FRC flags £94m error in Galliford Try accounts
16 Mar 2020
A Financial Reporting Council (FRC) investigation has found that FTSE 250 builder Galliford Try overstated its assets by £94.3m, following errors in the way it recognised revenue on certain construction contracts
16 Mar 2020
The regulator said its review of Galliford Try’s annual report and accounts for the year ended 30 June 2018 raised a number of issues.
Some of these related to the company’s application of IFRS 15 Revenue from Contracts with Customers and the standards it replaced, including IAS 18 Revenue’ and IAS 11 Construction Contracts.
There were also queries about the company’s application of IAS 7 Statement of Cash Flows which requires cash flows arising from loans and advances to other parties to be classified as investing cash flows.
As a result of the FRC’s intervention, in its December 2019 interim report, published this week, Galliford Try said it should not have recognised an £80m claim recoverable from the customer on the Aberdeen Western Peripheral Route (AWPR) contract at 30 June 2018 and 2019, as it did not meet the recognition criteria of the relevant revenue accounting standards.
It has corrected this error by way of a prior year adjustment to reduce retained earnings at each of those dates by £64.8m, net of tax.
This adjustment would have reduced revenue and profit before tax in the years to 30 June 2017 and 30 June 2018 by £62.5m and £17.5m, respectively.
Galliford Try also disclosed it should not have recognised certain claims recoverable from third parties at 30 June 2018. The company derecognised these claims when it adopted the new accounting standard, IFRS 15 from 1 July 2018.
The FRC challenged the company’s treatment of the adjustment. The company has now concluded that £21.9m of the net £28.7m transition adjustment should have been presented as the correction of an error in its application of the previous accounting standard, IAS 11.
This adjustment would have increased cost of sales and reduced profit before tax in the years to 30 June 2016 and earlier, 30 June 2017, and 30 June 2018 by £13.8m, £8.7m, and £4.6m, respectively.
In addition, Galliford Try has restated its cash flow statement, to report cash flows from loans and advances to joint ventures within investing activities. The company had previously reported £53.2m of cash flows within operating activities in 2018, prior to correcting this treatment in its annual report and accounts to 30 June 2019.
The FRC noted that the company has also reflected on other aspects of its financial reporting, which has led to certain other restatements of comparative information in the interim accounts. The total effect of all the errors identified was to overstate net assets by £94.3m at 30 June 2018.
In its report, Galliford Try said: ‘The group previously announced a total £61m write-down on the settlement of the Aberdeen Western Peripheral Route contract, together with an adverse adjudication award of £9m on an unrelated historical project.
‘After discussion with the corporate reporting review team (CRRT) of the Financial Reporting Council, the group has treated the write-down of the previously recorded Aberdeen Western Peripheral Route recoverable asset as an opening balance sheet adjustment at 30 June 2018 on the basis that the value to be recovered could not previously be measured reliably and therefore the asset should not have been recognised; this results in the settlement payment being recognised as exceptional income in the period to 31 December 2019.
‘The other adverse adjudication award of £9m has also been treated as an opening balance sheet adjustment at 30 June 2018 as the group considers that the loss should have been previously accrued under IAS 11.
‘As well as the Aberdeen Western Peripheral Route settlement, net of final costs, exceptional items also include transaction costs on the demerger incurred prior to 31 December 2019 of £5.8m.’
Galliford Try said it had concluded a dispute over final payment on the contract, which was negotiated from Transport Scotland.
The company said: ‘Following the successful settlement of the Aberdeen Western Peripheral Route final account, as previously announced, the group has received a cash payment of £32m in 2020.
‘The settlement brings to a conclusion a complex and challenging project and avoids a lengthy, distracting, uncertain and expensive litigation process.’
David Rule, FRC executive director of supervision, said: ‘The FRC found that Galliford Try overstated its revenue in 2018, which the company has now corrected. We will continue to hold companies to account when they do not comply with the requirements of relevant financial reporting standards.’
The FRC’s report did not sanction PwC, which was the construction company’s auditor for 20 years before being replaced by BDO last year.