NZ-style accounts lashed

By PETER GRIFFIN

A Deutsche Bank report on European telecommunications companies, in the spotlight for dubious accounting practices, has criticised certain bookkeeping methods that mirror those of Telecom New Zealand.

The bank's telecoms analysts said accounting issues hitting major operators like Cable and Wireless and KPNQwest would hopefully be short lived but would be prone to "sporadic reappearance", pushing down share prices.

Telecom's share price suffered last week as the market absorbed news that the Securities Commission had begun an inquiry into the company's accounting practices.

The focus has been on how Telecom has treated $28 million it made on the sale of bandwidth capacity, and how it accounted for bandwidth "swaps" with other telecoms carriers.

That latter practice, in which Telecom paid for and swapped capacity on the Southern Cross Cable with Global Crossing in return for transatlantic cable capacity, has cropped up in Europe and raised concerns.

"The net cash impact of these transactions is generally zero, but some operators have booked proceeds from asset disposals as revenue while booking the other side of the asset swap as capital expenditure," says the report.

"We doubt that this is in actual breach of international accounting standards, but it is undoubtedly dubious accounting practice."

Telecom was also criticised for selling network capacity in long-term contracts, but accounting for the earnings from those transactions up front, in the current financial period.

"Receiving large sums of cash up front when a large part of the initial build has been financed with debt looks pretty sensible," said the Deutsche Bank report.

"[But] the sales are also relatively high margin and, if not stripped out properly, can give a misleading impression of underlying operator margins."

Deutsche Bank went on to say that the collapse in the wholesale market for bandwidth meant this practice was likely to become less common.

Telecom's spokesman Martin Freeth was unwilling to reveal further details of the four capacity sales completed in the half year to December 31, the biggest of which was to Global Crossing.

In the 2001 financial year, Telecom made just one sale of excess bandwidth capacity.

Macquarie Equities senior analyst Arthur Lim described the focus on Telecom's accounts as a "beat up" driven by Australian analysts who may have underestimated Telecom's second quarter earnings.

Most analysts expect Telecom to emerge unscathed from the Securities Commission's examination.

* The New Zealand Society of Investment Analysts has supported Telecom, saying the company has been wrongly accused of misleading investors in the way it assembles its accounts.

The society instead pointed the finger at accounting bodies for slow progress in promoting accounting harmonisation.