to even add more confusion in results? The more transparent, the better for investors to assess their risks. Creativity and accounting are not good friends and do not mix well. Forget the stupid “C”!

Fran?ois Masquelier, SimplyTREASURY