Protest as $1 billion wiped from profits

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Nineteen company directors are protesting that a "quirk" in international accounting rules has wiped more than $1 billion of profits from New Zealand company accounts this year for liabilities that do not exist in any real sense.

They are telling investors to ignore the net profit after tax in company accounts and to look at the underlying profit while they lobby international accounting bodies and the Government for change.

Rob Challinor and Tony Frankham yesterday highlighted the difficulties arising from the accounting treatment of the Government's decision to eliminate tax deductions for depreciation on buildings with an expected life of 50 years.

An accounting standard requires a deferred tax liability to be set up representing the difference between the carrying values of buildings for accounting purposes and the value for tax purposes - now being zero.

The two professional directors said companies have included deferred tax liabilities in excess of $1 billion in their accounts this year.

The liabilities are a technical adjustment that is not payable.

"Most thinking people do not regard the provision as a liability," the directors said.

The impact on certain companies is so material that their financial statements will arguably not present a "true and fair view" as the market perceives that term.

The New Zealand Financial Reporting Act requires companies to observe international accounting standards so the deferred liability may not be treated merely as a note to the accounts as is possible in the United Kingdom.

The group of 19 New Zealand directors concerned about the issue have signed a letter to the International Accounting Standards Board in London seeking an exemption from the accounting rule.

They have been told the issue is acknowledged but processes have to be worked through.

Government officials here are also investigating if the law here needs to be changed to make the need for accounts to reflect a true and fair view the over-riding concept.

"We want the market to be informed and not get the wrong idea of the results of companies," the two senior directors said.

"The deferred tax liabilities required say nothing about the company that is useful to shareholders, potential investors, directors or managers.

"They are pointless in the sense that they are measuring something that has no practical application or purpose.

"They are non-cash, have no relevance to underlying or future performance and will not affect the ability to pay dividends," the professional directors said.

- NZPA