Friday, September 28, 2007/
One could never call the figures in a financial statement rubbery – but there is magic in the morass of text that accompanies them, with not always benevolent intent.
An interesting set of financial statements drifted across my desk the other day.
It appears that the CEO of a listed investment trust feels unloved and unwanted by his current bank, and he is shopping around for a more sympathetic lender.
(Now, because your correspondent is a timid soul, some of the details have been changed to avoid any criticism from said sensitive CEO – but your correspondent swears on his mother’s grave that his pretend numbers are in direct proportion to the wonderful reality.)
The trust’s financial statements disclose EBITDA of $145 million. Now, regular readers will be aware of my mistrust of EBITDA figures, and will understand why I plunged further into the morass of text that comprises the “notes to the accounts” of any modern set of financial accounts.
Determined reading took me to the statement that “profit available to noteholders” amounted to $50 million.
Well, $50 million is a healthy amount of money in any jurisdiction with an extradition treaty – but the suffix “available to noteholders” was troubling, and warranted further scrutiny.
Page 79 explained things. Investors had invested via a “stapled security”. Not only were investors equity holders, they had lent money to the trust. After subtracting the interest payments to noteholders, the trust had actually produced a loss of $45 million.
Or had it?
Elsewhere the notes explained that $14 million of said profit had been generated by a joint venture property development that had sold a part of the land it was developing. Two things struck your correspondent.
First, not a penny of the $14 million had actually been paid to the trust. Second, the profits were interim profits that would disappear if the property development was unsuccessful (as far as your correspondent could determine, property development was a bold new direction for the trust, so it is by no means certain that the development would proceed smoothly to fruition).
Another $11.5 million represented a revaluation of assets. Of course it is entirely possible that the property in question, if sold, would generate a sale price equivalent to the valuation included in the accounts. But your correspondent would feel a little more comfortable if the notes to the accounts had identified just who it was that had valued the assets, and how they had done so.
The icing on your correspondent’s metaphorical cake was the write down of an investment in a listed company – some $7 million that had not been recognised in the profit and loss statement.
Now your correspondent is a believer in symmetry. He thinks that a company that is happy to recognise a mark-to-market increase of property assets through the profit and loss should have a compelling explanation if it fails to similarly mark listed investments to market through the profit and loss.
Well… Under current accounting rules, the trust has without doubt disclosed a true and correct financial position (certainly the auditors have said that they think this is the case). But if you have managed to stay awake during this dry-as-dust analysis you may think that what was described as a profit available to noteholders of $50 million might arguably be calculated as a loss of $77.5 million.
Which leaves your correspondent with the conviction that accounting is an art, not a science – and a black art at that.
Of course, your correspondent will keep his old-fashioned views to himself. He suspects that his current employer will bend over backwards to lend money to the trust – but their current banker, scared that it might lose a customer, will likewise abandon their concerns, and have a change of heart.
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