Saturday, 28 November 2015

AirAsia's accounting issues (2)

I wrote before about this issue, more than four years ago:

"AirAsia had previously drawn criticism from many parties as to why it never equity accounted the losses suffered by its associates and there were calls for greater transparency over the financial numbers recorded by the associates. The airline subsequently explained that with AirAsia having written down to zero its investments for both TAA and IAA in AirAsia's balance sheet, it did not need to recognise any further losses made by TAA and IAA as it had no accounting obligation to make good on those losses."

 I find the AirAsia's accounting much too aggressive. Thai AirAsia and PT Indonesia AirAsia are two strategic investments in which AirAsia has a large share (almost 50%) and to which AirAsia is lending large amounts of money. Conservative accounting would really require these losses of RM 254 million to be accounted for.

 There are several possible outcomes, in each of it AirAsia has to take the loss:
  • Their Thai or Indonesian operation goes bankrupt, in this case AirAsia has to write off its loans
  • The equity of their Thai or Indonesia operation is replenished, AirAsia has to write of its losses
  • The Thai or Indonesian operation turns highly profitable, again AirAsia has to write of its previous losses against these profits

Finally, four years later, AirAsia had to recognize its previous losses in its Indonesian subsidiary when it announced its results:

From the options I gave above, it turned out to be the second option, AirAsia was forced by the Indonesian authorities to replenish the shareholders funds in its Indonesian subsidiary.

This one-off event dragged down the quarterly results substantially, the PBT was a loss of RM 462 Million, almost exactly the prior year absorbed losses.

I concluded my previous posting by:

There is still the other accounting issue, AirAsia has booked as "profits" RM 659 million deferred tax assets. This is tax it does not need to pay in the future if it makes profit. Again, a very aggressive way of accounting.

In other words, AirAsia is not accounting for losses that have occurred in its strategic investments, but it is accounting for possible future profits.

This does not seem right to me.

It still does not seem right to me, although I am not an accountant.

AirAsia did not incur those losses the last quarter, what they did was invest more money in their subsidiary.

By not recognizing the losses they have (in my opinion) artificially boosted their earnings over those years, but now they finally had to account for it (at least for their Indonesian subsidiary).
AirAsia X has booked RM 470 Million in "profits" due to deferred tax assets while it has not booked a single year of "normalized earnings" (corrected for one-off items) in its existence.
AirAsia and AirAsia X might have convinced their auditor who signed the accounts over those years, but they haven't convinced me. Surely this can not be the correct way to do things.

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