| July 11
July 11 Auditors and investors in Southeast Asia
are pushing back against an accounting standard used to value
farm animals, crops and other agricultural produce that they
fear will make profits more volatile and raise the risk of
The standard is used in many developed markets, but
attracted controversy in Asia last year when Singapore-listed
Olam International Ltd was accused by short-seller
Muddy Waters of aggressively booking fair value gains from its
array of so-called "biological assets".
How Malaysia, Indonesia and Thailand - all of which have
large palm oil, rubber and other agricultural industries -
account for such assets is proving to be the biggest sticking
point as they move to international accounting standards.
The standard means companies must regularly value how much
their palm fruit or cow herds are worth before they have been
harvested or slaughtered. That means estimating what the crop or
livestock will ultimately sell for.
If the market price of palm oil were to rise, they would
then boost their bottom line with a "fair value" gain in the
palm fruit on their trees - or similarly book a fair value loss
if prices fall.
Investors are concerned this leaves accounts of agricultural
companies at the mercy of sudden swings in commodity prices and
that unscrupulous executives could use dubious pricing models to
exploit the rule to pad their earnings.
"We would look through this noise and just look at the
underlying earnings, that is, strip out the fair value gains and
losses and look at the underlying revenue and expenses and
profits," said Andrew San, an assistant investment manager at
Aberdeen Asset Management in Kuala Lumpur.
Aberdeen, which oversaw $322.4 billion as of March, holds
stakes in Malaysian plantation companies including United
Plantations Bhd, United Malacca Bhd and
Oriental Holdings Bhd.
Commodities firm Olam was targeted in November by Muddy
Waters, which questioned the company's debt level and asset
quality, sending its stock and bond prices tumbling.
Olam said it adheres to Singapore Financial Reporting
Standards, which are based on international accounting rules.
Weeks after Muddy Waters' attack on Olam, Hong Kong
Exchanges and Clearing Ltd said companies wanting to
list have to exclude unrealised fair value gains from biological
assets in trying to meet the bourse's requirements.
"We consider that the risks in biological assets are higher
as they are perishable and their valuation is usually subject to
higher uncertainty due to the complex and not easily verifiable
assumptions adopted," the exchange said at the time.
Malaysia is due to adopt the standard, known as IAS 41, from
2014, while Indonesia has not yet fixed a timeline for
implementing it. Thailand's Federation of Accounting Professions
says it is discussing the issue with companies and will decide
whether or not to adopt it by the end of this year, with
implementation tentatively scheduled for 2015 or 2016.
I Gede Nyoman Yetna, a senior official in the Indonesian
stock exchange's listing division, told Reuters that the model
"is not considered to be compatible with the agricultural
environment in Indonesia".
Accountants say they are also worried that companies,
particularly those cultivating crops or livestock that have
relatively illiquid markets, will use dubious assumptions on
what constitutes fair value to suit their bottom lines.
"The big challenge is the pricing: Will people aggressively
use this standard to achieve certain gains?" said one accountant
in Malaysia, who declined to be named as he has been in involved
in discussions with the Malaysian accounting standards board on
their proposed adoption of the rule.
Agriculture companies listed in countries that already use
this accounting method have seen big swings in their profit as a
result of fair value gains.
Revaluation gains from biological assets delivered more than
a third of Singapore-listed Wilmar International Ltd's
$733.8 million pretax profit from its plantations and palm oil
mills in 2011 during the commodity's bull run, but just 7
percent of $410.8 million in 2012.
Thailand's largest meat and animal feed producer, Charoen
Pokphand Foods Pcl, adopted the standard early last
year after acquiring a stake in a Hong Kong-listed company that
already uses it.
The company's chief executive, Adirek Sripratak, said the
standard had proved "quite a headache" to apply.
"Under this standard, when market prices are up, it will
push up inventory gain, which will make profit look irregular.
If prices go down, there will be inventory loss," he said.
Adding to the difficulty in using the standard is that the
audit industry in some emerging markets does not have enough
professionals conversant with the rules to check that they are
"Our accounting profession is not as strong as Singapore and
Malaysia," said Ersa Tri Wahyuni, a technical advisor to the
Indonesian Institute of Accountants. "We only have 1,000 public
accountants, so the profession itself is not very strong."
The International Accounting Standards Board, which sets the
rules, is not deaf to these concerns.
Last month it announced proposed changes on how companies
should account for "bearer plants" - mature palm trees, grape
vines and other plants that yield produce over a certain period
of time, but are not the produce themselves.
It is proposing that those plants should not be accounted
for at fair value, but instead treated like manufacturing
equipment. However, the fruit hanging from their branches should
still be measured at fair value as it grows.
Some accountants are still not happy, arguing that it is
very difficult to split a tree into parts and account for it in
different ways and that instead the fruit should not be valued
until it is harvested.
"The tree should be accounted at cost whereas the fruit
bunches are at fair value? It creates a havoc for us," said the
Others acknowledge that, if used properly, fair value
accounting can provide investors with useful information.
"The pros are that some companies incur costs to develop
plantations and so on, so biological gains reflect future
profitability," said James Koh, an analyst at Maybank Kim Eng.
The lingering worry, though, is that in some Southeast Asian
markets, where corporate governance problems are already high on
investors' red flag list, this presents one more risk factor.
"Some companies in Indonesia, usually big and multinational
ones, are actually looking forward to the standard-setter
adopting the rule," said the Indonesian Institute of
Accountant's Wahyuni. "But we need to be careful whether this
eagerness is genuine or if they want to put the fair value into
their profit and loss account."
(Additional reporting by Khettiya Jittapong in Bangkok; Editing
by Alex Richardson)