Rubicon 'grab for paper profits'

By PAM GRAHAM

Rubicon reported a $14.1 million annual profit yesterday with the help of an accounting change disputed by shareholder Guinness Peat Group.

Rubicon said the shift to treating Fletcher Challenge Forest as an associate company, rather than a company it had an investment in, first disclosed at the half year, was generally accepted accounting practice and required by its auditor.

GPG director Tony Gibbs said it was a "grab for paper profits" he and fellow Rubicon director Gary Weiss opposed.

The change meant Rubicon could take $17.5 million of earnings from Fletcher Forests through its profit and loss account and did not have to mark the investment to market in its balance sheet. If it had not changed the accounting treatment of its Fletcher Forest investment, its largest, it would have reported a loss.

Under accounting rules, if a company has "substantial influence" on another company it can treat it as an associate. During the year Rubicon increased its stake in Fletcher Forests to 19.9 per cent from 17.6 per cent, strengthening its argument for equity accounting whereby the share of profits in associates are counted.

Accounting academic Alan Robb took issue with the rules governing valuations of investments in associates in balance sheets.

"I think it highlights the question of whether the financial position is really shown by equity accounting when it allows a company to show its investment at more than the verifiable market value at that date," he said.

He said under accounting standard FRS-38, investments in associates could be valued at the greater of the net market value or value-in-use. In Rubicon's case the value-in-use was what the directors think will be received by way of dividend and ultimately the sale of the shares. Directors did not have to write the investment down to market.

"It is a good example of why marking to market would provide more objective evidence of the value of an investment," he said.

Rubicon is carrying the investment in Fletcher Forests at $1.48 a share when the shares closed yesterday at 99c. Fletcher Forests has a strategy of selling forests to unlock value it argues is not being recognised by its share price. Rubicon is essentially taking the view the value will be unlocked and is higher than the current share price suggests.

Rubicon's $14.1 million profit was achieved on sales of $6.5 million and other revenue of $9.4 million. It was 53 per cent down on the profit last year that was boosted by the sale of energy assets.

The profit included eight unusual items. On the plus side was a $7.6 million release of a previous provision from the sale of energy assets and $6.06 million received from Fletcher Forests after an agreement that resolved outstanding issues on the separation of Fletcher Challenge.

Unusual items with a negative impact included $837,000 of costs from the court case between GPG and Rubicon shareholder Perry, $3.6 million of costs from a failed central North Island forest deal, a $2.1 million liability from an executive payment scheme triggered by a GPG partial takeover plan, a downward revaluation of Genesis Research & Development to market and a $2.16 million downward revaluation of an investment in Health Innovations Holdings. No dividend was paid.