Centurion Corporation Limited - MANAGEMENT REPLY: What explains discrepancies in restated financials?

28/9/2013 – Centurion Corporation Ltd expects strong demand for workers' accommodations in Singapore.

It anticipates near-full occupancy at its dormitories at Tuas and Toh Guan.

But the operating environment for its optical disc business is likely to remain challenging.

As a result, it made an impairment charge of S$3.9 mln on the plant and machinery of the optical disc business.

The company recently announced earnings for Q2 FY13:

Revenue: -6% to S$16 mln
Profit: up 13 times to S$56 mln
Fair value gains/losses: S$55.9 mln vs Nil
Cash flow from operations: S$4.8 mln vs S$7.1 mln
Dividend: Nil

The company has proposed a renounceable non-underwritten bonus issue of 1 warrant for every 10 existing shares.

Every warrant is convertible into one new share, at an exercise price of S$0.50.

The company has not yet announced the book closure date for the bonus issue.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. What explains discrepancies in restated financials?

With effect from Q2 ended June 30, Centurion Corporation Ltd has changed its accounting policy for investment properties, from cost, to fair value model (refer page 1 of Q2 earnings report).

In other words, the company would now account for the investment properties at their current market value, rather than the price it paid for them.

As a result, it restated the audited financials for FY2011 and FY2012.

And to say the least, the changes are significant.

All it takes is to compare the restated balance sheets (as shown on page 4 of the Q2 earnings report) to the original ones (as shown on page 47 of the 2012 annual report).

Centurion Corporation Ltd has restated 'investment in joint venture' to S$18.2 mln as on January 1, 2012 (refer page 4 of Q2 earnings report), an increase of S$13.6 mln over the audited 'investment in joint venture' at the end of FY2011 (refer page 47 of 2012 annual report).

The balance sheet on January 1, 2012 is same as that on December 31, 2011, as it should be.

Similarly, the company restated its 'investment properties' to S$151.6 mln as on January 1, 2012 – an increase of S$81.4 mln over the audited figures at the end of FY2011.

Together, the market value of its investments in joint venture and properties was S$95 mln more than the book value.

Consequently, Centurion Corporation Ltd recorded a S$95 mln fair value gain on its investments in the restated financials, and retained earnings increased by S$95 mln in the restated balance sheet.

But unfortunately, that doesn't match with the restated profit and loss statement for FY2011, as shown on page 65 of the offer document for Centurion Corporation Ltd's S$300 mln multi-currency medium-term notes programme launched on September 9.

The restated profit and loss statement for FY2011 correctly recorded a S$13.6 mln "fair value gain on joint venture's investment properties".

But the "fair value gain on group's investment properties" was recorded at only S$17.1 mln, against a gain of S$81.4 mln as per the restated balance sheet as on January 1, 2012.

That's a difference of S$64.3 mln.

We couldn't find an explanation to such a significant difference in the restated financials of 2011, which is when SM Summit Holdings Ltd completed the reverse takeover of Centurion Corporation Group and renamed itself Centurion Corporation Ltd.

That makes it even more important to sort out the S$64.3 mln difference in the restated FY2011 profit and loss statement.

The restated financials for FY2012 also confound us.

According to page 3 of the Q2 FY2013 earnings report, the 'investment properties' at the end of FY2012 were restated at S$211.5 mln.

That marks an increase of S$91 mln over the audited value of 'investment properties' on page 47 of the FY2012 annual report, and an increase of S$59.9 mln over the restated value of 'investment properties' for FY2011.

Again, both these facts don't match with other references in the announcements of Centurion Corporation Ltd.

On page 9 of the Q2 FY2013 earnings report, the company claims the restated value of 'investment properties' increased by just S$9.6 mln at the end of FY2012.

Clearly, the S$9.6 mln figure is far less than S$91 mln and S$59.9 mln increases, as mentioned above.

Moreover, the restated profit and loss statement for FY2012 (as shown on page 65 of the offer document for the medium term note programme) claims a 'fair value gain on the group's investment properties' to be S$3.9 mln.

Again, that is well short of increases as per the restated balance sheets.

Further, on page 9 of the Q2 FY2013 earnings report, Centurion Corporation Ltd claims the 'retained profits' increased by S$6.8 mln after the restatement of FY2012 financials.

But that does not match the restated balance sheet for FY2012 (as shown on page 3 of the Q2 FY2013 earnings report) which says 'retained earnings' increased by S$101.7 mln over the audited figure for FY2012 (as shown on page 47 of 2012 annual report), and increased by S$13.5 mln over restated balance at the end of FY2011.

All of this might seem complicated but the differences are for real.

