Concordia Healthcare Corp. T.CXR.R

Thoughts on revenue..... since the shorts won't help..

[visionaryfool]

In my numerous and largely unsuccessful attempts at getting the shorts to englighten me on the short thesis, beyond cliche statements like "channel stuffing" "high amounts of debt" "FDA is going to pull Donnatel any day now", I'm trying to reconstruct at least the revenue recognition issues identified by some. Mainly, short thesis claims company is channel stuffing by having a revenue policy which recognizes revenue on shipment and not sale to customer, having a large receivable balance, and having provision that allow distributors to return the product.

So this is my simplifed attempt at looking at and understanding the revenue recognition and provision policies. For all references to accounting policies, I'm referring to the 2015 financial statements.

Revenue - Note 2(q)
Provisions - Note 2(l), Note 3 (i), (ii), (iii), and (iv) under revenue recognition

So in revenue recognition, as the following lines:

"Revenue represents the amounts receivable after the deduction of discounts, harmonized sales tax, value-added tax, other sales taxes, allowances given, provisions for chargebacks, other price adjustments and accruals for estimated future rebates and returns. The methodology and assumptions used to estimate rebates and returns are monitored and adjusted in light of contractual and historical information."

What this means, IMO, is that revenue is NET of all rebates, chargebacks, allowances, etc. So if we go to Q1-2016 statements, the revenue is $228M on page 4. On page 14, Note 9, there is a breakdown of the provisions. The Company had actual total "provision" expense of $50.4M (second chart in Note 9) and it had anticipated actual amount to be $32.7M. The Company had to add an additional $50.4M to the provision expense to bring the provision balance to $32.7M. This mean, if I understand correctly, that the Company would have had to deduct total sales by $50.3M according to their revenue recognition policy. So, revenue could be seen like this:

Gross Revenue: $278M
Less: provisions: $50.3M
Net Revenue: $228M

The otherside of the entry would have to be a mix of A/R contra account and provision account.

Any thoughts?

[LatticeInExiIe]

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[MirrorWorldMan]

Big Pharma in general use ex factory, or shipment dates to wholesalers, not out of the pharmacy, when recognizing revenue.  Extended dating deals etc to wholesalers means the actual cash may not be received untill the following quarter or two. There is always a delay from when medicines are shipped from the supplier and when they are dispensed to patients, and accounts usually like to

[puma1]

not just big pharma  - whenever the party is not the final sellor, booking revenue on ship date is the only logical way to record revenue unless the recipient is a related party and even then there are times when ship date could still apply. just picture Samsung having to wait for Bell to sell the handset that Bell has on hand in order for Samsung to recognize the revenue. it isn't

[joesterth]

I think the accounting standards on revenue recognition are pretty intuitive. Revenue should only be recognized when substantially all the risks and rewards of the product have been passed onto the customer. It's irrelevant if the product has gone all the way down the chain to the final consumer. What's important is to understand if these customers are able to return any unsold products

[adamchess]

joesterth- It sounds to me that is exactly what they are saying? Revenues are recognized net of provision for returns, etc. As long as consistency is applied in recognizing revenues on a reasonable basis there should be low risk of substantially over stated revenues from period to period, imo. I wonder how many days they expect actual sales to end user customer from time of shipment? Average age

[sunshine7]

after many years managing a company, I can tell you that there was always a focus on a/r as a performance measure. It was always a trailing indicator and positively correlated to previous months sales. Conversely, a few consecutive months of declining sales looked good on a/r measure but there was no celebration. I believe their customers are credit worthy.

[visionaryfool]

From what I can see, as far as they are netting their revenue, there is no overstatement. Their policy seems reasonable to me as I've googled quite a few pharma companies and they all have the similar wording. Revenue is recognized on shippment and they all have provisions for rebates, copayments, etc.