Property price declines kept off balance sheets

Some of the UAE's biggest companies are using accounting techniques to avoid taking major losses on their investments in property since the downturn hit the region two years ago, analysts said. The techniques, which are not illegal and are in line with international accounting standards, allow companies to delay the impact of declining property prices on their financial statements by shifting assets between categories of investment.

Techniques include shifting off-plan investments into a category reserved for the company's headquarters and other property needed for the operation of business. Oman Insurance, the largest insurance company in the UAE, retroactively shifted almost half of its investments in property into property, plant and equipment (PPE). By doing so it has avoided the necessity of revaluing that land according to current market prices - a requirement that would have left a dent on earnings in the tens of millions of dirhams. Instead, it valued the land at the cost of acquisition before property prices began falling in late 2008. Oman Insurance declined to comment.

Several companies have reported increases in PPE while registering declines in the value of their investment properties. Abu Dhabi Commercial Bank transferred more than Dh24 million (US$6.5m) from its investment properties into PPE. The bank declined to give a description of what land was shifted and for what purpose. Damas International, the jewellery retailer recovering from a scandal over improper transactions by its former executives, took a different approach. It shifted more than Dh112m worth of land from PPE to investment properties to signify its intent to sell the vacant land. The move resulted in an impairment of Dh50.8m of the value of the land, according to its financial statements.

Sanjay Kalsi, the chief financial officer of Damas, said these were three properties originally meant to be used by the company that were now for sale as part of the company's strategy in the year ahead. Some such accounting techniques can present red flags to savvy analysts and investors, said Binod Shankar, a chartered financial analyst and managing director of the Genesis Institute. "A change in accounting policy is OK if it is mandated by regulatory authorities or if there is a legitimate reason why but when it's to make profits look better it comes across as a big warning sign," he said.

The property downturn is causing problems for the assets of companies across the spectrum including developers with large land banks and insurance companies that speculated in property during the boom. Valuation agents have reported a large increase in business as some companies attempt to get an independent estimation of the worth of their investments. Muneef Tarmoom, an activist investor and the president of the financial and management advisory company ISAT Consulting, said the lack of uniformity and disclosure should act as an impetus for the UAE Government to tighten regulations.

"The Ministry of Economy and Department of Economic Development need to seriously look into regulating listed firms from investing more than, say, 20 per cent of net asset value in non-related operating areas ? and make it obligatory on firms to disclose top five listed investments, so investors know where their money is going and can do something about it in annual general meetings," Mr Tarmoom said.

The lack of uniformity across different financial statements and the ability to use accounting techniques to conceal investments are part of a wider debate under way in the industry about how companies can accurately disclose their condition and prospects for the future. [e-mail]