Who is right in the end?

EXPANSIÓN analyzes the debt reduction formula used by a pharmaceutical company and criticized by a bearish investor.

Many experts argue that accounting is not an exact science, but rather the opinion of a company’s management, certified by its auditors, thatIt is the financial image that best reflects the position of your business. Although there is norms or standards – different depending on the jurisdiction – that determine the formulas for performing this exercise always exist chiaroscuro and operations subject to interpretation.

Of course, principles prudence, good image and transparency must regulate the preparation of balance sheets and income statements so that shareholders, creditors, employees, customers and suppliers groups can trust them.

Report on Grifols Posted on January 10 by Bearish Investor Gotham City Exploration puts the debate back on the table maneuverability that boards of directors should adapt accounting to their needs.

The main accusation of a bearish investor who, before launching a scandalous study sold Grifols shares short, is that the group uses various tricks to improve its debt ratio. One of them is to continue to consolidate companies in financial statements. BOD and Hemadespite the fact that he sold them in 2018 Scranton Enterprisesa Dutch company associated with the founding family of Grifols, through which they control 8.6% capital this company listed on Ibex.

In response to Gotham, the Barcelona company claims that buyback options what does it have to do with BPC and Haema as well as contract for the purchase of plasma from these companies for 30 yearsthey give you effective control that allows you to consolidate.

The debate raises three questions for experts from an accounting perspective.

1-Can Grifols merge two companies without owning any shares in them?

International Financial Reporting Standard (IFRS) No. 10 determines when a company can be consolidated. To do this, you must have “control” over it, which can be exercised without having a majority of the capital or the board. Enough with to exercise “power” over the society that allows one to exert “influence” in their economic performance.

“Potential voting rights of a significant nature“, according to the standard’s explanation, are one way to have such weight in a company. Grifols argues that its repurchase options – and its 30-year contract to purchase plasma – give it such significant power because You can complete them at any time and at an attractive price.

Gotham responds that Grifols’ explanations about BPC and Haema they are not homogeneous over the past years and what it could be operation “parking” the company’s subsidiaries related to directors and shareholders (Scranton). Grifols would improve your debt and Scranton will love it income received from the sale of plasma to a pharmaceutical company.

But accounting standards may justify consolidation – auditor KPMG he thinks so – although it all depends on how “meaningful” the options are considered.

2-How should subsidiaries be accounted for?

BOC and Haema improve the accounting solvency of Grifols because by registering 100% of gross operating profit (EBITDA) of these societies, since their consolidation requires it, increases denominator of their debt ratios. It must be taken into account that, in the opinion of creditor banks, the company’s financial liabilities should not exceed 7 times EBITDAand it’s already on the verge Enterprises do not expect the injection of one billion GICwhich KPMG forced to be taken into account as a debt.

Gotham points out that, on the one hand, this benefit is fictitious, since in case of trouble this money is in Scranton, not in Grifols. In fact, the company deducts 100% of the contribution of these suppliers from its net profit. And a supporter of the bears believes that the company should include in the list of obligations 1.313 million euros which, according to his calculations, will cost him to buy out these companies.

Juan Basterra, auditor partner PKF certificate, believes that both versions may be wrong. “Result inconsistent combine the benefits of these two companies rather than do the same with debt. The criticism of Gotham seems justified. You can’t report the good things to a company you control and forget about the bad things. But Gotham gets into same contradictionbut vice versa,” including debt but not benefit.

“Perhaps what would make the most sense to me,” says Basterra, “is stop including the results of operations of companies that are not wholly owned and not attributing debt to the company that is not required. “Both fail to evaluate objective results and distort the reality of the company, which is what is being addressed these days.”

3. Can Grifols and Scranton consolidate the same companies at the same time?

After his first report and Grifols’ response, Gotham insisted that it remained to be seen why both this company How Scranton At the same time, the same companies, BPC and Haema, are consolidating.

The accounting provisions here seem to be consistent with short seller. According to the aforementioned IFRS 10, “for an investor that owns more than half of the voting rights of an investee to have control over it, The investor’s voting rights must be significant. If there is another entity with existing rights entitling it to direct the relevant activities, and that entity is not an agent of the investor, the investor will not have authority over the investee.

That is, if we accept that Grifols has significant control over BPC and Haema, Scranton doesn’t take advantage of this.. Or if it is a shared power, both should write them as joint ventures.

TO end of accounts: Grifols has reasons to consolidate BKK and Haema; If you do this, you should include the cost of repurchase as a liability; and Scranton should not integrate these companies.

Accounting standard open to interpretation

To justify the consolidation of BPC Plasma and Haema, Grifols uses the international financial reporting standard (IFRS 10) No. 10, which defines cases in which a company may combine its balance sheet and income statement another company, basically when you “control” it, which can happen even if you don’t have the majority of the capital. According to this standard, “an investor controls an investee if and only if: The inverter meets all of the following conditions: has power over the investee; is exposed to or entitled to variable returns as a result of its involvement in the investee; and has the ability to use its power over the investee to influence its own profit margins.”

Have the right to buy the company (the case of Grifols with BPC and Haesma) can give this control. “Potential voting rights of a significant nature, alone or in combination with other rights, may provide an investor with the current ability to direct the relevant activities of (another company),” the standard states.

Companies and their auditors They must find out whether this condition exists, which Grifols believes is met in its dealings with BPC and Haesma.

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