Avalara Restates Cash Flows, Understates Lease Liability by $7.7 Million
Tax compliance software firm uses a discount rate higher than its peers.
March 25, 2021
Avalara (AVLR), a cloud-based provider of transaction tax compliance solutions to businesses, has revealed it is experiencing transaction compliance issues of its own. In its 2020 10-K, Avalara disclosed that it is restating two years of consolidated cash flows after discovering it had been incorrectly presenting the cash it holds for customers:
“During the fourth quarter of 2020, management concluded there was an immaterial error in the Company’s presentation and classification of funds held from customers in the consolidated statements of cash flows for the first three quarters of 2020 and for the four quarters and years ended December 31, 2019 and 2018, impacting previously reported quarterly and annual statements of cash flows.”
The error is related to the adoption of ASU 2016-18, which amends previous guidance to address the classification and presentation of changes in restricted cash and restricted cash equivalents in the consolidated statements of cash flows. Previously, Avalara presented the change in customer funds as a separate caption within Investing Activities in its statement of cash flows but now:
“...the Company has since concluded that funds held from customers are better classified as generally restricted under the accounting guidance and should be presented as restricted cash equivalents in the consolidated statement of cash flows.”
In the restatements, Avalara moves the cash in question like this:
“To correct this classification error, amounts previously reported as investing activities for the changes in funds held from customers for the years ended December 31, 2019 and 2018 are reported as restricted cash equivalents in the consolidated statement of cash flows. Accordingly, the Company has revised the previously reported financial information in this Annual Report on Form 10-K to correct the immaterial error for the years ended December 31, 2019 and 2018.”
The company says the errors were not material to any prior financial statements and had no impact on the consolidated balance sheets, consolidated statements of operations, or the consolidated statements of comprehensive loss. However, our calculation indicates the reclassification did impact Avalara’s cash flow from operations.
The company did not provide a reconciliation of the error for the first three quarters of 2020 with restatements for the prior two years. In 2019, the restatement reduced Avalara’s cash from operations by 1% and reduced its 2018 loss from operations by 4.8%. The restatement also increased Avalara’s end of period cash, cash equivalents, restricted cash, and restricted cash equivalents by 5.2% in 2019, and 9.2% in 2018.
Separately, Avalara also disclosed that it discounts operating leases by 6.6%. This rate is significantly higher than Avalara’s business software company peers, which report the following discount rates in their most recent filings:
Using an inflated discount rate hide’s a firm’s true liabilities from investors.
Avalara has $81.8 million in future operating lease obligations. The present value of those obligations, according to Avalara, is $67.9 million. If we use the blended average discount rate for Avalara’s peer group— 2.37%— we calculate a lease liability of $75.6 million. It means Avalara is understating its lease liabilities by $7.7 million, or 9.4% of its future operating lease obligations and 1.5% of total liabilities.
Related: ADP, PAYC, WDAY, INTU, PAYX
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