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• May 2012 Issue
• updates
  • News: Technical Updates
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• commentary
  • Budget: Beyond Budgeting: The Dynamic Budget
  • Full stop: on his high horse
  • Politics: is this state fit for the purpose?
  • Strategic CA(SA): in search of opportunity
• focus
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  • FDI: Competition is heating up in Africa
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• analysis
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• life
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  • Motoring: Audi RS5, The Mini Coupe
• special report - QE results
  • Qualification Examinations Part 1
• CPD Verifiable Articles
  • Brace yourself: for more regulatory changes (30min)
  • Outsourcing services: who needs to do what? (30min)

“Only assets and liabilities were to appear on the balance sheet, and only the bits and pieces were to be recognised in the income statement.””

Full stop: on his high horse

I grew up when the income statement was the prime document. Matching was all important and the bits and pieces that were left over were recognised in the balance sheet, e.g. deferrals. The standard setters then decided to promote the balance sheet and demote the income statement. Only assets and liabilities were to appear on the balance sheet, and only the bits and pieces were to be recognised in the income statement. This definitely simplified the accounting equation; but the demise of the matching and prudence concepts did not go down well with the analysts, as their main focus was profitability, the prime source of cash flow.

My problem is that, if the balance sheet (the statement of financial position is a misnomer) is all important, why do we not have a standard requiring listed companies to disclose net asset value per share (NAVPS)? When the income statement was all important, we required the disclosure of earnings per share (EPS). Per share information is vital for a shareholder of a listed company as comparisons need to be made with the market price of the share (dividend yield, price earnings ratio and price book ratio). Most, but not all, listed companies do publish NAVPS. However, this figure is not required to be audited and there is no requirement to reconcile the opening and closing figures.

The naïve investor figures that if a company's EPS is, say, 100 cents and the DPS paid is 40 cents, 60 cents is ploughed back into the company for the benefit of the shareholder and will result in a growing stream of profits thereafter. However, the accounting equation: “Opening NAVPS plus EPS less DPS paid = Closing NAVPS does not hold true because of pressure from the preparers to “smooth” earnings. You may remember the initiative many years ago to incorporate extraordinary items into the equation. There was tremendous opposition to this suggestion at the time, as preparers wanted a mechanism to beautify earnings. Fortunately, common sense prevailed and extraordinary items are no more. However, we still have legal mechanisms to conceal bad news in the form of other comprehensive income and direct charges or credits to equity.

I have set out two actual examples of the problem below:

The analyst should penalise the EPS for this serial diluter. The main reason for this consistent dilution is that the company regularly buys back its shares at a large premium over the net asset value per share.

The main reasons for the dilution in 2009 were an actuarial loss of 7 cents per share, a cash flow hedge loss of 112 cents per share and a foreign currency translation loss of 47 cents per share. It is important for the analyst to establish the causes for the dilution in NAVPS. Published information at present does not allow a reasonable calculation to be made.

The main reasons for these dilutions or enhancements to net asset value per share are share buybacks at a premium or discount over net asset value, prior year adjustments, foreign currency translation adjustments, cash flow hedge gains and losses, actuarial gains and losses accounted for in other comprehensive income, revaluations of various assets to other comprehensive income and changes in group holdings.

Wouldn't it be nice to see the following journal entry for a 10m share buyback at R50 a share where the NAVPS is R10?

And wouldn't it also be nice to see a company take a loss of R200m on an acquisition of 10m of its own shares for R50 when the share price falls to R30 a share? I recently saw a note in a listed company's financials disclosing the market value of the treasury shares held by the group. I thought that this was excellent. asa

Author: Charles Hattingh CA(SA), Chartered Financial Analyst, is the Managing Member of P C Finance Research cc.

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