Perrigo Restates to Correct More Than $1 Billion in Errors

Restatements are notoriously hard to predict, yet, in some cases the writing is on the wall, or in Perrigo’s case, a late filing. Back in March, we predicted that Perrigo would likely restate its historical financial statements. What we could not predict is that 85 days after the late filing, Perrigo would join the restatements club with a staggering $1 Billion restatement of net income.

Since 2001, there have only been 19 restatements that exceeded the $1 Billion threshold. Of those, 16 restatements were bigger restatements than Perrigo. The top 5 largest restatements include:

Besides the shear magnitude, here are two additional aspects of the Perrigo restatement that make it stand out. First, most of the impact of the restatement amount was concentrated in the first three quarters of 2016, and the impact on the annual periods was substantially less significant. It is important to remember that quarterly periods are not audited, and therefore, executive compensation is typically calculated based on full year metrics.

Secondly, we find the reference of ASC 606 adoption in the context of the restatement interesting.  For many companies, ASC 606 adoption is still a work in progress and to our knowledge, this is one of the first instances that ASC 606 is mentioned in the restatement footnote. The following is taken from Perrigo’s annual report.

During the 2016 year-end financial statement close process, and in anticipation of our potential sale of our royalty rights, we evaluated the potential effects of the Tysabri® royalty stream sale accounting and the accounting and disclosures associated with the pending 2018 adoption of ASC 606 “Revenues from Contracts with Customers.” After an extensive evaluation of the facts and circumstances and the judgments required to determine the appropriate classification, it was determined that under existing U.S. GAAP the contingent payments from Elan’s May 2013 sale of Tysabri® to Biogen (the “Tysabri® royalty stream”) should have been recorded as a financial asset, rather than an intangible asset, on the date of our acquisition of Elan.

Perrigo has not adopted ASC 606. Yet, the historical accounting practices and the restatement were evaluated in the context of the pending ASC 606 adoption. It remains to be seen whether ASC 606 mandatory adoption in 2018 will influence the restatements trends.