Financial Reports Discussion - How to Interprete the Group and Company Results

[Musicwhiz]

Correct me if I am wrong.. The main Company debt should be fully consolidated and thus any elimination at Group level is due to debt owned to consolidated subsidaries or associates. Am I right?

Right. This is my understanding of consolidation as I did the spreadsheets when I was working in audit some time back.

As for Nick's comment on comparing debt to EBITDA, I am afraid I do not know enough about these kinds of comparisons to comment on it intelligently.

[corydorus]

I guess it depends. Starhub is a classic example - all of its debts are held by the Company alone so if we use the Group NAV to calculate gearing, we get a pretty outrageous figure !

If Company level shows debts but at a Group level there are no such debts, it would mean the debt is inter-company and was eliminated upon consolidation. Unless there is another explanation, I would take that to be the case.

At Group level, all inter-company transactions (be it sales, purchases, debtors, creditors) must be eliminated in full.

The Debts are held by the Company and will naturally be expressed in the Group level. But the Group equity is extremely small due to the merger with SCV in 2004. Hence, if we only look at the Group figures, it may seem that Starhub's Debt to Equity ratio exceeds 4.00x. However, based on the Company figures, we know that it is the Company (and not the Group) which borrowed from the bank hence the debt to equity (company's one) is at a decent level. Of course, this whole mess can be mitigated by looking at debt to ebitda instead.

This is where the confusion at. Why wouldn't the Equity goes up at Group level after consolidation ?


Cory

[bluechipstamp]

This is where the confusion at. Why wouldn't the Equity goes up at Group level after consolidation ?

There's no confusion. SCV has been in negative equity since the day it was bought over by Starhub. Read the IPO prospectus.

[corydorus]

thanks. I think this clarify that we should look at Group Level because it takes into consideration of the whole business as we are buying the stock at this level.


Cory

[donmihaihai]

There's no confusion. SCV has been in negative equity since the day it was bought over by Starhub. Read the IPO prospectus.

How extremely stupid not to have thought of that. Thanks

I used to think it is due to pooling of interests method and I don't know it.

Group number is great but for stripper of financial statements, company number provide another tool to strip the "Company"

[D123]

There's no confusion. SCV has been in negative equity since the day it was bought over by Starhub. Read the IPO prospectus.

How extremely stupid not to have thought of that. Thanks

I used to think it is due to pooling of interests method and I don't know it.

Group number is great but for stripper of financial statements, company number provide another tool to strip the "Company"

The publicly available balance sheet of Starhub is difficult to analyze because Starhub used the pooling of interest method to present their balance sheet back when they merged with SCV. Since then, pooling of interest method has been disallowed but companies are not required to apply the new full consolidation method retrospectively. Hence, management has retained the old method of consolidation.

Why did they do that? I have no idea. Perhaps there's something ugly if full consolidation is used. Any Starhub shareholder should write to management for an explanation and a presentation of figures if full consolidation was used. I tried doing so about six months ago but got rebuffed by their IR. They simply told me that they are not required to change it retrospectively.

I'm not sure if we can make the retrospective adjustments ourselves though. Any accountants here please enlighten.

[donmihaihai]

Pooling of interests method is allowed and been use by many companies while they ipo. I dont know what kind of differences the b/s will be if purchase method is being used instead but it should not be a problem because that was an one time exercise and whatever come later has been consistently applied.
Accounting reflect the business. unable to understand the number is reader problem because of lack of skill rather than company problem unless fraud. I know many dint like to hear this but reading and understanding financial statements require very good accounting skill and it is not for anyone or any tom dick or harry who still start looking a few line in the statement.. I dont think it work this way.

[corydorus]

Quote
" Investopedia Says:
The opposite of pooling of interests is the purchase acquisition method. Pooling of interests is the preferable method to use because it doesn't result in the creation of goodwill. This in turn leads to higher reported earnings. "