30th April 2000
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Asian accounting assessed

Jardine Fleming Report

Sri Lanka has been placed in tier two of a special Ranking of Asian markets by Jardine Fleming Research (JFR) the Research arm of Jardine Fleming Stock Brokers Ltd. In their special report titled 'Welcome to the Jungle" JFR has categorised countries into four i.e Market Generally Accepted Accounting Principals, Conservatism in individual company policies, consistency in standards across markets and Disclosure.

The comprehensive report deals with the General Accounting Standards in Asia and looks at individual countries, sectors and individual companies. The 106 page report which is in five sections deals with an Overview, Key Accounting Issues in Asia, JF Accounting Standards and JF GAAP adjustments and Markets.

We publish the countrywide Rankings of Asian Markets with the Rankings table and the section on Sri Lanka from the report.

Report on Sri Lanka

Most of the problems are related to non- compliance with JF GAAP rather than Sri Lankan Accounting Standards( SLAS). 

Local standards allow non-recurring items to be booked as recurring items, which leaves room for inflated profits. Capitalisation of borrowing costs is allowed by SLAS.

SLAS is based mainly on IAS. Hence compliance with SLAS ensures compliance with IAS. Most of the companies selected in our sample adhere to local standards when preparing their financial statements. Note that our sample comprises large-cap blue chips, which have better disclosure and greater transparency. The Institute of Chartered Accountants of Sri Lanka ( ICASL) monitors company accounts to ensure compliance.

Most of the Companies we looked at had points knocked off for booking non- recurring items as recurring.The reason is that, under local standards, non-recurring items are treated specially only if they are rare "extraordinary" occurences rather than merely "exceptional." SLAS10 requires firms to classify items as either extraordinary or ordinary; unfortunately, it defines almost all items as arising out of ordinary activities. Only rarely would a transaction give rise to an extraordinary item. Interest capitalisation is another area where most companies have scored negative points.

In most cases, companies are guilty of not disclosing how they treat interest expense, rather than of improper interest capitalisation itself. On the whole, companies presented financial statements fairly and in line with local GAAP. Scores range from-2 to-6, with only two companies scoring-6. The issues we have highlighted have a relatively small impact on profits and are unlikely to mislead shareholders

by Nasafa Sadique.

Tier rankings of accounting practices in Asian Markets
Years Market Conservatism in individual Consistency in standards Disclosure Overall GAAP company policies Across markets Hong Kong/China 1 1 1 2 1 Singapore 1 1 1 2 1 Taiwan 2 1 1 1 1 South Korea 1 1 2 2 2 Malaysia 2 2 2 2 2 Thailand 2 2 2 2 2 India 2 2 2 2 2 Sri Lanka 2 2 2 3 2 Indonesia 3 3 3 2 3 Pakistan 3 2 3 3 3 Philippines 3 3 3 2 3

Rankings of Asian Markets

We have assessed the overall quality of accounting standards for Asian markets in four categories, listed below, and have ranked the markets as either tier 1 ( best), tier 2or tier3 ( worst).

The criteria we considered are: 

Market GAAP: Here we assess the strictness of rules on issues such as forex treatment, provisions and revaluations.

Conservatism on individual company policies: We look at policies that fall under an individual company's discretion, such as depreciation.

Consistency in standards across companies: Here we judge markets based on the uniformity of accounting rules that companies use.

Disclosure: We focus on issues of transparency, frequency of reporting , and detailed breakdowns in reporting.

CB report today

The Central Bank's annual report for 1999 is due to be presented on Sunday to President/Finance Minister, Chandrika Kumaratunga. With Central Bank disclosing the projected 1999 GDP growth as 4.2%, economists are eagerly awaiting to take a peek into the country's financial status.

Shipping & Aviation

CEE does it again

Acclaimed as the leader in offshore repairs and professional diving in Sri Lanka, Colombo Engineering Enterprises, headed by Kiran Atapattu, carried out a phenomenal offshore repair job on a vessel recently. The vessel in question was the container ship MV Tiger Cloud, belonging to the Bengal Tiger Line.

