Have Shine Justice and PwC overstated the assets of the law firm?

by Callum Foote | Jun 2, 2023 | Economy & Markets, Latest Posts

Callum Foote has dusted off the accounting standards (AASB) and discovered that Shine Justice and its auditors PwC may not be meeting their obligations as a company listed on the ASX and as auditors, respectively. Foote has therefore offered assistance to the Audit and Risk Committee of the Shine Board of Directors. His investigation concludes with some free staff training tips for PwC which ought to complement the firm’s newly avowed enthusiasm in the fields of integrity training and compliance. 

Why the standards are vital 

In accounting, auditing and tax consulting, standards are vital. Professional and ethical standards promote exemplary levels of professionalism and ethical behaviour thereby maximising the integrity of the accounting profession. While accounting and auditing standards facilitate investor confidence in the Australian economy including its capital markets.

Shine Justice and its auditor PwC appear to have a standards problem. Prima facie, Shine’s financial statements audited by PwC for the past three years – FY2020, FY2021, and FY2022 – do not comply with Australian Accounting Standard AASB 123 Borrowing Costs.

Since 2016, Shine has taken out disbursement funding facilities with financiers, most recently from Western Funds Management (WFM) which was used to finance certain outgoings on the J&J/E mesh action and smaller cases.

Disbursements are payments made on behalf of law firms on behalf of their clients, such as barrister and expert witness costs.

An investigation conducted by this reporter into Shine’s use of disbursement funding arrangements in the pelvic mesh action revealed that interest accrued 1.5x higher than the disbursement payments themselves.

An analysis of Shine’s financial accounts, illuminated through correspondence with a Shine spokesperson, has revealed that Shine may be counting this sky-high interest as an asset along with the principal. 

Shine has advised this journalist that it has applied an accounting policy to include borrowing costs in a financial asset, unbilled disbursements, but AASB 123 requires these borrowing costs must be recognised as an expense. If Shine has applied the incorrect accounting policy, as advised, then it has understated finance costs when reporting to the market.

Roman Lanis, Associate Professor of Accounting at the University of Technology in Sydney did not speak directly to Shine’s financial accounts, but confirmed the analysis contained within this article.

I can confirm that according to AASB123-Borrowing Costs (operative date 1 July 2021) in Recognition para. 8 it states that ‘an entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. An entity shall recognise other borrowing costs as an expense in the period in which it incurs them.

According to Lanis, “Before that, in Definitions para. 5, a qualifying asset is defined as one ‘that necessarily takes a substantial period of time to get ready for its intended use or sale’. In Definitions para.7, it indicates that financial assets are not qualifying assets.”

Lanis’s analysis solidifies the position that if Shine is indeed capitalising borrowing costs into its unbilled disbursement assets, then Shine is in breach of Australian accounting standards.

Accounting policy for borrowing costs

Shine has a disbursement funding facility with Western Funds Management (WFM) that has accrued interest at the rate of 20% compounded monthly until November 2021  and 14% compounded monthly thereafter.  According to an affidavit signed by Shine Chief Financial Officer Ravin Raj, the interest on this debt facility was $3.9m for FY2019, $6.3m for FY2020,  $7.7m for FY2021, and $6.2m for FY2022.

Members of the mesh class action (Supplied) (L-R) Sandra Passerman, Serena Brejcha, Michelle Clarke, Dee Bannister-Hood, Julie Davies, Gia Thompson, Anne Sanders.

Shine’s financial statements do not appear to describe the accounting policy used for borrowing costs.

In correspondence with this journalist, a Shine spokesperson explained that the interest on the disbursement funding facility is recognised (or included) in unbilled disbursement assets. Unbilled disbursements are classified as a financial asset by Shine in its financial statements. The spokesperson’s accounting policy advice is as follows:

As disclosed in Note 6g of the Financial Report included in our 2022 Annual Report, the amount of disbursements funded under the disbursements funding facilities described in that note (including interest) is recognised within disbursement funding creditors (and is included in liabilities in the balance sheet) and an offsetting amount is recognised in unbilled disbursements (debtors) (and is included in assets in the balance sheet). This is in accordance with all relevant accounting standards. We reserve the right to take legal action in respect of any suggestion to the contrary.”

Breaking down the importance of the above statement is vital to understanding Shine and PwC’s accounting woes.

By referring to “the amount of disbursements funded under the disbursements funding facilities described in that note (including interest)” we now know that Shine includes the interest accrued on its disbursement funding facilities in its count of disbursement liabilities.

Next, “an offsetting amount is recognised in unbilled disbursements (debtors) (and is included in assets in the balance sheet)” this tells us that Shine then recognises the interest accrued on these disbursements as assets.

Perhaps Shine needs to invest less time considering its rights to take legal action against journalists and more time on its obligations to comply with AASB 123 and continuous disclosure.

Staff training on AASB 123

Shine is not permitted to recognise interest on the disbursement funding facility into unbilled disbursement assets. There are three simple steps to this conclusion.

Step 1: The core principle of AASB 123 is at paragraph 1. Paraphrasing for Shine and PwC –  Borrowing costs must be recognised as an expense if they do not directly relate to the acquisition, construction, or production of a qualifying asset.

Step 2: The definition of borrowing costs in AASB 123 is at paragraph 5. Clarifying for Shine and PwC – the interest that accrues on Shine’s disbursement funding facility meets the definition of borrowing costs being interest incurred in connection with the borrowing of funds.

Step 3: The definition of qualifying asset in AASB123 is at paragraph 5 and further explained at paragraph 6. Clarifying for Shine and PwC – financial assets including Shine’s unbilled disbursement asset are NOT qualifying assets.

Financial effects of Shine’s incorrect policy

If Shine has applied the incorrect accounting policy, then the finance costs disclosed in its most recent consolidated statement of profit and loss is understated because interest on the disbursement funding facility has been excluded.

A material understatement of finance costs is likely to be a significant matter to the market. AASB 101 Presentation of Financial Statements requires the disclosure of finance costs in the statement of profit and loss. It is an important disclosure because the amount of finance costs assists users of the financial statements to assess debt obligations and debt servicing capability.

The financial effect on finance costs of the incorrect accounting policy is as follows.

Disclosed AmountWFM Interest ExcludedTrue Amount
Finance costs – 2022$ 5,346,000$ 6,168,000$ 11,514,000
Finance costs – 2021$ 6,619,000$ 7,674,000$14,293,000

This means that in the last two years alone, Shine may have understated their true finance costs by almost $14 million.

If Shine has applied the incorrect accounting policy, then the profits it has disclosed in its most recent consolidated statement of profit and loss may also be overstated. If necessary, Shine and PwC should analyse the financial effect of the incorrect accounting policy on profits for themselves.

Continuous disclosure obligation

As a listed company, Shine has stringent disclosure obligations, indeed investors on the share market expect that the firm will comply with continuous disclosure obligations.  

ASX Listing Rule 3.1 requires a listed entity to disclose information “concerning it” that “a reasonable person would expect to have a material effect on the price or value of the entity’s securities”.

If necessary, Shine’s Audit & Risk Management Committee should assess whether the incorrect accounting policy for borrowing costs and the resulting understatement of finance costs in the profit and loss statement requires a market update. They may find it necessary to restate the relevant years of their Financial Reports.

Shine Justice to offload heavy finance costs onto pelvic mesh victims?

Callum Foote was a reporter for Michael West Media for four years.

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