Incorrect Revenue Recognition

A PE-backed buyer acquired a marketing business from a listed company. Within a year of the deal, the buyer brought a claim alleging breaches of accounts and information warranties.

The claims related to mis-statement of employee entitlements, due to incorrect determination of the employees’ employment status; non-disclosure of a bonus scheme; revenue recognition.

Although not clear-cut, the insurer accepted that there had been a breach of warranty in relation to the employee entitlements. Due to the complex nature of some of the other allegations, the buyer and insurer chose to involve accounting experts to examine the revenue recognition and bonus scheme elements. The loss claimed was calculated on a multiple, as that had been the buyer’s basis for valuation.

RCA advised the buyer, drove the negotiation and settlement meetings, bringing together the buyer and the insurer (and advisers as required). The claim was settled, with a payment from the insurer, to the insured’s satisfaction.