The damage in question was to the container cell-guides of all three hatches. After removing the damaged cell-guides, specially imported steel was used. Deploying a total of 52 welders, working non-stop, the repair was completed in a record time of five days. The total steel tonnage renewed was 50.

In addition to afloat ship repairs, the company is also well known and accepted for its underwater service, which are approved by the following renowned classification bodies: Lloyds Register of Shipping - UK, American Bureau of Shipping - USA, Nippon Kaiji Kyoki - Japan, Germaischer Lloyd - Germany, Indian Register of Shipping - India, Bureau Veritas - France and Det Norske Veritas - Norway.

Old guards get a run for their money

It is now over seven months since P&O Ports, Australia formally took over the old Queen Elizabeth Container Terminal of the Sri Lanka Ports Authority, and launched operations as South Asia Gateway Terminal (SAGT).

More than three years of bureaucratic wrangling and dragging of feet has passed since the time the idea of a private container terminal operator at Colombo Port was first mooted. The idea was to provide Sri Lankan shippers an alternative to the services provided by the SLPA.

Various political and other nationalist groups showed their disapproval to the venture, citing the constant outflow of precious foreign exchange would further impoverish our tiny island.

A directive from the SAGT that the operator requires payment from shipping lines in US dollars for vessel container operations, to be paid into an account in Singapore, has further fueled the strong opposition to the endeavour. Many allegations of exchange control violation were presented.

"The tariff is currently in US dollars but is converted to Sri Lankan rupees upon payment," says SAGT chief John Buckley. 

"Shipping lines prefer this as it gives them better control over funds, and they would not have to remit large sums of US dollars as advance to Colombo agents to cover their Colombo port chaf quay cranes handed over under the terms of the agreement, the extensive cleaning of the site and the repairs and renovations on the existing buildings required to facilitate occupation as the chief problems faced by SAGT.

In addition, the Indian port worker's strike also contributed to the negative impact on throughput in January and early February, this year.

"However, with the transfer of the PONL/NYK services (SAX and GKX) to SAGT from March 26, and other new feeder services now calling at SAGT, monthly throughput from April will be 25,000 TEUs," asserts Buckley.

"Quay crane productivity has increased on the Queen Elizabeth Quay (QEQ) from an average 8-10 cph prior to SAGT's taking over, to 20 cph under SAGT's operations. This is despite the unpredictable breakdown rate of the old equipment," said Buckley.

Throughput at SAGT would have been even better but for the fact that the draught at the QCT berths does not permit the handling of mainline vessels.

For the time being, until the 340m main berth is readied in March next year, only feeder vessels are able to use the facility.

"Capital and maintenance dredging in the channel, and within the harbour, will also be required, but this is the responsibility of the SLPA," adds Buckley.

"We are only responsible for capital dredging for the project construction stages. In terms of bottlenecks/hazards, shipping lines do complain about the lack of maintenance dredging, and the port needs this issue on a priority basis," said Buckley.

Once the main berth is completed, next year, SAGT intends employing three super post-panamax quay cranes and nine RTGs to raise its handling capacity to 29,000 TEUs per month. During the second phase, the QCT berths will be shut down and the old quay cranes removed to allow for the third stage, where a 650m quay has been planned, with six super post-panamax quay cranes and 18 RTGs, to yield 700,000 TEUs. "Upon completion of the third stage's construction, SAGT will have a facility of 940m quay length at 14m draught, six super post-panamax quay cranes, three post-panamax quay cranes and 28 RTGs, to yield an aggregate capacity of one million TEUs," concluded Buckley.

Cosco refocuses on core business of shipping 

SINGAPORE Cosco Investment (S) Ltd plans to refocus on its core business of shipping and related businesses while shedding its non-core business units following a 70 per cent drop in profits. 

