Accounting for flora and fauna gives Southeast Asia growing pains

Milk cows are seen at a farm in the Moc Chau highlands, 200km west of Hanoi, on Nov 20, 2012. Auditors and investors in Southeast Asia are pushing back against an accounting standard used to value farm animals, crops and other agricultural produce th
Milk cows are seen at a farm in the Moc Chau highlands, 200km west of Hanoi, on Nov 20, 2012. Auditors and investors in Southeast Asia are pushing back against an accounting standard used to value farm animals, crops and other agricultural produce that they fear will make profits more volatile and raise the risk of corporate skulduggery. -- FILE PHOTO: REUTERS

REUTERS - Auditors and investors in Southeast Asia are pushing back against an accounting standard used to value farm animals, crops and other agricultural produce that they fear will make profits more volatile and raise the risk of corporate skulduggery.

The standard is used in many developed markets, but attracted controversy in Asia last year when Singapore-listed Olam International was accused by short-seller Muddy Waters of aggressively booking fair value gains from its array of so-called "biological assets".

How Malaysia, Indonesia and Thailand - all of which have large palm oil, rubber and other agricultural industries - account for such assets is proving to be the biggest sticking point as they move to international accounting standards.

The standard means companies must regularly value how much their palm fruit or cow herds are worth before they have been harvested or slaughtered. That means estimating what the crop or livestock will ultimately sell for.

If the market price of palm oil were to rise, they would then boost their bottom line with a "fair value" gain in the palm fruit on their trees - or similarly book a fair value loss if prices fall.

Investors are concerned this leaves accounts of agricultural companies at the mercy of sudden swings in commodity prices and that unscrupulous executives could use dubious pricing models to exploit the rule to pad their earnings.

Commodities firm Olam was targeted in November by Muddy Waters, which questioned the company's debt level and asset quality. Olam said it adheres to Singapore Financial Reporting Standards, which are based on international accounting rules.

Weeks after Muddy Waters' attack on Olam, Hong Kong Exchanges and Clearing Ltd said companies wanting to list have to exclude unrealised fair value gains from biological assets in trying to meet the bourse's requirements.

Malaysia is due to adopt the standard, known as IAS 41, from 2014, while Indonesia has not yet fixed a timeline for implementing it. Thailand's Federation of Accounting Professions says it is discussing the issue with companies and will decide whether or not to adopt it by the end of this year, with implementation tentatively scheduled for 2015 or 2016.