SINGAPORE Dec 10 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
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
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)