Cerillion (CER): Accrued income

The latest note from my SharePad writing colleague Bruce Packard tweaked my interest:

Bruce wrote:

“My comments on Cerillion and RBGP may seem harsh, but we’re in a bull market where often investors are prepared to accept headline numbers and not delve too deeply below the surface.”

Always worth delving deep to see what lurks beneath the headline numbers.

I looked at RBG Holdings here.

Bruce’s Cerillion (CER) comment:

"Risks This is a company with accruals of £8.5m at FY 2020 or 41% of revenue. There’s a chapter in Tim Steer’s book The Signs Were There on accruals accounting; management discretion plays a part in when to recognise revenue for multi-year contracts.

Accrued income is uninvoiced income and is therefore only an estimate of what the company thinks that it is owed. Support services companies like Carillion were over optimistic in the past, or the worry is management are tempted to change the accruals assumptions in order to hit their numbers, which is what Utilitywise did. This merely builds up problems for the future and inevitably ends badly.

In Cerillion’s FY to Sept 2020 accruals grew +19% to £8.5m which outpaced revenue +11% to £20.8m."

This is CER’s trade receivables note:

So yes, for 2020, £8.5m of accrued income – which represents sums recognised as revenue but have yet to be invoiced.

What is somewhat unusual is £2.4m of accrued income is non-current, which means CER has recognised non-invoiced revenue but will not receive the payment for at least 12 months. I can’t recall ever seeing a company with such non-current accrued income before.

Bruce refers to Carillion within Tim Steer’s book, which noted Carillion’s sales grew 3% over five years but accrued income soared 91% and total receivables advanced 52%:

Carillion (£m) 2011 2016 Change
Revenue 5,051.2 5,214.2 3.2%
Trade receivables 282.7 229.5 (18.8%)
Amounts owed on construction contracts 321.5 614.5 91.1%
Other receivables 350.5 749.5 113.8%
Amounts owed by joint ventures 128.5 59.9 (53.4%)
Amounts owed by jointly controlled operations 11.4 10.6 (7.0%)
Total receivables 1,094.6 1,664.0 52.0%

Depending on where you start from, there may be a growth mismatch between sales and accrued income at CER.

Over the last four years (2016-2020), CER’s sales are up 149%, while total accrued income is up only 53% and total receivables are up only 30%:

Cerillion (£k) 2016 2017 2018 2019 2020
Revenue 8,365 16,033 17,353 18,752 20,814
Trade receivables 2,894 1,957 2,136 2,806 2,687
Current accrued income 5,566 5,098 5,751 4,731 6,056
Other receivables 465 493 288 391 367
Prepayments 240 193 185 239 407
Non-current accrued income 0 768 577 2,376 2,439
Total 9,165 8,509 8,937 10,543 11,956
Total accrued income 5,566 5,866 6,328 7,107 8,495
Trade receivables/revenue 35% 12% 12% 15% 13%
Accrued income/revenue 67% 37% 36% 38% 41%

But over the last three years (2017-2020), CER’s sales are up 30%, while total accrued income is up greater at 45% and total receivables are up greater at 41%. Not as bad as Carillion, but not ideal nonetheless.

What is unnerving is the relative size of CER’s accrued income. As Bruce notes, 41% of revenue for 2020 – suggesting perhaps 41% of revenue was yet to be invoiced and therefore of a more subjective value.

Companies typically carry c20% of revenue as trade receivables, so anything well beyond that requires some consideration. CER carries c50% of revenue as trade receivables and accrued income.

Note that CER does benefit from deferred income – payments made in advance by customers for services CER has yet to deliver:

Such deferred income came to £5.1m for 2020, so a notable amount that goes some way to counterbalancing the £8.5m total accrued income.

The receivables and payables seem to balance each other out on a cash flow basis.

Lots of working-capital trouble manifests itself within working-capital cash movements, but for CER the movements are favourable on aggregate:

For what I can tell, CER has a stark range of contract profiles – some with customers paying upfront and some with customers paying in arrears (sometimes by more than a year).

