The China hustle lives on

There are reasons as to why Chinese stocks on non-Chinese exchanges have been a problem in the past:

  1. The VIE structure used for many China stocks is dubious.
  2. China is an easily-marketable theme that attracted the pump and dump industry.
  3. No repercussions for egregious accounting fraud.

Have investors learned their lesson?  Apparently not!  More Chinese stocks with VIE structures are being IPOed.  This is despite the VIE structure becoming even more dubious.  China Law Blog has an excellent post explaining why the VIE (should have) died on January 19, 2015.  Go read it.

Draft makes clear that the State Council understands how VIEs work and that their sole function is to evade the requirements of Chinese law. The Draft makes clear that such evasion is illegal and will be prohibited upon the effective date of the new investment law.

I hope that the investors who buy into the newly-minted Chinese VIEs lend their shares out.

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Equifax: a quick accounting note on capitalizing expenses

It’s possible that Equifax is pulling on accounting levers to juice its earnings and the Adjusted EBITDA that it reports.  Capitalizing expenses (e.g. software development costs) creates profits now and losses later- it changes the timing of when expenses are recognized.

  1. On the balance sheets, capitalized internal-use software grew from 212.5M to 307.0M (an increase of 44% per year, or 94.5M).  This area of accounting is subjective- should software development costs be amortized over 3 years, 10 years, or somewhere in between?  What expenses should be considered capex?  Should these expenses even be capitalized?- some software companies don’t capitalize software development costs at all.  The answers are not clearcut.  However, accounting distortions can occur if a company were to suddenly aggressively capitalize expenses that it previously expensed.
  2. While capitalized internal-use software grew 94.5M, consolidated income before income taxes grew 91.6M in the same timeframe.  So it’s possible that Equifax’s growth is not as fast as it seems.

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