Olam International

[l0nEr]

The problem with biological gain is that one is simply booking future profit in advance and that this future profit might not happen. In such a case, why not simply book the profit after the sales of goods which should have been a better accounting standards? Biological gain allows companies to play around with their profits and I am sure Oceanus has proven the case. The benefit of biological gain is perhaps that shareholders are able to "see the actual value" of the biological asset as it grows just like in the case of the properties in REITs which have to undergo revaluation annually. However, biological asset is certainly much riskier and easier to play around as compared to property.

Yep... REIT property valuation is done by an independent party. If i am not wrong, they also relies on Models (level 3 fair value) or recently transacted prices/per sq ft prices (level 2 fair value) to determine the fair value of the properties. This is because there is usually no way to obtain a level 1 fair value estimate of the property since there is no active market
Refer to FRS 113.
Not exactly sure if is done this way in real life though... think they just dont disclose that they are most probably relying on level 2 fair value estimates generated by the independent valuer.

1) one of the major contention of MW is more of the negative goodwill rather than the biological gain. Negative goodwill arose in numerous circumstances as somehow Olam is able to purchase companies "cheaply" and hence book negative goodwil when it revalue their asset to be much more than it has paid. Some of the acquisition like the Crown Flour Mill and Sk Food are also a bit shady given their past track records. IN its defense of goodwill , Olam simply uses FRS and the auditors as its shield. It is certainly rare to have the opportunity to make numerous acquisition with negative goodwill booked, implying that the initial owners failed in their valuation of asset.

Not exactly. If you buy distressed assets or poorly managed stuff, you buy assets cheaply. There can be a lot of reasons why assets become distressed (i.e. management screwed up, overleverage, kena fraud, etc etc), but the value might be greater than that. Particularly, when the going concern assumption is no longer there, the assets cannot be valued at 'value-in-use', which tends to be of a higher value. (a PPE is probably worth more being used to generate income than to be sold to some other company). There are a lot of distressed debt funds, and PE funds that earn from such 'mispricing'. Its always cheaper and more advantageous when one party is 'forced' to sell I think Olam did say some of these assets are bought at distressed state.

2) MW has rightly pointed out the 3 levels of derivatives reporting in p.g. 30 of its report which Olam has definitely not been able to counter effectively. Over the years, the amount of level 3 derivatives have grown significantly as the management has decided to shift a huge portion of its level 2 derivatives to level 3. The problem with level 3 is that the valuation is based on inputs by the management rather than being based on quoted prices in the market. What this means is that lots of assumptions have been built in as anyone else that has built a DCF mdoel will have understood. Moreover, commodities are volatile which makes any prediction inaccurate. It was stunning that the potential effect of adjusting the assumption by +/- 1% will have resulted in a change of profit of $12 million on the fair value of the derivatives. With regard to this point, Olam points out that this model is frequently used by the industry. The 3 level of derivatives are certainly worth learning.

Yup. This is a question for the international accounting board to decide.
I think they were forced to use it mainly because of the cotton contracts, which was facing a lot of issues at that point of time.
The size of the fluctuation is because of the large amount of outstanding contracts.
So its up to you to decide if the assumptions are reasonable. Do you think they are??
Actually to me this is just an accounting issue. Even if they revalue the stock upwards, when they realise the sale, their COGS will also be higher (i.e. lower profits). An example is, if Olam keeps revaluing the cow higher as it grows (from initial cost of 500 to 2000), when Olam finally sells the cow at 5000, its cost will be higher at 2000, resulting in lower profits of 3000 at the point of sale. While analysts and people keep ignoring the non-cash revaluation gains of 1500, they also do not adjust/or take into account of the 1500 in the year of the sale (i.e. analysts will only see profits of 3000, and not 4500, so the 1500 is MIA).
The whole issue of placing a level 3 or 2 is just so that people have a value on the balance sheet on the respectively balance sheet date. Eventually, if the asset is being sold, it will eventually flow through to the P/L (its just a question of when). If the company is not under the obligation to release a balance sheet, but just the P&L statement, this issue would not even have surfaced, coz people will just continue to see the profits and cash flowing it thats all!

3) irregularities have been frequently found in Olam's financial statement especially from Q4 report to the actual report in the annual report. often, there are huge variations in the various inputs like PPE, cash, interest income and expense between the Q4 results and the final results in the annual report, but the bottom line be it the profit, equity or cash remains unchanged. In Q4 2011, they found that Olam reported 0 interest income despite an average cash balance of $818.8 million. This seemed like a good way to sense how real the huge cash balance of the S-chips here is. Of course, it can possibly imply the high working capital requirement of the company though it seemed unrealistic to have 0 interest income

This is indeed interesting...