Focus Media: calculating losses on disposal

I have been thinking a little about the last post - where I quoted Focus Media's accounts. They purchased several business for very precise dollar consideration. For example they purchased WonderAd for $14,926,003 and they disposed of it (to the original owner) later for  a loss of $14,926,003.

This was after the the businesses had operating losses in aggregate larger than original consideration paid.

I interpreted this as WonderAd being given back to the original owner.

Now I am not quite sure. My concern is best seen by example:

Suppose I buy a business for $10 million. 

Moreover suppose it has $3 million in property plant and equipment (subject to depreciation) and $7 million in goodwill. 

Then a year later it loses $12 million in operating losses. $11 million of that was "cash losses". The other million dollars was depreciation. [Obviously I will need to inject some cash to cover the cash losses...] 

Now I give it back to the original owner for no consideration. What is my final loss on disposal? 

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

Also there remains $2 million of property, plant and equipment. ($1 million has already been expensed through the operating losses). 

This gives a loss on disposal of $9 million not $10 million,

My loss on disposal does not equal the purchase price. It is sort of logical it shouldn't. After a year of running the business the assets and liabilities of the business will not be the same as when I purchased the business - and hence the loss on disposal should not equal the acquisition price of the business.

Except by luck. A lot of luck...

I thought at first it might be possible if the business had no depreciable assets. Then the depreciation adjustment as per this example would not be there.

But the business would also not have to have variance in receiveables, payables etc. Otherwise all these would go into calculating the loss on disposal.

If the loss on disposal equals the purchase price an awful lot of luck would need to be involved.  

Now lets get back to the disclosures in the last post.

WonderAd was purchased for $14,926,003 and disposed of with a loss of precisely $14,926,003.

Either the accounting is wrong or there is luck to six significant figures.

And Jinhua was purchased for $7,659,158 and disposed of with a loss of precisely $7,659,158.

Either the accounting is wrong or there is luck to five significant figures.

And Wangmai was purchased for $2,749,158 and disposed of with a loss of precisely $2,749,158.

Either the accounting is wrong or there is luck to five significant figures.

I could go on - but in order to make this work I need either no depreciable assets or luck to maybe 25 significant figures.

I figure the accounting is probably wrong.

And it is not as if these are small businesses. These subsidiaries declared over $127 million in revenue and over $170 million of costs during 2009.

A business with that much revenue and that much has receiveables and payables that change all the time. It has depreciable assets such as computers, and furniture. It has obligations.

I have struggled for another explanation - but as far as I can see the accounts need to be restated. Does anyone else have an explanation?

Whatever - this company has restated the accounts many times and so far these have not dampened the ardour of longs. One more restatement won't hurt.

Hop-to-it Deloitte.




John

There is an alternative explanation for this mistake. They just made up the losses - because they needed fake losses to offset fake profits as explained in this post. Because they made up the losses they missed the subtlety that loss on disposal does not equal acquisition price.

This is a key issue for the due-diligence.

I would prefer think they just got the accounting wrong as they have before (and with no real impact on the stock). However if they have made up these losses it is extremely bad for the take-private transaction. If they are fake (that is made up) losses they are there to balance fake (as in made-up) profits. When the fake losses go away the real (lack of) profitability will be exposed and the company will not be able to service the debt that the PE firms load it with.