BloombergJ. Michael "Mike" Pearson, chairman and chief executive officer of Valeant Pharmaceuticals International Inc., had his whole team including board members at his side Monday morning to respond to allegations from short sellers and media reports about the company’s businessAmong the items addressed by Valeant Pharmaceuticals International on Mondayto tackle the thorny accounting issues surrounding the company was the firm’s relationship with one of its distributors. Criticism by short sellers and some media focuses on the until recently unacknowledged specialized pharmacy network. Time Valeant Pharmaceuticals International Inc.10 Aug24 Aug7 Sep21 Sep5 Oct19 OctUS:VRX $100$150$200$250$300 Valeant VRX, -0.45% brought out all of its financial executives to explain, more than once, that prior lack of disclosure about Philidor RX Services was acceptable under the accounting standards. That’s because, the company said, Philidor’s revenues did not meet the threshold for segment reporting, either before or after the company purchased an option at $100 million to buy the company for $0. Valeant had previously disclosed that they had purchased the option, but had not announced the terms. On the call, CEO J. Michael Pearson admitted the structure of the deal to potentially buy Philidor was “probably” unusual but said, “I think it is legal.” Valeant’s Controller Tanya Carro explained that Philidor was not considered material to Valeant at the time it purchased its option to buy the firm because it generated only $111 million in revenue. Carro cited the Generally Accepted Accounting Principle for what’s material as 10% of revenue. The rule, ASC 280, refers to the threshold for determining which customers to disclose, not when to disclose an M&A transaction in the footnotes. When determining whether to disclose an M&A transaction, such as the purchase of an option to buy a company for $0, the line is not so bright. The current definition of materiality for financial statement footnote disclosures, found in the standards issued by the Financial Accounting Standards Board, the keepers of the GAAP, says that information is material if omitting it or misstating it could influence decisions that users make on the basis of the financial information of a specific reporting entity. Philidor is no longer considered a customer for accounting purposes, because ever since Valeant purchased the option to buy it, its results have been consolidated into Valeant’s. So disclosure of its activity from that perspective is not likely. Pharmacies in the Philidor network, including R&O, are also consolidated by Valeant and their net revenue is only booked when the product is sold to a patient. On the call it was also revealed that Philidor has an option to acquire another pharmacy Isolani, LLC that is not yet exercised. Isolani holds a 10% equity stake and the right to acquire the remaining 90% of equity of R&O which has not yet been exercised. Valeant says that R&O’s results are also consolidated into its own. That should make Valeant’s accounting, as well as Philidor’s, resistant to Citron Research’s accusations of “channel stuffing,” according to the company. However, that conclusion is premised on the assumption Valeant is accounting for the sales and inventory as they have described. An internal audit of Philidor’s accounting and operations by what it says will be a Big Four accounting company has been postponed while an ad-hoc committee of the board investigates additional accusations made by The Wall Street Journal over the weekend. That report published evidence that Valeant executives used fictitious email address when working to support Philidor’s operations. Channel stuffing is when a manufacturer send product to an independent third party distributor at quarter-end or year-end to boost sales and then takes it back into inventory after results are announced. Sometimes the product is un-saleable or obsolete and so it just sits there, even though the manufacturer counted the shipments as sales, thereby juicing results. Valeant says inventory held at Philidor and R&O remains on the Valeant balance sheet and revenues don’t get recorded until the product goes out to patients. There’s “no way to ‘stuff the channel,’” current board member and former CFO Howard Schiller said. More from MarketWatch