Would that be the Australian set of accounts, the UK set or ... ?

Friday 22nd February 2002

Close examination of recent preliminary reports from Australian companies again provided information of interest to New Zealand investors.

Reports from BHP Billiton, Rio Tinto, News Corporation and Santos had comments that reinforced their views of last year which were considered in The National Business Review on August 31.

They also indirectly exposed some of the claptrap that emanated from accountants in various countries, including New Zealand, after the financial mess associated with failed US energy trader Enron.

That issue was possibly of more interest than the companies' views of the immediate outlook for their international operations, although the latter were worth noting.

There is a view that a set of company accounts is drawn up according to immutable rules applicable anywhere in what can be described loosely as the "western corporate world."

It is a view some accountants foster, for various reasons which do not need elaboration here.

The bigwigs of international accountancy know better, which explains the ongoing attempts to harmonise accounting standards among the US, UK, Canada, Australia and New Zealand through a group known as the G4 + 1.

BHP Billiton's preliminary report for the six months ended December 31 was the best example of discrepancies in accounting standards.

The organisation is a "dual listed company" (DLC), being a combination of Australia's BHP and the UK's Billiton last year.

Its report was prepared under UK generally accepted accounting principles (GAAP), which produced a final "attributable profit" of $US1.198 billion.

The company "reconciled" that profit to US GAAP, resulting in the $US1.198 billion becoming $US982 million.

A figure of $US12.18 billion for shareholders' funds under UK GAAP became $US17.25 billion under the US standards.

That was not the end of it. A note said: "BHP Billiton Limited is an Australian company which prepares its primary financial statements in accordance with Australian GAAP. The reconciliation of the BHP Billiton Group's net income and shareholders' funds under UK GAAP demonstrates both those adjustments necessary to show the link to the BHP Billiton Group's net income and shareholders' funds under Australian GAAP and then those adjustments necessary to reconcile to their equivalents presented in accordance with US GAAP."

Financial statements produced under Australian GAAP resulted in net profit attributable to members of the combined BHP Billiton Group at $US1.77 billion, which was converted from Australian dollars at the then ruling exchange rate.

We got three different "profiles" for the company, or four if account is taken of a 'frozen-in-time" exchange rate. The difference was small when going from Australian GAAP to the UK standard but about 10% after applying US GAAP.

So, what was BHP Billiton Group's half-year profit? Take your pick. It depended on your domicile but became an extraordinary exercise if you were one of the many thousands of New Zealanders who owned BHP Billiton shares either directly or indirectly, the latter through managed funds.

A reverse discrepancy appeared in media company News Corporation's report for the six months ended December.

It was minor in the context of the group's total revenue and earnings and relatively obscure, because effectively buried in a note.

The company's Fox Sports domestic cable networks lost $US24 million in the half-year, but an adjustment to reporting under Australian GAAP added $US28 million to give "News' reportable share" of $US4 million profit.

The company said the adjustments related to capital losses from start-up businesses and identifiable intangible amortisation.

News Corporation's results were based on exchange rates ruling at December 31 between $A/$US and £UK/$US.

The financial statements were presented in Australian dollars, so there were effectively three currency translations to get the end result. News shareholders and anyone with a general interest in investment should realise it would have been different if the figures were produced on December 30 or January 2, the latter date allowing for the point that not much currency trading occurs in London, New York or Australia on New Year's Day.

A set of financial statements reflects only a company's position at a given hour on a given day and should be treated as such, particularly when different GAAPs are applied to international operations.

BHP Billiton was cautious about the rest of the year. Deputy chief executive Brian Gilbertson said there was little evidence yet of a recovery in the major economies. The company was confident of the medium-term outlook but the current half-year would be difficult.

Mr Gilbertson said the group's robust cash flows and diversified income stream left it well placed in the downturn and in a strong position to take advantage of the recovery when it occurred.

A slump in advertising, particularly that associated with televised sports in the US after September 11, affected News Corporation and seemed likely to continue in the second half.

Oil producer Santos was relatively buoyant about the immediate future, despite having to adjust to a decline in oil prices over the past two years, subject to a recent improvement in the year ended December 31.

Rio Tinto's preliminary report for the year ended December 31 said the US economic downturn began well before September 11 in relation to the company's business, and was apparent before 2000 began.

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