Commodities trader Noble Group is disputing allegations of
possible accounting irregularities by regulators, who have relied on those
potential inaccuracies to block a key step in the company's restructuring
plans.
Noble, in a filing to the Singapore Exchange (SGX) on
Friday, defended some of its accounting practices that it said had been
challenged by Singapore's Accounting and Corporate Regulatory Authority (Acra).
The issues highlighted included its derivative treatment of variable marketing
contracts, its recognition of gains and losses, its treatment of overhead costs
and its classification of current and non-current assets.
The company said that it will submit a comprehensive
response to Acra's assessments and questions.
Noble also said that investigations by Singapore authorities
are not targeting any individuals from the company.
The Monetary Authority of Singapore (MAS), one of the three
regulators involved in the probe, told The Business Times (BT) that its scrutiny
encompasses Noble, its subsidiary Noble Resources International, as well as
their officers.
Those comments came a day after MAS, Singapore Exchange
Regulation (SGX RegCo) and the Singapore Police Force's Commercial Affairs
Department said that they would not allow Noble to proceed with the part of its
restructuring plan that involves re-listing on SGX as New Noble.
Acra had determined during investigations that the net asset
value (NAV) of New Noble, which was to assume Noble's listing status on the stock
exchange as part of the embattled trader's massive US$3.5 billion debt revamp
plan, could have been grossly overstated.
Consequently, Noble's NAV could be reduced by 40 to 45 per
cent.
But Noble disagreed with Acra. The company highlighted that,
going by Acra's position, its pro forma net losses would also be cut by 45 to
99 per cent.
The focus on Noble's accounts has raised questions about why
and how there could be so much uncertainty and dispute over the company's
numbers.
Themin Suwardy, associate professor of accounting practice
at Singapore Management University, said that commodities traders in general
depend largely on estimates in their accounting treatment.
Prof Suwardy told BT that he is not privy to what accounting
irregularities had been alleged by Acra in Noble's case.
However, he added that because commodities traders are
dealing in the future value of assets, it is therefore very possible that there
are different inputs, variables and valuation models that could result in very
different net financial asset values.
Prof Suwardy said: "If you are trading commodities at a
future date, you cannot run away from estimates."
He cited the company's 2015 annual report as an example, and
pointed out that the word "estimate" appeared 62 times in the notes
of the financial statements.
The academic said that there are three levels of "fair
value hierarchy" in trying to determine the worth of a financial
instrument.
Level 1 is the most tangible, best because the inputs are
quoted prices in active markets for identical assets or liabilities that the
entity can access at the measurement date.
Level 2 inputs are observable for the asset or liability,
either directly or indirectly.
Level 3 inputs, however, are unobservable for the asset or
liability, so estimates and variables are used to plug into valuation models.
Using Noble's 2015 annual report again as a reference, Prof
Suwardy noted that 97 per cent of the Hong Kong-based trader's net financial
assets are not determined by Level 1 inputs.
The heavy use of estimates and assumptions to determine fair
value is not, on the face of it, wrong, Prof Suwardy said. But it does make the
accounts susceptible to vastly different values depending on the assumptions
used.
"When the use of Level 2 and Level 3 estimates is very
significant, investors reading the details (in the notes of the financial
statement) should exercise adequate caution that these are management's
estimates, but deemed reasonable by auditors. What is reasonable at one point
in time may of course be different from reality, that is ex-ante (forecast)
versus ex-post (actual) can be very different," he highlighted.
Lee Kin Wai, associate professor of accounting at Nanyang
Technological University's Nanyang Business School, said that companies should
use valuation techniques that are appropriate to the circumstances, and for
which sufficient data is available. They should maximise the use of relevant
observable inputs such as quoted prices, and minimise the use of unobservable
inputs.
RSM Chio Lim audit partner Lock Chee Wee told BT that
valuing contracts to current prices is standard practice for derivatives. But
if one can satisfy the strict criteria of hedge accounting, it is possible to
defer the derivative's fair value losses or gains until an actual transaction
takes place.
Without knowing the details about Noble, however, Mr Lock
declined further comment.
Tay Peck Gek
08 December 2018
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