As part of its surveillance function, in February 2005, the SC commenced a review in respect of accounting for Minority Interests in the financial statements of listed corporations (PLCs), in compliance with FRS 127 Consolidated Financial Statements and Investments in Subsidiaries.
This review has thus far revealed that several PLCs have been accounting for the losses of their subsidiaries by passing it over to minority interests (in excess of their cost of investments). This accounting treatment has enabled the PLCs concerned to report a higher set of earnings.
FRS 127 prescribes that losses incurred by subsidiaries with minority interests can be allocated to the minorities in excess of their investment only in the following exceptions:
- The minorities have a binding obligation to absorb the excess losses; and
- The minorities have the ability to make good or absorb the losses incurred.
In the absence of a binding obligation and the ability on the part of the minorities to absorb the losses, PLCs are not permitted to allocate the excess losses to the minorities. Doing so would constitute a departure from FRS 127 whilst having the effect of misreporting the performance of PLCs. By inappropriately allocating losses to minorities, PLCs wrongly overstate their profits attributable to its shareholders, thus giving a false impression on profitability and return to shareholders.
Regulation 4 of the Securities Industry (Compliance With Approved Accounting Standards) Regulations 1999 principally requires every listed corporation, its directors and chief executive to ensure that the consolidated financial statements are made out in accordance with approved accounting standards.
Where the directors and chief executive officers fail to comply with Regulation 4, the SC has taken appropriate enforcement actions against them after considering mitigating factors such as voluntary rectification and amounts involved. These actions include private reprimands and directives to furnish undertakings for future compliance.
Financial reporting and corporate surveillance, covering a range of areas including accounting for minority interest, is a continuous and ongoing effort for the SC. The SC views non-compliance with financial reporting regulations as a serious matter as high standards of financial reporting are fundamental in promoting market integrity and enhancing investor protection.
All listed corporations, their directors and chief executive officers are reminded of the importance of adhering to all relevant financial reporting standards and disclosure requirements in the interests of the investing public.
