The nature of accounting liabilities II Altran Technologies is a fast-growing French R&D consulting firm. In x1 its revenues soared to A1.3 billion, a 40% increase on the x0 figure, and it maintained its operating profit margin ratio at a healthy 18%. However, its share price fell 65% during the second quarter of x2 as doubts emerged about its accounting policies. Some analysts accuse the company of understating its liabilities, a charge which management vigorously deny.

The main area of controversy surrounds Altran’s treatment of acquisitions. The company has grown rapidly by acquiring smaller consultancies in other countries – it bought 28 businesses in x1 alone – in order to increase market share. In most cases it pays for the acquired business with cash:

part is paid when the contract is signed and part is deferred and linked to the increase in the acquisition’s annual earnings over the following five years. The total price paid is usually twice the initial payment. Altran does not recognise the ‘earn-out payments’ as a liability until the acquired company has generated the increase in profits. ‘It’s impossible to quantify these earn-out payments in advance, so they shouldn’t be held as debts,’ argues Michel Friedlander, the company’s chief executive.

Altran paid A78 million in earn-out payments in x1. Analysts claim the company’s end-x1 indebtedness including estimated earn-out payments was A956 million rather than the A337 million reported in the x1 balance sheet. This gives a debt–equity ratio of over 240% which puts the company’s bonds in the ‘junk’ category, according to analysts.

Required How should Altran account for future estimated earn-out payments at the balance sheet date, in your view? Give the reason(s) for your decision.

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