Hong Kong Exchange clamps down on accounting practice under fire at Olam

SINGAPORE Mon Dec 10, 2012 12:21am EST

SINGAPORE Dec 10 (Reuters) - Hong Kong Exchange is prohibiting companies that seek approval to list on its stock market from relying on an accounting practice at the centre of accusations by short-seller Muddy Waters against Olam International Ltd.

Olam, a commodities company listed in Hong Kong's rival financial centre Singapore, has been criticised by Muddy Waters for the way it accounts for assumed future increases in the value of its crops and other so-called biological assets.

Olam has said its accounting is in line with Singapore's financial standards, which are based on IFRS rules and insist that agricultural assets are valued according to certain models. Analysts have noted that biological gains make up an especially large portion of Olam's pretax profit.

However, Hong Kong Exchanges and Clearing Ltd seems to be taking a different view on the practice from its Singapore rival.

In a guidance note released on Friday, the bourse said agricultural companies could not rely on "unrealised fair value gains on valuation of biological assets" to demonstrate a trading and profitability track record, as required for approval to list shares on the exchange.

In practice that means a cattle farmer, for example, who buys young calves at a certain price cannot make an assumption on how much their value will increase as they mature but must wait until they are actually sold before booking a profit.

The guidance does not, however, apply to companies already listed on the exchange which count on assumed gains in biological assets in their reported profits.

"Biological assets are subject to inherent risks and their valuation is usually subject to higher uncertainty due to complex and not easily verifiable assumptions adopted," the exchange wrote in its note.

"Allowing an applicant engaging in agricultural activities to use unrealised fair value gains on valuation of biological assets to fulfil the trading record and profit requirements is contrary to the principles of the Listing Rules."

The Hong Kong exchange requires companies listing on its market to have a trading track record of at least three years, and to have recorded a profit of at least HK$20 million ($2.6 million) in the latest year and at least HK$30 million in the first and second year combined.

Olam's shares have fallen around 15 percent since Muddy Waters first criticised the company. It has sued the short-seller in a Singapore court and issued a detailed rebuttal of the allegations. ($1 = 7.7500 Hong Kong dollars) (Reporting by Rachel Armstrong; Editing by Edmund Klamann)

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