The O'Brien Column: Accounting differences can make profit results comparisons hard

By Peter V O'Brien

Friday 21st June 2002

Companies balancing in February or March seemed to improve profitability overall compared with the same periods last year.

The word "seemed" was used because in some cases it was difficult to make meaningful comparisons with earlier reports.

Inclusion of "unusual" items, whether favourable or unfavourable, one-off costs or profits without differentiating tax treatment in relation to tax on pre-tax operating profit and the consequent lack of like-for-like comparisons sometimes affected calculations of earnings relativities for preliminary interim reports.

All companies reported according to Stock Exchange rules and general accounting standards but it would have been useful if there was uniformity in recording comparative net operating profit after tax.

That includes at least a textual adjustment for the effect of acquisitions and/or divestments during the relative period.

Food chain operator Restaurant Brands, for example, reported in April for the 15 months ended February after a balance date change, the previous year's figures being for 12 months. Its report included detailed adjustments for better understanding of comparatives.

The company's final net profit for 15 months was $23.3 million, compared with $9.1 million for the preceding 12 months.

Restaurants Brands' net profit for the 12 months ended February 28, "excluding strategic initiatives" was $12.2 million.

It was $11.84 million on the same basis for the previous February year. The "strategic initiatives" in each case were taken as unusual items, with an allowance made for tax, as normal.

The latter was deducted in the appropriate section but the company also provided a note showing profit before tax excluding the strategic initiatives.

It was also sufficiently informative to show the difference between $12.16 million and $11.84 million was a gain of 2.7%, somewhat different from the change of 137.4% given as the bottom-line improvement when net profit for 15 months was compared formally with the figure for the year ended November 30, 2001.

The company included a note in the comparatives under that treatment excluding the effect of strategic initiatives, bringing the 137.4% back to 17.1% after tax.

A minor example of problems that can arise when trying to make direct comparisons with previous periods can be seen in the context of Horizon Energy Distribution, which reported net profit of $7.41 million for the year ended March 31, an increase of 48.3% over the previous year.

Horizon chairman Colin Holmes said in the preliminary report the higher profit arose from significant one-off items, including the reversal of provisions of $2 million relating to disputed amounts with Todd Energy and Transpower and other adjustments.

The reversal of provisions was straightforward and stated in the text. Those "other adjustments" seemed to be comparatively small in the context of the total result, given the company earned $4.99 million in 2001.

No company could be expected to detail such amounts in a preliminary report, particularly when they might have been spread over several matters.

Horizon's statements were therefore OK. Talk of "adjustments" in other companies can confuse comparisons if, even as one-off costs but not "unusual" or "extraordinary" items, they have an impact on net profit.

Issues arising from a lack of detail include situations where companies might write off intangibles in one year (see page 33 regarding technology companies), some gains on the sale of assets, which are considered part of normal operations, and particular one-offs.

Most of those matters are of minimal concern to the bulk of private investors and shareholders and to accounting watchdogs. Such information is relevant to exact, like-to-like comparisons of profit change.

The importance of potential profitability, or losses, should not be underemphasised when looking at historical comparatives but the latter are relevant when considering overall corporate health across the market or in a sector.

Results in the latest reporting round were generally reasonable. Some gains were modest and there were a few big downturns in the meat-processing industry, the latter being well documented.

Retailers Arthur Barnett and Kirkcaldie & Stains improved 6.4% and 5.5% respectively and Hallenstein Glasson eased 2.7% in its latest half-year.

Brewer DB was static, while competitor Lion Nathan gained 12.5%.

The 30 companies that reported, a few for three or nine months, had more profit ups than downs but things could be different when they next report.

A tightening economy, including rising interest rates and movements in the exchange rate, will have an effect.

Those matters will show up in the flood of reports from companies with post-March balance dates, particularly the June 30 crop.

The latest results were generally well received on the sharemarket. It pushed the NZSE40 index to a 2002 high on Monday, while the small companies index (SCI) was at a 2002 low.

At least New Zealand was not suffering the woes of overseas exchanges.

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