Telecom's financial statements unreliable: Commission

Telecom, which is trying to win the lion's share of government funding to roll-out a nationwide broadband network, has overstated the value of its network assets for a second straight year, according to the antitrust regulator.

The Commerce Commission says the country's biggest phone company has provided unreliable financial statements for regulatory purposes that overvalue key assets by as much as $1.3 billion in the year ended June 30, 2010.

See more details on the Commerce Commission website here.

Telecom used "poorly applied accounting principles in the valuation of assets and the reporting of product statements" and the regulator is mulling whether to force the company to republish its regulatory financial statements, according to its second summary and analysis.

"Telecom has not satisfied the commission that its 2009/10 trenching discount factors are objectively justifiable, and in particular, that the reflect economies of scale," Telecommunications Commissioner Ross Patterson said in a statement.

"A number of costs, including the cost of providing rural phone lines - for which Telecom has reported a loss - are likely to be substantially overstated," he said.

Telecom said it had noted the commission's concerns.

"Those requirements needed to be interpreted and for certain key areas there are many possible valid interpretations that can be taken. Valuation methodologies, for example, have an element of judgment and subjectivity. Different interpretations can produce quite different results," Telecom group general counsel Tristan Gilbertson, said.

"However, if the Commission provides us with any additional clarification then we will have regard to that in the production of the next set of regulatory accounts," he said.

In the previous year, Telecom overvalued its fixed assets by $711 million, using current cost accounting (CCA) methodology, which takes into account current values then depreciated, rather than the regulator's preferred historical cost accounting (HCA), which takes the value of an asset at the time of purchase before considering depreciation.

In 2009, Patterson said the first year of regulatory reporting was typically one of transition, but he didn't offer any such caveats in today's statement.

The passive copper and fibre network's value was the regulator's bone of contention again, with a CCA valuation of $4.6 billion in 2010 compared to a net valuation of $1.4 billion under HCA methodology. In 2009, the CCA value of the passive network was $5.4 billion, compared to $1.4 billion under HCA.

"Telecom has not satisfied the commission that its 2010 trenching discount factors are objectively justifiable, and in particular, that they provide recognition of appropriate economies of scale for the CCA valuation," the report said.

The shares fell 0.5 per cent to just over $2.14 in trading today, and have gained 0.2 per cent this year.