BOC’s Seylan sale reversal raises questions
View(s):The state-owned Bank of Ceylon’s (BOC) controversial reversal of a 7.5 per cent stake in the private Seylan Bank has raised questions amongst certain quarters over how the BOC will list this stake under the ‘financial investments available for sale’ entry in the annual report.
Authorities have made it clear that in order to facilitate industry consolidation, the government won’t dilute state holdings in banks. The Seylan Bank stake acquired in 2009 is shown in the BOC Annual Report (over many years) as “financial investments available for sale”.
Given this recent drama, the issues raised by some in the industry are that if such holdings in banks aren’t available for sale, how does State Owned Enterprises (SOE’s) value these in their upcoming annual reports?
The state policy, some argued ‘restricts’ these assets’ marketability, thereby restricting their sale. “Then how should these reflect in their financial statements?”an industry analyst asked.
The answer to the initial question is that this stock is valued at Mark-To Market (MTM) which is an accounting method that records the value of an asset according to its current market price. How it works for example in the Seylan stock owned by the BOC is that these shares in Seylan are MTM every day. At the closing bell of the Colombo Stock Exchange, the price assigned to a Seylan stock is calculated and added to the balance sheet date and presented in the annual report. “There’s no fall in their value due to the state policy of retaining private bank assets,” a senior chartered accountant told the Business Times putting apprehension on this issue to rest.
He added that the Seylan shares should be reflected in the balance sheet as they always were – “Available for sale” and may be for further clarity add a footnote stating the government’s policy (that is whether it is up for sale or not).
Available for sale is a compulsory accounting classification – the last one amongst four categories. The other three consists of namely, ‘trading investments’ (this contains debt or equity), ‘held to maturity’ (which has only debt such as treasury bills holding them to maturity) and ‘loans and receivables’ (these contain working capital, project financing).
However some argue that while the classification cannot be dropped, the items under it can be changed at any time. For example, in the BOC’s 2015 report, the referred to classification has in “notes to financial statements” footnote (no. 27) listed its stakes in NDB, People’s Leasing and Finance and Seylan Bank as ‘quoted equity shares’. “If the board at any given time decides not to sell any of these stakes, a resolution is passed and this item can be removed,” another accountant argued.