The present mix seems to balance out on a cash flow basis, but the worry is the upfront payments slow to leave cash conversion exposed as the company’s revenue recognition is not backed by customer invoices let alone the associated payments.



If I understand the company properly, their main income stream is installing and integrating billing systems and customer relationship management software for telcos. These will be big, complex projects lasting months, but hopefully not years. There will tend to be loads of change requests to handle. Revenue recognition is going to be a tricky area, based on criteria such as system up-time, billing accuracy, correct rating of Call Detail Records while the billing itself might be based on time booked against the project. The aspect that puzzles me is that they seem to be billing in advance of the revenue milestones. That might imply substantial upfront costs before the systems start to get used. Do the auditors comment on this in their report? It might be worth benchmarking against other cos. in the same field - Keenan Arbor, Amdocs, etc

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As I understand, CER’s non-current accrued income does mean revenue was recognised during the year but the associated payment will not be received within twelve months of the balance-sheet date. Some projects therefore seem to last for more than one year – or at least the payment terms do.

Some further digging from CER’s 2020 annual report.

The AR implies milestone payments can be received a year after a contract starts:

"Revenue to recognise: ‘The transaction price’

Revenue is measured at the fair value of the consideration received or receivable net of sales related taxes. When a contract includes a significant financing component as a result of payments made in arrears (i.e. typically milestone payments made after one-year from contract inception), the accounting effect of the adjustment for the financing component decreases the amount of revenue recognised with a corresponding increase to nance income as the Group has provided financing to the customer. The Group’s contracts do not typically include variable consideration. "

This AR note says "Revenue recognised on performance obligations partially satisfied in previous periods was £12,994,913 (2019: £8,965,033)."

So revenue of £13m out of a £21m total involved some work undertaken during 2019 or before – implying the bulk of contracts are long.

The AR confirms the projects are complex and revenue is estimated using the ‘percentage-of-completion’ method:

"Where a licenced product requires significant customer modifications and implementation is complex, revenue is recognised over time, based on the percentage of completion method. This method relies on the Group’s internal measure of progress compared to total effort to complete the modifications and implementation. Estimates are based on the total number of days performed on the project compared to the total number of days expected to complete the project. The estimate of the total number of days to complete a project is inherently judgemental and depends upon the complexity of the work being undertaken, the customisation being made to software and the customer environment being interfaced to. The scope of projects frequently change and most frequently in agreement with customer modifications. Consequently, the judgement of total estimate at completion is subjected to a high level of review at all stages in a project life cycle. Provision is made for any losses on the contract as soon as they are foreseen."

So obvious scope for subjectivity there.

And this line may explain the deferred income:

“Where services are offered on a trial basis or the customer’s ability and intention to pay are in doubt, no revenue arrangement is deemed to exist and any monies received will be recognised as a liability (deferred income).”

I presume fees paid by customers on a trial can be refunded, which could mean those cash inflows reversing. FWIW PwC is happy with the revenue recognition policy.

For further perspective I employed SharePad to screen for software/computer services businesses with high levels of debtors versus revenue:

CER was 17th out of 104 with 46% of revenue represented by debtors.

I looked at ten other shares on the list with revenue higher than CER’s and high levels of debtors (BOKU, NETW, FNX, SPE, D4T4, AVV, PEN, SUMO, SPA and ECK).

Of the ten, only NETW and AVV carried non-current trade receivables – i.e. payments to be made 12-months or more after the revenue has been recognised.

For NETW, such receivables were $2.6m and represented 1% of trailing revenue. For AVV, such receivables were £23m and represented 3% of trailing revenue.

For perspective, CER’s £2.4m of non-current receivables (or accrued income) represented 11% of trailing revenue. So CER’s situation appears very unusual from this small study.


That looks like a very complex setup. I bet it keeps the auditors awake at night. If that similarly named company can be invoked, it might pay to watch the directors’ emoluments and pay attention to the timing of changes in the C suite