Co-ops fight to retain share assets

Cooperatives Association executive director Ramsey Margolis.

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THE GHOST of Enron is haunting New Zealand's co-operatives, threatening to turn their balance sheets upside down by reclassifying shares as debt rather than equity.

The 2001 collapse of the US energy high-flyer ignited a complete rewrite of accounting rules and standards, and not just for public companies such as Enron. Co-operatives found themselves caught in a tangle of changes that failed to recognise the unique characteristics of their long-standing structures.

The changes are no trivial matter either, threatening to cause apparent declines in shareholder equity, making co-ops much less attractive to banks when they seek to borrow money. Some could even find themselves in breach of banking covenants.

Ernst & Young partner Kimberley Crook said many banking covenants were linked to the balance sheet and measures such as debt to equity ratios.

Co-ops, which deliver up to 22% of New Zealand's GDP according to Cooperatives Association executive director Ramsey Margolis, have been fighting a rearguard action on the changes since 2003.

In December 2008, co-ops worldwide thought they had the problem licked when the International Accounting Standards Board made significant changes to the offending rule, called International Accounting Standard 32.

However, the board is now holding talks with the US Financial Accounting Standards Board and its Japanese equivalent to produce a new global standard – in the process threatening to undo progress made towards a solution for co-operative businesses.

Here's the issue:

The 1993 New Zealand Companies Act did not allow "nominal value shares", the basis on which co-ops charged members for membership. These shares allowed members to join a co-op for, say, a dollar a share in. When they left, they were entitled to receive the same price on the way out.

Co-ops appealed to the government and won the right to write their own act, which included the right for members to have their shares bought out at the entry price.

This, when written into the constitutions of most New Zealand co-ops, is what caused their equity to be considered debt under the new international accounting standards, Margolis explained, because they include a mandatory future obligation on the issuer. It also had flow-on effects for associated transactions that could distort a co-op's profit and loss account.

Changes to IAS 32 in December 2008 appeared to solve the problem for "simple" ($1-in, $1-out) shares, but it remained for more complex shares that were revalued after issue. The change was seen as a "short-term fix", said Crook.

Now, with a new effort at international standardisation under way between the International Accounting Standards Board (IASB), the US Financial Accounting Standards Board and others, it is possible New Zealand co-ops will end up with a definition of co-operative shares that "doesn't reflect the reality that over the past 150 years declaring their member shares as assets have not given their members, or anyone else for that matter, any problems", said Margolis.

"It's important to remember that when someone buys a share in a co-operative, they're paying a membership fee, one which is returnable when the member leaves the co-op, and not buying an investment," he said. "This is why I prefer to call people who have shares in a co-operative `members' rather than `shareholders', as to call them the latter, to my mind, muddies the water."

Crook said the IASB is expected to publish a draft accounting standard soon that will replace IAS 32 and early indications are promising.

The IASB is considering permitting equity treatment of redeemable shares provided two conditions are met: the holder must own the shares in order to engage in transactions with the co-operative entity or to participate in its activities, and the shares' terms require, or permit, the holder or issuer to require redemption when the holder ceases participating.

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