PwC: TH didn’t make impairment on decline in investments’ value

PETALING JAYA: Lembaga Tabung Haji’s (TH) 2017 financial statements have been overstated mainly because the pilgrims fund did not make impairments on significant decline in value of its investments, a review of its financial position shows.

The fund should be making a RM1.43bil loss in 2017 instead of a RM3.41bil profit as reported in its annual report 2017, according to the review conducted by PricewaterhouseCoopers (PwC).

Impairment is an accounting principle describing a permanent reduction in the value of a company’s assets.

The RM3.41bil profit did not include the impairment loss on available-for-sale (AFS) equity investments of RM4.26bil, impairment loss on AFS debt security instruments of RM7mil and other adjustments of RM4.85bil.

Also, instead of retained earnings of RM162mil, TH has accumulated losses of RM4.68bil as at Dec 31, 2017.

PwC’s findings showed that Tabung Haji did not make impairment in shares equity instruments due to its policy on significant or prolonged decline in the value of its investments.

“TH’s investments in AFS have been marked-to-market, which resulted in unrealised fair value losses recognised as a negative AFS reserve of RM4.667bil as at Dec 31, 2017, due to declining value,” PwC wrote.

TH’s threshold in determining whether there has been significant decline in the value for equity shares – to determine whether there is an impairment – was changed twice in 2017, from 70% to 85%, and then to 90%.

PwC said TH management indicated that this was mainly to defer impairment losses to “enable TH to make certain level of distribution to depositors in 2017”.

Such a policy, it said, did not follow the Financial Reporting Standard (FRS) requirements, which the fund should comply.

“It is also worth noting that the minister had approved the impairment policy for significant decline at 90%,” PwC wrote.

“Management informed us that Tabung Haji had received a memo from the minister dated Feb 10, 2018, approving the impairment policy for significant decline at 90%.”

However, no disclosure was made in the 2017 financial statements of the approval obtained from the ministry to explain the departure from the application of FRS Implementation Committee 14 nor was the FRS compliance statement qualified for this departure.

The review did not state who the minister was but Lembaga Tabung Haji is under the portfolio of the minister in the Prime Minister’s Department.

PwC also noted that no impairment was made of TH’s investments in associates as well as investments in subsidiaries, financing receivable from subsidiaries and debt security instruments. The fund also did not recognise a fair value loss on investment properties.

Negative fair value loss on investment properties totalling RM77mil was not recorded as at Dec 31, 2017, PwC said.

“Management stated that no adjustment was made for TH Platinum Park due to its intention to reclassify property to plant, property and equipment in 2018 by occupying a portion of building for own use.”

The fund should be making a RM1.43bil loss in 2017 instead of a RM3.41bil profit as reported in its annual report 2017. PricewaterhouseCoopers (PwC)