Eskom – will the lights stay on?

PARASTATAL: FINANCIALS SHOW FRIGHTENING EROSION

Their liabilities have been escalating at a rapid pace.

and intangible assets of R614.2 billion. However, an amount of approximately R99 billion (16.1%) represents capitalised borrowing costs less accumulated depreciation (based on a 50- to 80-year depreciation period).

This is because international accounting standards require borrowing costs that are attributable to certain assets, including the acquisition or construction of manufacturing plants or power generation facilities, to be capitalised. In other words, added to the cost of those assets. This means the capitalised borrowing costs won’t be included in the finance costs deducted from income in the income statement, but are depreciated over the lifetime of the plant and machinery (generating plant: 80 years).

Another potential problem with the balance sheet, is that the group holds complex derivative instruments for risk management (economic hedging). Whereas managing the risks in regard to a foreign exchange contract may be manageable, matters can go horribly wrong with credit default swaps. Valuing any of these instruments is also complex. For example, Eskom hedges electricity sales “in terms of agreements where the sales price is influenced by the market price of aluminium”. It hasn’t been running its day to day operations very well. Should it really be playing with such complex instruments? In 2009 the total amount of derivatives held for risk management on the asset side of the balance sheet was R1.8 billion. In the September 2017 interim financial report it was R20.1 billion. Should this valuation be checked?

R37.8bn in securities has dropped to R6.7bn

Hence, three critical risk areas contained in the financials and what should be done are:

Property, plant and equipment: a third party valuation of property, plant and equipment should be undertaken. The note to the financial statements in regard to the property, plant and equipment should disclose the total amount of capitalised borrowing costs. A due diligence should be carried out on the derivatives held for risk management. Barbara is a CA (SA) with postgraduate qualifications in tax and international tax.