Singaporean Accounting at Its Best - Balding's WorldBalding's World

As I have written about the discrepancy between inflows into Singaporean public assets, reported earnings, and then the amount they claim as assets under management, the question of how to reconcile these divergent numbers arises. There are numerous reasons for the difference between earnings, inflows, and assets under management but a recent case exemplifies the difference perfectly.

Singapore Airlines recently sold its 49% stake in Virgin Atlantic to Delta Airlines. A summary article of the deal from Bloomberg News reports the following:

“Delta will buy the 49 percent shareholding for $360 million, according to a stock exchange filling late yesterday. Singapore Air will book an S$322 million ($264 million) gain from the sale, after accounting for a writedown in its investment in the U.K. carrier controlled by billionaire Richard Branson…Singapore Air bought the stake for S$1.65 billion, Germaine Shen, a spokeswoman, said by e-mail.”

To summarize the article: Singapore Airlines buys its 49% stake in Virgin Atlantic for $1.65 billion SGD, sells it for $360 million, and books a profit of $322 million SGD. Only through extremely shady accounting can a company buy an asset for $1.65 billion and sell it for a $1.3 billion less but record a $322 million profit. Let’s explain how this is possible.

Because Virgin Atlantic is a private company, its shares are not publicly traded on an exchange and provide no public record to value the stake. Singapore Airlines therefore, marked the value of its Virgin Atlantic holding on its balance sheet based upon what it believed it could sell the shares for on the open market. So in the most technical of ways, Singapore Airlines is completely within its accounting rights to book a profit on this transaction.

However, a closer look reveals some very disturbing trends and patterns. First, to book a profit of $322 million SGD on a sale of $360 million, Singapore Airline implicitly valued the Virgin Atlantic stake at $38 million SGD. This means that Singapore Airlines was valuing its Virgin stake at 98% less than what is paid for it. Booking “profits” like this eventually cause a firm to go bankrupt.

Second, as has been pointed out by Muddy Waters Research in the Olam fight, recording large amounts of “accounting” profits and cash losses should cause real concern for investors. If “accounting” profits are growing fast or are a large portion of total profits, this should raise a red flag to investors. As I have noted previously about Singapore, Inc. public balance sheet, given the rapid growth in “unlisted assets” this should cause everyone some real concern. In the absence of “unlisted asset” growth, Singapore, Inc. returns are abysmal. This is the hallmark of a company trying to stay afloat not a prosperous company enjoying strong returns.

Third, this further harms the reputation of Singapore companies and their overseas adventures. At the same time that Singapore Air was buying a part of Virgin Atlantic, it was buying a part of Air New Zealand which it eventually wrote down to near zero. Given the range of international investments which have lost money, it should concern investors and citizens that the only place Singapore seems to be able to make money, is in Singapore.

Fourth, the baseline price used by Singapore Air is extremely suspect. The $38 million SGD baseline for 49% of Virgin Atlantic used by Singapore is for an airline with $5.4 billion SGD in revenue and a $158 million SGD operating loss in 2012. Valuing the 49% stake of a $5.4 billion SGD at $38 million after a difficult year appears designed to provide the basis for an accounting profit. In other words, Singapore Air has every incentive to undervalue its Virgin Atlantic stake to record a “profit” rather than accurately valuing the company.

This continued pattern of suspect accounting and returns at Temasek linked companies should provide serious cause for concern to investor and citizens alike. With “profits” like that, companies eventually go out of business.

13 thoughts on “Singaporean Accounting at Its Best”

reminds me of the adage:
Revenue is vanity
Profit is sanity
Cash Flow is REALITY

Last line:
“With “profits” like that, companies eventually go out of business.”

Ah, but Temasek (and its various linked companies) will never go out of business.
Emptying coffers? Not to worry. There’s nothing a hike of fares/fees/fines/duties/levies/taxes won’t fix.

How about placing more restrictions on the withdrawal of CPF money? Further raising the legal retirement age? Extolling the virtues of marriage and getting more young dunces to produce more future taxpayers… I mean BABIES, to meet the demographic needs of our beloved motherland?

Oops newlyweds, now you have to service a hefty housing loan that lasts for up to 30 years. How does it feel to get a chunk of disposable income sucked out of you every month?

You see, it is easy to gamble away money when it is not your money.
Closed books, no accountability. Not even a word of ‘sorry’ when things get fecked up. At the end of the day, you know you can still keep your cushy job at Temasek no matter what happens.

It’s just business as usual in Singapore Inc. The best family-owned, rent-seeking corporate fiefdom money can buy.

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Hi, saw a glaring mistake so registered to comment.

The accounting isn’t as dodgy as you claimed. SIA wrote down 95% of their Virgin Atlantic investment sometimes after the 911 attack and have already taken a loss in their financials on this (can’t find the exact statement from SIA but this report does mentioned about it: http://bschool.nus.edu/departments/Marketing/Jochen%20papers/jatmheracleouswirtzstrategyorganizationsingaporeairlines2009.pdf). Therefore, to balance the accounts now, they have to book a profit in the current financial period. It’s common accounting practices. The only problem here is that the event happens too long ago and it isn’t make known to the public clearly.

We can question SIA’s investment foresight since they wrote down many investments, but there are other benefits that they gained from these investments that are harder to be quantified. Things like access to the routes, tax concession, alliances, fending off competitors, etc are not reflected in the financials. However, these helped SIA to make profit or solidify their market leader position even further so we can’t really say their investments are totally useless.

Lastly, to call them shady and disturbing is wrong, it only shows your bias towards the agenda of condemning the government’s investment.

The Man on January 11, 2013 at 8:54 am said:

As I clearly state, they wrote down their investment and I provided a link to it that even specified when they did it. Please pay attention to what I actually write.

the part on writing down VA is in the last page of the link above.

I am not an accountant, but I sent your piece on the sale of the Virgin Atlantic stake to an accountant (not in Singapore or Singaporean) and he says:
How interesting: what it demonstrates is that Balding knows very little about accounting and the effect of complying with the requirements of the relevant IFRS standards. In writing down the asset on the basis of an impairment calculation that would have been based on discounted cash flows from operations not on a possible sale value SIA would previously have to have recorded a LOSS on the write down in its P&L account when the provision was made. In other words its accounting was very conservative and the write back on sale is a function of having previously taken a great big hit and made the correct accounting adjustment.

This is not to say they made a great commercial decision with either of these acquisitions but to imply there is something dodgy about the accounting presentation is total bs*.

The Man on January 11, 2013 at 8:52 am said:

If you will actually read what I wrote rather than what your government bosses tell you, you will have read that this accounting is legal and permitted. I even explain why it is. I guess you were too busy getting instructions from others to read what I actually wrote.