And in the absence of appropriate explanations, the restated financials of the company appear to be inaccurate.

The subscribers of the S$300 mln multi-currency medium-term notes programme would want clarity on these points.

Nonetheless, we would be happy to stand corrected by the management of Centurion Corporation Ltd if there are explanations for these discrepancies.

Management replyAs this is a change in accounting policy, restated financials have to be prepared in accordance with the accounting standard FRS 8 - Accounting Policies, Changes in Accounting Estimates and Errors.



The following are extracts of the relevant paragraphs in the FRS 8 :
Applying changes in accounting policies

19 Subject to paragraph 23:

(a) an entity shall account for a change in accounting policy resulting from the initial application of a FRS in accordance with the specific transitional provisions, if any, in that FRS; and

(b) when an entity changes an accounting policy upon initial application of a FRS that does not include specific transitional provisions applying to that change, or changes an accounting policy voluntarily, it shall apply the change retrospectively.

Retrospective application

22 Subject to paragraph 23, when a change in accounting policy is applied retrospectively in accordance with paragraph 19(a) or (b), the entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.

Limitations on retrospective application

23 When retrospective application is required by paragraph 19(a) or (b), a change in accounting policy shall be applied retrospectively except to the extent that it is impracticable to determine either the period-specific effects or the cumulative effect of the change.



With regards to the questions on reconciliation and movements from cost to fair value model, the restatements have been prepared and presented in accordance with the requirements of the accounting standard on investment properties under FRS 40 and the restatement with retrospective effect as required under accounting standards FRS 8 - Accounting Policies, Changes in Accounting Estimates and Errors. The required disclosures on the effects of the change from cost to fair value model as required by the accounting standards can be found in Note 5 of our Q2 results announcement.

Question

2. Why are the restated financials inconsistent with its own accounting policy?

On page 8 of the Q2 FY2013 earnings report, Centurion Corporation Ltd says: "With effect from this quarter, the Group changed its accounting policy with respect to the subsequent measurement of investment properties from cost to fair value model, with the changes in fair values recognized in the statement of comprehensive income".

In reality, Centurion Corporation Ltd has recorded fair value gains in its 'income statement', NOT 'the statement of comprehensive income' (please refer page 1 of Q2 earnings report and page 65 of the offer document for medium term notes issue).

This is important because recording fair value gains in the 'income statement' jacks up the earnings per share of the company.

That wouldn't have happened if the fair value gains were recorded in the 'statement of comprehensive income'.

Obviously, that paints a rosier picture of its past performance for the purpose of raising S$300 mln through multi-currency medium-term notes programme.

Management reply There are no inconsistencies and this is prepared in compliance with the required accounting standards.
Para 7 of FRS 1 defines total comprehensive income as the change of equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income comprises all components of income statement and of other comprehensive income.
Para 35 of FRS 40 Investment Property states that gain or loss arising from a change in the fair value of investment property shall be recognised in profit or loss for the period in which it arises.

Question

3. Why is it booking an 'associate' company as a 'joint venture'?

While restating its financials, Centurion Corporation Ltd has recorded a fair value gain on its joint venture's investment property.

The 'joint venture' it is referring to is Lian Beng-Centurion (Mandai) Pte Ltd (refer page 72 of 2012 annual report).

Centurion Corporation Ltd has a 45% stake, while SGX-listed Lian Beng Group Ltd owns the remaining 55% stake.

Moreover, Lian Beng Group Ltd considers Lian Beng-Centurion (Mandai) Pte Ltd as a subsidiary (refer page 86 of Lian Beng Group's 2013 annual report).

According to page 53 of Centurion Corporation Ltd's 2012 annual report, "Associated companies are entities over which the Group has significant influence, but not control, generally accompanied by a shareholding giving rise to voting rights of 20% and above but not exceeding 50%. The Group's joint ventures are entities over which the Group has contractual arrangements to jointly share the control over the economic activity of the entities with one or more parties".

Clearly, Lian Beng Group Ltd claims control over Lian Beng-Centurion (Mandai) Pte Ltd which is why it accounted for it as a subsidiary, not as a joint venture.

Then, why is Centurion Corporation Ltd projecting Lian Beng-Centurion (Mandai) Pte Ltd as a joint venture even though it is an associate company?

Management reply Lian Beng-Centurion (Mandai) Pte Ltd is a joint venture in accordance with the definition as set out in accounting standard FRS 31 - Interests in Joint Ventures. As disclosed in page 53 of our annual report, the group applies the equity method of accounting for both investments in associated companies and in joint ventures.

(Total:8 questions)

We thank the management for the replies. However, we have follow-up questions which will be sent to the management shortly.

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