Chinese Water Accounting Is Slippery When Wet [WSJ]
Beijing Enterprises Water has a nice arrangement with local Chinese governments to build and operate wastewater plants. BEW operates the plants for 30 years and then transfers them to the government. If that deal sounds almost too good to be true, then the accounting makes it ludicrous:
[B]efore the plants have begun operating, BEW promptly recognizes profits. This is permissible under international accounting rules for projects where governments have guaranteed the revenues once the plant is up and running.
The point of such treatment is to smooth out the profit picture over the life of a project. But smoothing can distort: it gives companies the chance to front-load profits. While critics of fair-value accounting have long derided what they say is an unfair impact it can have on losses, a bigger gripe is that companies can sometimes use it to make gains bigger.
Not only that, the process is subjective. It involves imagination on the company’s part, and one way to do so is basing profit on capital expenditure for a project. While constructing a sewage plant, BEW derives a “fair value” construction revenue and gross margin.
Well, that stinks. Also, there are other problems: "[BEW's] operating cash flow has been negative for most of the past decade" and the company's debt load is growing fast. The article suggests that it might be time to evacuate.
Akebono Cuts Pay, Forecasts in Latest Japan Accounting Scandal [Bloomberg]
Akebono Brake is one of Japan's oldest auto industry players, but it's just the latest to have accounting issues come up:
Akebono Brake inflated its sales and profit by “channel-stuffing” its distributors with too much inventory, according to a statement on Tuesday. The company said Nov. 4 it found evidence revenue was overstated by 210 million yen in the second quarter and delayed its earnings announcement by about a month.
In other news:
- "It’s alarming and disappointing when a tax law passed by Congress has a shorter shelf life than a carton of eggs."
- A morbid 8-K.
- Not a good time to work at a bank.
- Carl Icahn wrote an op-ed about corporate inversions. (via TaxProf)
- Why Americans annoy everyone else.