Friday 22nd June 2018
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A variety of accounting treatments used by the country's port companies makes it hard to compare and greater alignment would increase transparency, says deputy Auditor-General Greg Schollum.
The public sector watchdog identified two main issues in the 2016-17 audits of port companies including variations in their reported returns and the impact of earthquake damage, according to a letter sent to chief executives and chairs of the companies.
The letter was published on the Office of the Auditor-General's website and said the audits "identified considerable variation in individual port companies’ reported returns", noting the different approaches taken by port companies in valuing property, plant, and equipment account for some of the variances but "mask the underlying performance of many entities in the sector and make them difficult to compare."
For the year ended June 30, 2017, the port sector generated an average return on equity of 8.9 percent. However, returns by individual companies ranged between 2.3 percent and 26.1 percent, Schollum said.
Nine of the 12 port companies measure some asset classes at fair value, but aren't consistent in that measurement, and these differences have a significant effect on the return on equity reported, Schollum said.
As a result, "we are concerned that these different valuation approaches make the performance of entities in the port sector less transparent for shareholders and other stakeholders to assess."
According to Schollum, it would be more appropriate to use fair value and to assess the fair value based on the expected cash flows to be generated.
Second, he said two port companies have been severely affected by earthquake damage in recent times, which has had consequences for their business continuity and insurance cover.
He noted that Lyttelton Port Co and CentrePort had significant write-offs and impairment charges on assets, and suffered lower revenue since the earthquakes. The accounting treatment for insurance proceeds has also been complex, he said.
Schollum said the 2016 audit report for Lyttelton Port drew attention to the basis for recognition of an impairment expense of $99.5 million, which arose because the return generated by replacing destroyed assets, and some capital expenditure for the company’s future, did not meet the investment return established by the company’s directors.
The 2017 audit report for CentrePort drew attention to the significant earthquake damage to its assets, including assumptions about insurance proceeds, the extent of impairment of assets, related tax treatment, and equity in joint venture properties.
He cited work carried out in 2013 on insuring public assets and said key questions to ask are 'have we done the work needed to understand and manage our risks?' and 'are we fully satisfied that our valuation methodologies and policies are best practice?'
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