Telecom's profit set for probe

By PETER GRIFFIN

Telecom's accounting practices have become the subject of a Securities Commission inquiry, but analysts put the attention down to post-Enron nervousness.

Telecom's half-year result, issued on Tuesday, showed net earnings of $312 million which included almost $28 million in gains made through "one-off" sales of broadband capacity - $23 million from the Southern Cross cable, of which Telecom is a half owner.

Debate has focused on whether Telecom should report those gains more conservatively - spreading them over the length of the contracts, rather than including them all in one result.

Quoting unnamed analysts, the Australian Financial Review said yesterday that, if Telecom took the more conservative approach to its accounting, it "could strip between $40 million and $60 million in pre-tax earnings from accounts to reveal more than a 5 per cent decline in pre-tax profit for the six months to December 31", rather than the 4 per cent increase it reported.

Telecom spokesman Martin Freeth would not comment on the analysts' projections, but said earnings would have been affected if the more commonly accepted accounting method had been followed.

"If those revenues weren't booked in the period, it would flow through to the bottom line."

The issue of reporting revenue for long-term arrangements up front has come to the fore as the US Securities and Exchange Commission turns its attention to the balance sheets of Bermuda-based Global Crossing, which last month filed for Chapter 11 bankruptcy protection from its creditors, creating the fourth largest corporate insolvency in US history.

Global Crossing participated with Telecom in a bandwidth capacity swap during the past six months. Telecom said it had been paid for the Southern Cross cable capacity which it "swapped" with Global Crossing capacity on a transatlantic cable.

Telecom treats bandwidth capacity as an asset on its books and counts earnings from bandwidth swaps as revenue to be reported in the financial period in which the sale occurs, but when it buys bandwidth capacity the cost may be depreciated over several years.

Locally the financial community found little to fault in Telecom's accounting.

JB Were analyst Andrew White said Telecom had been transparent in its treatment of the contracts.

"The practice is not inconsistent with practices offshore. Whether or not they are entirely correct is a different issue."

But Alan Robb, a senior accounting lecturer at the University of Canterbury, said Telecom might not be complying with generally accepted accounting principles (GAAP).

"From what I have seen, Telecom has not disclosed what period the sale of capacity covers. Is it for six months or six years or 60 years?" he said.

"The fact that it will have to disclose this when it prepares its June 30, 2002, annual report and reconciles its practice with US GAAP is no consolation to investors who are trying to understand things today."

Under more stringent US practices, the money made on capacity sales would have to be spread over the life of the contract.

Securities Commission chairwoman Jane Diplock said a preliminary inquiry would examine whether Telecom's results complied with New Zealand accounting principles.

"There may be nothing in it, we don't know at this stage," she said.

The accounting question and news of a potential credit downgrade from ratings agency Moody's pushed Telecom's share price down 10c to close at $5.22 last night.

Mr Freeth said a credit downgrade by Moody's would not come as a surprise because Standard and Poor's had scaled back Telecom's long-term corporate credit rating to A from A+ last September.

Moodys said underperformance in Telecom's Australian business was behind the possible downgrade.