The announcement was made following the posting of its 1999 financial results which saw the company's full-year earnings drop nearly 70 per cent to S$815,000 for the year ended Dec 31, from $2.6 million the year before. Turnover was also down some 38 per cent to $201.4 million from $325.1 million the year before. 

Shipping and related businesses are run by Cosco Investment group's wholly-owned subsidiary, Cosco (S) Pte Ltd and its various subsidiaries. 

The group's financial statement noted that the after tax profit was lower primarily due to the purchase of new ships combined with poor shipping market conditions. While the 1999 turnover from Cosco's shipping activities remained almost identical to the previous year at nearly $115.8 million, profit dropped some 23 per cent over the previous year. 

"The loss suffered by the shipping segment was mainly attributable to an increase in interest expense as a result of the delivery of two new vessels during the year; higher bunker prices and continuing low freight rates," noted the report. Interest on borrowings amounted to some $14 million during 1999. 

According to a source close to Cosco the financial drain of purchasing the two ships was exacerbated by low freight rates: "Basically the shipping market remained pretty poor through 1999 and the rest of Cosco's shipping business was not able to offset the decline." 

But the source noted that with freight rates slowly improving and bunker prices stabilising, this year is looking brighter. He went on to say: "Cosco started out as a shipping company, added additional businesses not related to shipping and now that times are lean, the company is getting back to its core business again." 

He said the company is looking towards expanding its shipping activities in the region including shipping-related logistics, but could not elaborate. 

The source also indicated the company was only disposing of its Singapore properties estimated to be worth $70 million. But he noted the company is not under any great pressure to sell its property assests and as such, "is in no particular hurry to sell it's not a fire-sale!", he cautioned. Cosco's property activities are handled by its subsidiary Harington Property Pte Ltd. 

Cosco also noted it had taken action to reduce its ratio of debt to equity and "disposal of non-core businesses will help to reduce the ratio. "The increase in ordinary share capital arising from the conversion of most of the warrants and the issue of preference shares have enabled the company to reduce debt and interest costs. The extraordinary conditions faced by the company over the last two years have been difficult, but the worst appears now to be behind us," it said. 

Two further properties in China will be maintained as they continue to generate guaranteed revenue. The group's trading subsidiary Cosco Trading (S) Pte Ltd is also being retained along with shipping-related businesses. 

These include: Costar Shipping Pte Ltd (Cosco's full container and break-bulk liner services); Cosco Marine Engineering (S) Pte Ltd (engineering and ship repair); Xing Yuan Pte Ltd (ship chandling services); Cosco-KSH Consultants Pte Ltd; G.W. Maritime Pte Ltd (marine survey services); Seacare MarinePlus Pte Ltd (crew management); Freightworld Pte Ltd (international freight forwarding); and Cosem Pte Ltd (container depot and freight handling joint venture with Sembawang Marine and Logistics Ltd). 

The group had previously divested itself of its oil trading and bunkering subsidiaries in 1998. 

Profits slump

CHINESE state shipping firm Cosco has reported a 70% drop in profit last year, down to US$0.47m from US$1.5m in 1998. 

Turnover fell 38% to US$117.5m at the same time. The company now plans to sell off its non-shipping related businesses to cut its losses. Profits in its shipping interests fell 23% in 1999, but the company says that this was mainly due to the cost of new ships, the rise in bunker costs and the weak freight market all round. With rates on the rise and bunker prices down and, apparently, steady Cosco predicts that this year will be better for the firm. Selling off non-core assets will also enable the firm to cut its debt-equity ratio as well as interest costs, which were around US$8.1m last year.

As well as its liner, bulk and break-bulk shipping divisions, Cosco has interests in property in Singapore and China. The company also owns firms involved in ship repair, engineering, marine surveying and has several investments in the logistics and supply chain forwarding industry. This last sector is one the firm is believed to have earmarked for further investment in the future. 

Cosco sold its oil and bunker divisions two years ago.

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