By ANNE GIBSON
Controversy over how to account for property writedowns is rocking the property industry.
The issue has come to a head as a result of rising interest rates, which are dampening the value of city office blocks.
Two Wellington-listed real estate firms have been accused of trying to show their annual results in the best possible light.
Both Capital Properties (which took over Auckland's Shortland Properties last December) and Colonial First State Investments have issued results in the past few weeks.
Capital announced a $13.1 million surplus after tax, but acknowledged that it had removed $19.7 million from its books in devaluations of its properties.
The company said higher interest rates had taken their toll, dampening the value of office blocks in Auckland and Wellington.
But property weekly New Zealand Property Investor claimed that Capital should have taken that $19.7 million devaluation on to its bottom line and declared a deficit of $6.5 million.
This view was supported by three industry experts: Wellington accountant Robert Walker, Herald investment writer and analyst Brian Gaynor, and the head of one of New Zealand's largest listed property companies, Rod Hodge, executive director of Trans Tasman Properties.
They all said it was crucial to take devaluations into the bottom-line figure. They confirmed that many property firms did not follow the correct practice and cited both the Capital and Colonial results as examples.
Colonial declared an after-tax profit of $12.2 million, before revaluation, for the 10 months to March 31.
It devalued its properties by $3.7 million but did not include this item in its after-tax surplus.
Its investor relations manager, Andrew Murrell, said the decision was taken after much debate within the company and after receiving advice from the stock exchange.
However, Colonial general manager Lloyd Cundy said the company's stock exchange announcement declared an after-tax surplus of $8.5 million.
Colonial emphasised the $12.2 million only in its press release.
The Property Investor article, headed Capital Properties' annual deficit, claimed that the company did not "properly show the impact of the writedown in property values.
The major impact will be that after-tax earnings for the year will be a deficit of $6.5 million, rather than the reported profit of $13.1 million."
The company should have used the same reporting standards as fellow listed real estate vehicles Trans Tasman and Property for Industry.
Capital Properties had used the old reporting form to file its Stock Exchange announcement.
As a result of the magazine's contacting the exchange, Capital had been asked to refile.
Capital chief executive Nick Wevers came out of the bunker fighting, saying Capital had done nothing wrong and no change in format was required.
He has just been appointed head of the Property Council, the national group which represents the interests of the commercial property sector.
He attacked Property Investor, saying he did not know what it was on about.
"We are going to put in a new form, but it doesn't change anything, it doesn't turn our figures from a profit into a loss," he said.
He acknowledged that the Stock Exchange had sent Capital a new form "but it's a sort of a version change, it's a procedural thing."
Capital duly refiled its return, which still showed the $13.1 million profit.
Stock Exchange managing director Bill Foster confirmed that it had sent Capital a new form.
"They have been asked to refile on the correct form because that's our practice."
Some companies used the old forms, which were not as demanding and did not require as much detail as the new one.
Mr Foster said it was not up to the exchange to make assumptions as to what difference this would make to Capital's figures.
Mr Walker, on a working group looking at revising the securities regulations, said many property companies were not following the correct procedure in filing results.
To support his view, he cited both Standard Accounting Practice No 17 and FRS7 of the Financial Reporting Act.
He said both were clear that revaluations of investment properties should be taken into the net surplus or deficit.
Mr Gaynor also cited SSAP17, which states that the revaluation of properties should be charged directly to the income statement or transferred directly to the revaluation reserve in the balance sheet - if there are sufficient reserves to cover it.
He criticised both Colonial and Capital for not following the correct procedure.
SSAP17's appendix shows a recommended approach towards accounting for revaluations. It takes unrealised net changes in the value of investment properties into account before the surplus or deficit for the year.
Mr Hodge was proud that his company's annual result had followed correct procedure and said an examination by his staff of six listed property companies showed three took devaluations into the bottom-line figure and three did not.
Defending Capital, Mr Wevers said the company had complied with SSAP17.
"Capital Properties wanted to amend the form and show the property revaluations below the operating-profit line, but was not able to because of the NZSE [stock exchange] directive."
He criticised the Trans Tasman result, which he said did not comply with SSAP17.
"SSAP17 was adopted in the late 1980s so that property companies could not include unrealised revaluations in the operating surplus [above the line] as was commonly the case then with companies such as Robt Jones Investments," he said.
The focus should be on operating surplus before revaluations "because this is the figure that dividends are based on."
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