{ "docId": "019dd923-622c-750b-8b96-a79a828f1e2b", "docSlug": "be28a8f1faf0", "documentTitle": "IQE plc (IQE)", "authorId": "51_Muddy_Waters", "authorName": "Carson Block", "documentKindSlug": "research-note", "documentKindLabel": "Research note", "sourceTypeSlug": "short_seller", "sourceTypeLabel": "Short seller", "presentationDate": "2018-02-08 00:00:00", "orientation": "portrait", "aspectRatio": 0.77272725, "pageNumber": 6, "pageCount": 17, "prevPage": 5, "nextPage": 7, "slideType": "expose_contradiction", "function": "expose_contradiction", "density": "dense", "nDataPoints": 6, "notes": "The slide uses evidence from CSC's 2016 Annual Report to contradict IQE's financial reporting.", "elementsJson": [ "headline_text", "paragraph", "screenshot", "data_table" ], "metadataConfidence": 1, "imagePath": null, "slideHref": "/slides/019dd923-622c-750b-8b96-a79a828f1e2b/6", "deckHref": "/decks/019dd923-622c-750b-8b96-a79a828f1e2b", "deckJsonHref": "/decks/019dd923-622c-750b-8b96-a79a828f1e2b.json", "deckAnchorHref": "/decks/019dd923-622c-750b-8b96-a79a828f1e2b#slide-6", "components": [ { "bbox": { "h": 0.05, "w": 0.56, "x": 0.22, "y": 0.62 }, "kind": "callout", "text": "Subsequent to the formation of the Joint venture the Company purchased £20,000,000 of Intellectual property from the IQE plc Group in return for 8,000,000 of A preference shares and £12,000,000 of cash.", "attrs": null, "subkind": "primary", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "2f24c5ed-8423-4ed0-87be-dde2e123019a", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "callout", "text": "The fact that such closely-connected entities are engaging in having one’s cake and eating it too accounting is one reason we believe the gains are non-substantive and should be disregarded.", "attrs": null, "subkind": null, "toolName": "Visual emphasis", "toolSlug": "visual-emphasis", "confidence": null, "componentId": "019dd953-2b61-7647-86f6-8774ec242d7c", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.08, "w": 0.78, "x": 0.11, "y": 0.67 }, "kind": "paragraph", "text": "There are reasons to be skeptical of this divergent accounting treatment – particularly IQE's recognition of licensing revenue. We elaborate below on our view that IQE dominates CSC.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "329b4ec2-7653-433b-bf15-389fdb680a09", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.05, "w": 0.78, "x": 0.11, "y": 0.56 }, "kind": "paragraph", "text": "CSC's financials expressly call the transactions purchases of intellectual property from IQE, rather than licenses.", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b317de2f-cfb7-4cb6-a3ee-877456d59e12", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.15, "w": 0.78, "x": 0.11, "y": 0.13 }, "kind": "paragraph", "text": "IQE recognized IP licensing revenue from CSC of £7.7 million and £4.9 million, respectively, in 2015 and 2016. CSC's accounts do not appear to support this treatment because CSC capitalized these payments as investments in intangible assets...", "attrs": null, "subkind": "paragraph", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f1f13fed-731d-4a5c-a008-cc96c78348a8", "frameworkName": null, "frameworkSlug": null }, { "bbox": null, "kind": "quote", "text": "Subsequent to the formation of the Joint venture the Company purchased £20,000,000 of Intellectual property from the IQE plc Group in return for 8,000,000 of A preference shares and £12,000,000 of cash. — CSC’s 2016 AR, p. 32", "attrs": null, "subkind": null, "toolName": "Authority citation", "toolSlug": "authority-citation", "confidence": null, "componentId": "019dd953-2b61-7647-86f6-8a03bf7d1250", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.18, "w": 0.36, "x": 0.32, "y": 0.37 }, "kind": "table", "text": "Intangible assets table showing Cost, Additions, Amortisation, and Net Book Value for 2015/2016.", "attrs": null, "subkind": "data", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "f41e979d-5dc8-4e59-847b-24b50e219d06", "frameworkName": null, "frameworkSlug": null }, { "bbox": { "h": 0.02, "w": 0.78, "x": 0.11, "y": 0.1 }, "kind": "title", "text": "Accounting Issue 1 – CSC's accounts call into question IQE's revenue recognition and gross profit", "attrs": null, "subkind": "headline", "toolName": null, "toolSlug": null, "confidence": null, "componentId": "b7ef05e7-f519-48ce-bcb9-7d7a19751848", "frameworkName": null, "frameworkSlug": null } ], "metrics": [], "tools": [], "frameworks": [ { "name": "fraud-exposure", "slug": null, "matchId": "4e5fee69-b7b4-4d9b-941f-50f61964fde1", "evidence": "The slide explicitly identifies a discrepancy in accounting treatment to argue that reported gains are non-substantive.", "confidence": 0.9 } ], "arcBeats": [ { "to": 14, "from": 3, "beatId": "0ac51eb6-3b46-48a0-9d94-74187bdd07e4", "arcName": "Overcoming the Monster", "arcSlug": "overcoming-monster", "beatName": "Expose Contradiction", "beatSlug": null, "evidence": "The report highlights several contradictions and issues with IQE's accounting practices.", "position": 0, "confidence": 0.8, "parentBeatName": null, "parentBeatSlug": null } ], "loops": [ { "to": 9, "from": 3, "name": "Aha Moment", "slug": "03-aha-moment", "bestFor": "Data-heavy sections, research findings, analytical arguments", "matchId": "0febe2a6-c98d-43cf-9c83-9221d1db1f76", "evidence": "The report presents several accounting issues that cast doubt on the substance of gains from transactions with CSC.", "position": 0, "objective": "What are the accounting issues with IQE's transactions with CSC?", "structure": "The Problem/Question -> What the Data Shows -> The Insight", "confidence": 0.8, "description": "Establish a tension, present data, then deliver the insight that changes everything" } ], "imagePathAlt": null, "thumbSrc": null, "thumbSrcAlt": null, "locked": true }