No room in the disposal group, or: back to the balance sheet!

An example of issues arising in applying IFRS 5 to assets held for sale

Here’s something I recently read about:

  • Construction, services and property group Kier has been forced to restate its debt by more than £40 million after uncovering an accounting error, reports have revealed.
  • In a recent trading update, the group said it has increased its debt from £130 million to £180.5 million after an audit had identified a “number of adjustments”.
  • Stocks in Kier plunged some 13 per cent after news of the error came to light.
  • According to reports, a large proportion of the additional debt comes from the group taking a £25 million hit on a delayed hospital project. It said the one-off “non-underlying provision” was going to be included in its next financial statement to cover “additional costs associated with the project’s delay”.
  • Kier Finance Director Bev Dew said an internal review led to an accounting restatement after the reclassification of £40.2 million of debt associated with an asset resale.
  • “We are not actually selling that debt when we sell the asset, so as a consequence there was an error and we have bought that debt back to the balance sheet,” she said.
  • The news marks a tough start to 2019 after a torrid 2018. Last year, it was revealed that Kier planned to sell new shares to existing investors at a one-third discount in a bid to cut its liabilities of more than £600 million. The move almost halved existing share values.

Actually, the company subsequently announced that Bev Dew will be leaving before the end of the year (deploying in its release a male pronoun, rather than the female one used above). I spent quite a long time on the company’s website trying to locate the “trading update” referred to in the story, without any success. It’s certainly not located in the sequential listing of news releases, or in the listing of “regulatory news,” and a website-wide search for the phrase “number of adjustments,” which appears to be a direct quote from the update, didn’t turn it up either. Maybe it could be demonstrated that it’s on there somewhere, but it certainly seems suboptimal that someone might read in the paper or online about a major accounting event and then be unable to readily access a direct company-generated account of the incident. I suppose the largest part of the explanation would be that the amounts to be amended had never been reported within formal financial statements, only communicated by other means, so that there was no correction of an accounting error within the scope of IAS 8. But in the circumstances, that doesn’t seem sufficient to justify such evasiveness. If a comparable fact pattern arose in Canada, I expect the 13% drop in the share price would drive a strong presumption on the part of regulators that the information about the error constituted a “material change,” such that a news release and subsequent regulatory filing would be required.

That aside, the issue seems to be that the company had wrongly identified a “disposal group” – that is, in terms of IFRS 5, a group of assets to be disposed of by sale or otherwise together as a group in a single transaction “and liabilities directly associated with those assets that will be transferred in the transaction.” IFRS 5 doesn’t actually have a lot to say about identifying those liabilities. I suppose that’s because it’s considered to be obvious: the liabilities are those that will be derecognized as a direct result of completing the disposal transaction, or something along those lines. Still, one wonders whether the occasional stretched interpretation might slip through here. For example, some practitioners might try to blur the line between liabilities that will be transferred in the transaction and those that will be settled as a result of it. Suppose for instance that a particular liability isn’t being transferred to the counterparty in the transaction and will remain the company’s obligation; however, the company has entered into a contract entailing that the liability will be mandatorily settled out of the proceeds from the transaction. Some might try to argue that the liabilities should therefore be classified within the disposal group, because they’ll be extinguished just as if they were part of it. Indeed, such a presentation might assist users in “assessing the timing, amount and uncertainty of future cash flows,” just as IFRS 5 seeks to do. Even so, while some of the lines drawn by IFRS 5 are certainly rather arbitrary, this kind of treatment – one driven entirely by an internal management determination about how to allocate its resources – would seem to fall clearly on the wrong side of them.

Of course, I’m not saying the example I just gave has anything to do with the error initially made by Kier. I’d like to definitively tell you it doesn’t, but as I noted, I couldn’t find that information…

The opinions expressed are solely those of the author

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