Posted by: donmihaihai | May 20, 2011

Accounting, evaluation and management

INT FRS 115 has causes restatement of 1Q2011 financial statement for property companies that I read. It changed the revenues profile and pushes some revenues that recognised before backward. It is not important as the whole thing is about timing issue. Comparing company to company has never been a straight forward apple to apple.

Property developer in Singapore(exclude those from China) are known to be using percentage of completion method for recognition of revenues for better evaluation of business or smooth out revenues or whatever reasons people can think of. But there other like delisted MCL land or HK Land who use completion method. End result is the same but comparison must make with accounting policies in mind.

Fair value accounting.
Accounting standard has been pushing toward fair value accounting, whether it is FRS39, 40 or 41. There is even a crazier push toward this level at accounting for M&A. Olam is an example of repurchase of debts and record gained. Boardroom FY2011 is an even better example for M&A. It recognised exception gain just because it pay higher price for subsequent purchase as compare to lower price paid for initial amount. This is a sweet pot for creative, aggressive accounting or even fraud. What are professional bodies thinking? Checking at many stock market monitor everyday?

But this created situation for investor who can spot the differences. It used to be a time where everything is historical cost and investor need to find way to find out what is the fair value assets sitting B/S. Nowadays I think the job become more understanding all the impact of differences accounting policies, example the impact of FRS 12. And use it to evaluate management. And my experience says it is a much better method than reading commentaries from director/CEO.

Operating Vs trading property
REIT has change the landscape and many property companies has been focus on trading property rather than operating. Even REIT managers do not seem to be operating property but focus on getting the highest return as fast as possible. Can this keep continue as they wish? I think not and in the future, property companies that remain focusing on operating property will has an advantage against other that trade or even REIT. Company that owns an investment property or two is at disadvantage because they are not learning the skill. The mentality of flipping or trading may create a situation that can be similar to the US subprime or financial crisis.

Next is REIT a better investment as compare to property company that focuses on investment property? Other than tax advantage, I see REIT as disadvantage in other aspect. That say I think it is unwise to buy REIT at the same or premium valuation compare to property companies.

Minor turns adult at stroke of midnight?
Generally, company A consolidates company B when it own more than 50% of B. Will this consolidation change the profile of company A? What about the reverse? If someone says yes then it concerns more on the look of the company than anything else. It is the same for associate, JV and investment. Control exists because controls exist not because of accounting policies.

There is a concern that current valuation is on the high side because of wide margin earned by listed companies in US and expert has been voicing that that is not sustainable. But another value investor(don’t remember which one) did say one of the reasons is due to equity accounting as more and more companies having associate, JV and investment. Not that I know which is the correct one but knowing the impact of using equity accounting, etc is a must when trying to understand the business.

Such as recently there are some investors singing the wonder of associate and JV income, or rather dividends from associate and JV. Following that line of thought and flip into the future will know that it is laughable. Accounting is the language of business. Accounting is not the business or business is the language of accounting.

Lastly, I disagree that accounting should be makes understandable to all people. It can’t be everything for everyone.

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Responses

  1. hi dnhh, at the end of the day, the tax advantage, the fees make it a more worthwhile investment for the owners.

    is it a better investment for us investors? i think it varies from management to managmeent. management is the most important.

  2. Management is a factor so is price. Anyway, like moat, it is easy to talk about good management but hard to recognise one.

    Maybe can take a look at fee collector and property owner together with REIT to get a wider view from just REIT itself.

  3. true. we have to be patient for the fat pitch. i am still suffering from this lack of patience syndrome.

    thanks for mentioning it dnhh

  4. Not sure why if I interpreted you rightly, but can u elaborate why u think a company that operates properties might end up better than one that trades properties and perhaps recycle them through REITs?

  5. There are lot of players in the market not just listed co and REIT but private co and many focus on buying and selling property. Many owns just one or a few units.

    It doesn’t mean that “operator” doesn’t trade but “operator” will developed a full set of skill – developing, operating, buying, selling and re-developing. This require an “operator” mindset and operate differently and even treat tenant differently.

    I long run I see them gaining advantage.


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