• Yinson and Malakoff have finally started to exclude profits distributed to perpetual bondholders from earnings per share (EPS).
  
• However, both companies have not disclosed whether there was incompliance with the relevant accounting standards which might entail legal consequences.
• Poor disclosures about the change called into question about compliance with IAS 34/MFRS 134, which applies to interim financial reporting, and with IAS 8/MFRS 108, which applies when there are changes in accounting policy or correction of errors.
• On the other hand, PESTECH’s justification for its EPS computation method was exceedingly unsatisfactory.

11 months have passed since my first write-up on the issue of questionable profit allocation during EPS computation by Yinson Holdings Berhad (Yinson), Malakoff Corporation Berhad (Malakoff), PESTECH International Berhad (PESTECH) and Dialog Group Berhad (Dialog). This potential mistake was also found to have been committed and quietly amended by YNH Property Berhad (YNH). I have since filed complaints to the relevant authorities, the progress of which is shared in this write-up.

My complaint against YNH to Bursa Malaysia and SC

Although I had expected a swift closure on the case of YNH which I lodged to Bursa Malaysia on 30^th May 2022, things did not go as anticipated. Referencing to one case of complaint that was resolved by Bursa Malaysia/SC within a month, I had thought that my straightforward question could be answered even earlier since it basically boils down to whether a company is allowed to change its reported EPS figure (from positive to negative) without providing any justification. Bursa Malaysia has not updated me on the case despite acknowledging my follow-up email on 2^nd November 2022. While I understand that Bursa Malaysia would not disclose their investigations to complainants, the lack of feedback is unsettling.

As a precaution, I filed another complaint against YNH, this time to the Securities Commission Malaysia (SC) on 12^th December 2022, together with the case number provided by Bursa Malaysia as required by SC. SC has subsequently acknowledged receipt of my complaint and issued me a case number. For now, I have exhausted all my viable means to solve the puzzle regarding YNH.

Complaints against the auditor of Yinson and the MD of Malakoff to MIA

Due to unsatisfactory replies received during the companies’ annual general meeting (AGM), I formally lodged complaints to the Malaysian Institute of Accountants (MIA) against the external auditor of Yinson from PricewaterhouseCoopers, and the managing director of Malakoff, for assumed gross carelessness in the performance of their duties. After handing in my complaint forms together with statutory declarations on 22^nd August 2022, I liaised with the registrar of MIA and furnished few more information required. The registrar subsequently issued notices of complaint to those members concerned on 5^th September 2022, and forwarded my cases to the Investigation Committee by the end of the same month.

Although the investigation officer of MIA did not reply to my follow-up request on 1^st December 2022, an interesting development has taken place: both companies have started to exclude distributions to perpetual bondholders from the profit used in computing EPS, for both the current and prior periods, in their latest quarterly report.

In its third quarter report for the financial year ending December 2022 published on 29^th November 2022, Malakoff “reconsidered the guidance” provided by MFRS 133 in respect of cumulative preference share and decided to adjust EPS for distributions to its perpetual sukuk holders; this rationale is in line with what I had written in “The norm” section of my very first write-up. Retrospective adjustments were also made to EPS of previous periods.

On 22^nd December 2022, Yinson followed suit and made similar retrospective adjustments to EPS in its third quarter report for the financial year ending January 2023, albeit with scarce explanations, as seen below.

Not quite yet

While this change in EPS computation method by Yinson and Malakoff is much welcomed, a question remained on whether the retrospective adjustments arose from a change in accounting policy (from a compliant policy to a better policy) or a correction of errors (from an incompliant policy to a compliant one) – the later could trigger legal consequences under Companies Act 2016 as I have previously discussed. Yinson did not disclose the nature of/reason for the change, which is required by paragraph 29(a) (if there has been a voluntary change in accounting policy) or 49(a) (if there are corrections of errors) of IAS 8/MFRS 108, while Malakoff’s disclosure was ambiguous.

A fine line exists between those two categories of changes: a change in accounting policy is in fact a correction of error when the previous policy applied was not in line with IFRS. This distinction could be implied from paragraph 5 of IAS 8/MFRS 108 as recapped below:

“Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that: (a) was available when financial statements for those periods were authorised for issue; and (b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements. Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.”

Cross referencing other disclosures in their quarterly report, we could infer that those changes made by Yinson and Malakoff were correction of errors. Both companies did not mention about adoption of any new accounting policy that became effective during the latest reported quarterly period, hence the only explanation left is that there has been a correction of errors.

Assuming that Yinson and Malakoff have indeed corrected material prior period errors, the details provided are likely insufficient to meet requirements of IFRSs/MFRSs. Paragraph 15B(g) and 15C of IAS 34/MFRS 134 imply that companies should follow IAS 8/MFRS 108 when correcting prior period errors in interim financial reports; and paragraph 49(b)(ii) of the latter standard mandates that “the amount of the correction” be disclosed for EPS (i.e. how much EPS has changed due to the correction) – this has clearly not been given by either company.

Since the case for Yinson and for Malakoff has now converged to that for YNH, Bursa Malaysia’s and/or SC’s verdict on YNH would be highly relevant. Anyway, since all these cases are still being investigated, I would not make my conclusion for now. The silver lining is that the change in EPS computation method will at least “results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows,” as per paragraph 14(b) of IAS 8/MFRS 108.

PESTECH – added to the rank

While I have considered attending both the AGM of PESTECH and Dialog which were held last month, I decided to join only the former since Dialog’s distributions to perpetual bondholders are likely still considered immaterial taking into account the company’s total profit.

On 25^th November 2022, I posted the following question to the management of PESTECH during the company’s 11^th AGM:

“Referring to p.156 of annual report 2022, may I know why are distributions to Perpetual SUKUK-holders not being deducted from the numerator of earnings per share as per MFRS 133? With such distributions amounting to RM 1.4 mil in FY21 and FY 3.7 mil in FY22, shouldn’t earnings per share be calculated based on profit attributable to ordinary equity holders of RM 64.8 mil in FY21 and RM 10.0m in FY22, rather than RM 66.2m and RM 13.7m as used?”

Quoting the CFO’s (who is a member of MIA) reply, PESTECH’s managing director stated that:

“Profit attributable to shareholders is attributable to shareholders, not to SUKUK holders. SUKUK holders’ returns are fixed… are on a fixed coupon rate.”

What that followed was to be expected, although my complaint for this case is still being processed by the registrar of MIA pending few more documents from me.

One more relevant issue

Although questionable “profit allocation” (referred to as “profit attribution” by the International Accounting Standards Board) has mostly affected EPS in the case of Yinson and Malakoff, it is actually not limited to this accounting figure and hence a careful interpretation is warranted. I have made a key simplifying assumption in all of my previous discussions, and in extreme cases this assumption can lead to vastly misleading conclusions. However, I shall elaborate on this issue, with one real case that I found, only after clearing my backlog of write-ups that I have been working on since October.

*This post is a follow-up to my previous posts titled "Has Yinson Found the Yellow Brick Road?", "Malakoff Corporation Berhad – Part 2: A Gap in Understanding the Gap," "YNH Property Berhad – Looking Beyond the 99.998%," and "Sunway Berhad – Part 2: Above the Rising Cloud."​