Financial Crisis

Filing Season Finds: Wednesday, February 28

For February 27, 2018, our forensic accounting red flag comes from a food and beverage company that will experience a significant impact on its reported revenue due to a new accounting standard.

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We pulled this highlight from yesterday’s research of 103 10-K filings, from which our Robo-Analyst technology collected 16,566 data points. Our analyst team used this data to make 2,645 forensic accounting adjustments with a dollar value of $973 billion. The adjustments were applied as follows:

  • 1,146 income statement adjustments with a total value of $86 billion
  • 1,059 balance sheet adjustments with a total value of $409 billion
  • 440 valuation adjustments with a total value of $1479 billion

Figure 1: Filing Season Diligence for Tuesday, February 27th

Sources: New Constructs, LLC and company filings. 

We believe this research is necessary to fulfill the Fiduciary Duty of Care. Ernst & Young’s recent white paper, “Getting ROIC Right”, demonstrates how these adjustments contribute to meaningfully superior models and metrics.

Today’s Forensic Accounting Needle in a Haystack Is for Food and Beverage Investors

Analyst Jacob McDonough found an unusual item yesterday in Dean Foods’ (DF) 10-K.

On page 10 of the footnotes (page 51 overall), DF discussed the impact to its revenue of a new accounting standard that takes effect this year. As a part of its production process, DF ends up with excess butterfat, which it sells to third parties. Historically, the company has recorded these sales as a reduction to cost of goods sold. However, new accounting rules will require DF to recognize these sales as revenue beginning this year.

While the rule change won’t impact reported earnings, it will have a big effect on revenue and gross margins. Had the rule been in effect this year, DF would have reported 8% higher revenue and gross margins of 21.6% rather than 23.3%. Investors need to be aware of the impact of this rule change when analyzing DF’s quarterly and annual results in 2018.

This article originally published on February 28, 2018.

Disclosure: David Trainer, Hunter Anderson, and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.

Article by Sam McBride, New Constructs


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