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Revaluation rule revised

Surveillance panel sets out new temporary statement

When you want a change for the better, it’s a fairly good bet you don’t want someone like the Stock Exchange or its market surveillance panel making the change for you.

Capital Properties gave the brokers a turn when it complied by all the rules, reported a full-year profit of $6.6 million and — somewhere in the accounts — noted downward property revaluations of $19.7 million.

Capital had reported in the same way twice before, and Shortland Properties, which it took over, had done so five or six times without complaint. Shortland director Dennis Thom was chairman of the surveillance panel for part of that time.

Perhaps it’s okay for a small devaluation, not so for a large one. But with a couple of complaints in hand, the surveillance panel took a peek and decided it was time to change the way listed property companies report.

Go back a decade, and anyone with property used it for upward revaluation, and was able to raise debt and equity against what turned out to be above-the-ceiling valuation.

The rules had a touch of sophistication added, but not so the cowboy New Zealand exchange could be seen to be assisting investors with satisfactory reporting standards.

To make up for the 80s, revaluations of property investments have to be added to, or subtracted from, the revaluation reserve in the annual accounts. If there’s no money there, the theoretical transaction has to be carried out in the profit and loss neighbourhood.

The first page of the exchange’s standard consolidated operating statement in appendix 1, rule 10.4, ends with the bottom line at item 4c — the operating profit (now surplus) or loss (now deficit), with extraordinary items added.

In the policy guideline issued today in response to Capital’s 7 June reporting of its profit (well, unrealised deficit), the surveillance panel acknowledged: “There is no line in the consolidated operating statement in Appendix 1 on which to record unrealised net changes in the value of investment properties and listing rule 10.4.2 [prescribing the content of half-yearly and annual announcements] is silent as to precisely where unrealised net changes in the value of investment properties are required to be disclosed.”

There is, however, a line on the next page which covers this item precisely. Section 5 relates to details of specific receipts/outlays included in revenues or excluded from expenses, having a material effect on profit or loss. The last line, 5h, seeks details of “unrealised changes in value of investments”.

That’s where Capital Properties and Shortland Properties entered their revaluations.

The surveillance panel said in its guidelines today that property companies shouldn’t do this, because section 5h “provides for explanatory detail on a number of items relating to the operating statement and is not intended to substitute for correct completion of that statement.”

Remember, the panel found the accounts as presented were correct, did comply. The panel found revaluations should be dealt with under one of the alternatives in SSAP 17 (the statement of standard accounting practice concerning investment properties and those intended for sale) to comply with GAAP (generally accepted accounting practice), but acknowledged “there is not complete consistency” between its appendix 1 and listing rule 10.4.2, and SSAP 17.

While this has been known for a long time, the panel has decided to recommend now that the form of appendix 1 be reviewed.

Meanwhile, it wants listed companies holding property investments to carry on filling out the consolidated operating statement (front page of companies’ statements, down to section 4c) without touching on the subject of revaluations.

It also wants them not to mention revaluations in section 5.

Capital Properties’ chief executive, Nick Wevers, said the company suggested dropping an extra line in after 4a (operating score plus extras after tax, before minority interests get involved).

Instead, the surveillance panel figured on a more complicated and therefore less obvious way of doing things, in the interim: companies should write a note at the top of the consolidated operating statement (at the end of the preamble which nobody reads), telling readers they’ll find a supplementary statement on revaluations after 4c (which will put it on page 2, and probably put the bottom line of section 4c on page 2 as well if the opening explanation runs to a few lines).

That will also put the supplementary statement a few lines from 5h, immediately creating confusion between a statement outlining revaluations and a line now determined to say nothing of such things.

The other thing about the supplementary statement is that it must show “the relevant lines of the consolidated operating statement adjusted to take into account that treatment [in accordance with SSAP 17]” — in other words, a restatement of anything on the front page touched by revaluation.

In Capital’s case, that will probably mean the line after 4a being placed on the second page as a restatement line.

The company won’t have a chance to test the sense of the new temporary rules for a while. Its next result, late October, is a half-yearly one, for which revaluations are not carried out.

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