Morrissey's label is miserable now

The crisis at music group Sanctuary has raised concerns about the accounting
methods of the entire music industry.

Iain Daly, an analyst at Robert W Baird, said the market had long held
‘misgivings’ about Sanctuary Group’s accounting, but added that because of
‘fuzzy definitions’ the group had not contravened any financial reporting
standards.

‘Sanctuary was aggressive in its accounting, and although other music groups
are not as forceful, some do follow similar methods,’ Daly said.

The company, which has Elton John, Joss Stone and Morrissey on its books,
among others, has admitted that it may face a ‘serious loss of capital’ as a
result of its accounting issues.

It is understood to have treated advances to artists as assets rather than
expenses. The company also recognised revenues from rights to its back catalogue
up front, even though the cash was only due over a longer period. Sanctuary is
working with auditors Baker Tilly to review its accounting policies and to
establish the extent, if any, of capital loss.

If it has suffered a serious loss of capital, the board will be forced to
call an emergency general meeting to consider the position of the company and
take appropriate action. A serious loss of capital is declared when a company’s
net assets are half or less than half of its called up share capital.

Sanctuary, which is carrying £120m net debt – roughly six times its market
cap – is in negotiations with bankers HBOS and other lenders to make a debt-
for-equity swap in an effort to reduce debt and strengthen its balance sheet.