Beware the financial acronym

MARIA SLADE
Last updated 08:19 14/06/2013

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OPINION: Can you remember when eftpos wasn't actually a word, but stood for Electronic Funds Transfer at Point of Sale?

Likewise very few people probably now know that laser began life as Light Amplification by the Stimulated Emission of Radiation, or that scuba similarly originated from Self-Contained Underwater Breathing Apparatus.

We live in a world of acronyms, and the business sector is probably one of the worst offenders. EBITDAF, anyone?

Granted, "earnings before interest, tax, depreciation, amortisation, change in fair value and other significant items" is not a catchy phrase, so you can't really blame companies for acronymising it (if that's a word, but we're on grammatical thin ice here anyway).

Where the Financial Markets Authority (FMA) has come down on corporates is in their use of these trendy terms to dress themselves up. Market participants must now follow new FMA guidelines when using alternative profit measures such as "normalised profit" or "underlying earnings" - numbers which sometimes bear little resemblance to actual accounting standards, but which when cast in the right light can put a gloss on things.

Deloitte's latest survey of financial reporting shows that of 100 companies surveyed, 90 had used 253 alternative profit measures in their most recent annual reports. None fully complied with the FMA's new guidelines, although this was to be expected given that the rules only came into effect on January 1, Deloitte said.

We hardly raised an eyebrow here on the business desk. The financial performance accessorising we see on a daily basis is as colourful as a cheap jewellery shop. But no matter how the investor relations people like to gussie it up, it should always be stripped back to the classic little black dress - net profit after tax, the figure which really matters,

Thus we reported late last month that transport and logistics operator Mainfreight's net profit for the year to March fell 18 per cent to $65.9 million, down from $80.4m the previous year.

For obvious reasons the company preferred to highlight its net profit before abnormals which showed an increase of 3.4 per cent to $67.9m, up from $65.7m.

Mainfreight's 2012 net profit (that's profit after everything, including the abnormals) had been boosted by a $14.7m windfall from its acquisition of the European logistics group Wim Bosman the year before. As part of the purchase a certain amount had been set aside which was due to be paid only if Wim Bosman met agreed sales targets. It didn't, so the sum - coming out at $14.7m once exchange rates and tax had been taken into account - was booked back to the company's income statement. That boosted its profit, but of course made this year's net profit figure look a little pale in comparison.

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Mainfreight says this is how it was required to treat the event under international accounting rules. However there is a view that the ultimate effect was disingenuous, because you do not make a profit merely by buying an asset.

Once upon a time, before New Zealand was required to comply with the international rules, the non-payment of the amount would probably have been kept on the balance sheet with the value of Wim Bosman simply reduced accordingly.

Just because companies must now scrupulously adhere to international accounting standards does not mean that their books should not bear close scrutiny.

In fact, it could be argued that more than ever investors need to fight their way through the acronyms, fancy financial performance measures and notes to the accounts in order to gain a clear picture of a company's performance.

*Maria Slade is morning editor at the Fairfax Business Bureau. maria.slade@fairfaxmedia.co.nz

- BusinessDay.co.nz

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