It is impossible to judge the probity of Telecom’s international cable capacity sales “until we know all the circumstances”, says Victoria University accounting professor Don Trow. Using the information given in Telecom's accounts, he says, he finds it impossible to reach a conclusion.
Telecom has reported in its half-year results (see p10,11) sales and purchases of international cable capacity, with a total gain of $27.9 million. New Zealand’s Securities Commission has raised questions about Telecom’s accounting for the full benefit of this transaction in the half-year, rather than spreading it over the useful life of the capacity.
The items, Telecom directors said at the conference announcing the results, represent both sale and purchase transactions, whereby capacity on the Southern Cross cable was sold and transatlantic capacity bought, to and from parties including the now-defunct Global Crossing.
Trow says he cannot see using current information whether the $27.9 million represents the difference between income and expense, or just the income, with the expenses, as some sources have suggested, accounted separately as capital expenditure.
At press time, Securities Commission personnel “qualified” to answer questions were unavailable. Securities Commission chairwoman Jane Diplock was in an all-day meeting.
Telecom public affairs manager Martin Freeth says the $27.9m figure represents the gain on the sales side of the capacity exchange. It is the difference between the book value of the capacity at the date of sale and the price Telecom got for it. The purchases of capacity do not figure in that total. The price paid for those goes onto the balance sheet, Freeth says, "but it doesn't appear in the profit-and-loss account until we start depreciating it".
As for accounting for the transactions up-front, "that is standard New Zealand accounting practice," Freeth says. When the company has to account do US shareholders, it will do a "GAP [US general accounting practice standard] reconciliation" which removes the effect of the difference between US and NZ treatments.
Trow says the accounting principle reflects a difference between US practices, which are more tightly tied down and insist that such gains be spread – “they have what they call ‘cookbooks’ with all the rules” – and the practices of “British countries” like New Zealand, which are more flexible.
“I feel sorry for Telecom,” he says, “because its accounting is generally very clean and conservative.”
Doubts, spread internationally, could affect confidence not only in Telecom but in New Zealand accounting practice, he says, and could be unfairly damaging to both. The amount concerned is “a drop in the bucket” compared with Telecom’s EBITDA [earnings before interest, tax, depreciation and amortisation] of $1101 million, he says.