DESPITE dire warnings from CEO Geoff Dixon that Qantas might not survive, the scurvy old marsupial should limp to a record profit today to the order of $650million.
And unless Dicko and his CFO Peter Gregg have changed accounting policies, some 10 per cent of the Roo's reported profits may be mere smoke and mirrors, albeit entirely legal smoke and mirrors. A big call you say?
Well, here's one for all you swashbuckling marketeers who love nothing more than to cosy up in front of crackling log fire with a glass of cabernet and a nice set of company accounts.
We're talking sexy stuff here such as software costs capitalised, capitalised interest and steamy leveraged-lease-accounting through the exotic British Virgin Islands (BVI).
Team Roo adopted a new accounting policy for its software development projects in 2001, capitalising these costs -- just like Telstra -- rather than expensing them, and consequently hoisting 2001 net profit by $32.2 million.
Adding deferred expenditure to this capitalisation of software costs helped increase Qantas's after-tax profit in that year by 9.7 per cent. As there was no change to accounting policy in 2002 and 2003 we can assume capitalised costs on deferred expenditure plus capitalised interest increased by $39 million in 2003. If software development kept the same pace it would be $46 million in 2002 and $85 million in 2003 before tax.
Capitalised interest was $13 million in 2001, rising to $77 million in 2002 and $82.7 million in 2003.
(It is noteworthy KPMG, which earns $1.8 million from the Qantas audit but $2 million for other services, lost its role as auditor for the National Australia Bank to Ernst & Young, thanks to a similar workload of audit and consultancy.)
Then we have the peculiar situation, redolent of the French banking sector, where $206 million in net deferred losses on forex hedging were booked in the balance sheet as receivable assets in 2002. The next year, in 2003, forex revenue gains of $118 million were booked as liabilities.
Were one to strip out these deferred losses as receivables in 2002 one would find a deficiency between current assets and current liabilities of $1.83 billion. In 2003 this deficiency was $813 million.
To aircraft leasing, where the interest Qantas receives on its debt funding is also offset against borrowing costs. Put simply, Qantas buys a plane from Boeing. It leases it for 125 per cent of its useful life (which makes it a finance lease). It then acts as lessor and sub-leases the plane to a company in the BVI.
Having bought it, say, for $100 million then leased it for $110 million, Qantas as lessor can now book a profit on the finance lease sale of the plane.
The BVI company doesn't need a plane, so it leases it on to a US lessor trust, which has no use for a plane either so turns around and sub-leases the plane to the same BVI company. Effectively, the BVI company has sub-sub-leased the plane to Qantas and takes a fee.
Ironically, the plane hasn't even left the hangar, but it's been on the full round-the-world trip in tax-effective financing terms. It would be hard to imagine Qantas paying the CBA, were the CBA the lessor.
But Qantas has debt-funded the BVI company to get its plane through the US loop to get a tax break. You might say that Qantas is being subsidised by Dubya.
The Urgent Issues Group must be wondering what Qantas is doing providing a loan (an asset) to a mysterious BVI entity because it needs to pay them a lease liability back.
So what does it do? Qantas offsets this debt funding against the lease liability in the balance sheet but invisible.
Net debt-equity stood at 37:63 and there is some $2 billion in off-balance sheet leases. Were Qantas to put these leases back on the balance sheet its gearing might be closer to 50-50. The market, as far as we could see, doesn't appear to have factored in these imaginative accounting procedures. Qantas says it is standard to capitalise the interest on jet aircraft lease progress payments.
On software development, it is naturally "in accordance with the accounting standards".
As for the jet leases, it says these are typical of such cross-border structures promoted to help US companies.
Whatever the case, Qantas, in capitalising expenses, has been bumping up its net profit in the past couple of years by up to 15 per cent, though it doesn't state this.
It's a practice which, according to accounting gurus, is not best practice
QAN Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
(20min delay)