Saturday, May 27, 2006

Air NZ troubles caused by an accounting loss

I'm guessing this is not really a revelation for most people who tracked the development closely - but I for one did not realise that the $600 million dollar loss that Air NZ suffered (causing its shareprice tailspin and subsequent Government bailout) was actually primarily caused by a change in accounting policies.

Air NZ changed their recognition of taxation liabilities from a partial basis to a complete basis (optionally) which increased their deferred tax liability by $786 million (compare that figure again to the total loss above...) and increased the debt to assets ratio from 34% to 66% - causing issues in a number of their debt covenants.  Now while one would have to question the internal decision to optionally cause themselves so much pain - it also casts into start relief the decision of the Government to spend taxpayers money "bailing" them out.  This is a company that effectively chose to make a loss, and subsequently gained millions of dollars in taxpayer funded capital injections as a result.  Hardly indicative of an efficient markets hypothesis...

However more interestingly is that NZ is currently changing / has changed its accounting standards.  One change (by moving from SSAP-12 to NZ IAS 12) will make the complete basis compulsory  (That's right Air NZ would now no longer have the choice and those losses would at least have been forced on them...).  The question in my mind is how many other companies are about to have a big shock as a similar treatment occurs to their balance sheets.  Or without the Government hyperbole will we even notice as it does?
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