Shine Corporate Ltd (ASX: SHJ) shares have entered voluntary suspension from trade on the ASX.
On Monday (January 18), Shine, one of Australia's largest law firms, issued a note to the ASX saying it will review its profit guidance for the year ahead. Specifically, "management is currently reviewing its Work In Progress (WIP) recovery rates and provisioning….The Company expects a material reduction in its previous FY2016 EBITDA guidance pending finalisation of this review."
A day later (January 19), Shine shares – at the company's request – were placed in a trading halt, "pending the finalisation of its review of its Work in Progress recovery rates and provisioning and the impact of this on the FY2016 EBITDA guidance." Shares were due to recommence trading today.
However, today, the company requested a suspension from trading, under ASX listing rule 17.2.
"Further to the Company's earnings guidance announcement on 18 January 2016 and its request for a trading halt on 19 January 2016, the Company is requesting a voluntary suspension pending the finalisation of its review of its Work in Progress recovery rates and provisioning and the impact of this on the FY2016 EBITDA guidance," Shine's ASX announcement read.
"The suspension will be lifted upon the release of an announcement by the Company following the finalisation of its review." It added, "The Company is currently working towards finalising its review and releasing an announcement by the commencement of trading on Monday, 25 January 2016."
What is 'Work In Progress'?
Work in Progress or WIP is exactly that. Monies owed by clients to lawyers may take years to be collected. If you've ever been through any type of legal process (employment law, contract, commercial, etc.), you'd know legal matters take a long time to be resolved. In many instances, however, costs are incurred upfront and significant work is completed before the collection of monies by the law firm.
So how do you account for 'work in progress'? I hear you ask.
Basically, management estimates the value of the work completed on each individual case.
For the values presented in Shine's 2015 accounts, seen above: "The recoverability of these amounts is assessed by management and any amounts in excess of the net recoverable value are provided for when identified."
'But, how can they do that accurately?' You might ask.
"Historical experience and knowledge of the client cases has been used to determine the net realisable value of work in progress at balance date and also the classification between current and non current."
Remember, in accounting mumbo jumbo, the word "current" usually means "within 12 months", whereas "non current" means "in more than 12 months". So, Shine accounted for current work in progress assets of $91,913,016 at June 30, 2015, because its management determined that was the value of work completed to be realised within 12 months.
There are many other nuances here, of course, but it's easy to see how the numbers could be a little hit-and-miss from time to time.
Is Shine the next Slater & Gordon Limited (ASX: SGH)?
Shine's revelations follow that of the law firm Slater & Gordon. In 2015, Slater & Gordon revealed it would be subject to an ASIC 'probe'. ASIC is the corporate regulator.
Slater & Gordon's share price has been scolded as investors thrust it into the focal point of bearishness early in 2015. Slater & Gordon's share price has also been rocked by other announcements over its UK acquisition and profit downgrades.
What now?
Shine is expected to come out of a trading halt on Monday, which will likely see its share price sold down – my brokerage account is tipping a 50% fall.
To be completely honest, I was caught off-guard by Slater & Gordon's UK acquisition and the subsequent sell-down of its securities. However, Shine's recent announcements are less surprising because the accounting policies used to calculate work in progress and, therefore, the way companies determine their profit forecasts, are regularly being scrutinised. You can see why from the example used above.
While it's concerning to see any investment drop, the reason shares enter 'trading halts' or 'suspensions' is to avoid an investor making a buy or sell decision based on incorrect or incomplete information.
Therefore, unfortunately, there's not much that can be done until we know more.
