Why Britam restated its profit two months after declaration

Investment firm Britam has said the recent downward revision of its 2014 profit by Sh342.3 million was done to reverse an erroneous accounting of its ownership of a 21.4-acre piece of land in Ngong’ in the previous year’s books.

While the land was held by a subsidiary, it was accounted for as held by an associate company.

Two other adjustments to the 2013 numbers were also made in relation to the cost of guarantee on the Deposit Administration product fund (Sh75 million) and deferred income tax on a life business surplus (Sh478 million).

Britam says the restatement of its profit came after it realised that any gains arising from Bramer should not have entered its profit and loss accounts as share of profit from an associate.

Bramer Properties Limited, a fully owned Britam subsidiary, acquired the land in 2013 at a cost of Sh327.6 million.

In accounting terms, Bramer does not qualify as an associate, which is defined as an entity in which a company owns between 20 per cent and 50 per cent equity with significant influence but no control.

Based on this criteria, Britam has only two associates — mortgage lender Housing Finance and property developer Acorn Group. The accounting error saw Britam state its share of profit of associates, including Bramer, as Sh774.6 million for the year ended December 2014.

This helped raise Britam’s total net profit to Sh2.8 billion for the year, according to the initial results published on March 20.

But the investment company on April 24, revised its net profit down to Sh2.4 billion, attributing the move to the erroneous treatment of Bramer as an associate.

This had the effect of reducing the total share of associates’ profit from the previously stated Sh774.6 million to Sh259 million, a difference of Sh515.6 million.

Earnings from the minority-owned firms included revaluation gains on the Ngong’ land which Britam said had appreciated by Sh207.3 million.

“Management, while preparing financial statements of the company for the year ended December 31, 2014, realised that the beneficial ownership of the Ngong’ property previously accounted for in the books of its subsidiary Bramer Properties Limited in the year 2013 is instead held by itself,” Britam says in its latest annual report.

“Consequently, the company adjusted all comparative amounts presented in the current year’s financial statements affected by the accounting error,” the investment firm said, noting that the value of the land, including revaluation gains, has been transferred from the books of the subsidiary to its own books.

Britam’s director of marketing and corporate affairs said in a statement that the restatements resulting from the revised opinion of the firm’s auditors, Deloitte and PricewaterhouseCoopers (PwC), relate to 2014 accounts and that the annual report and financial statements reflect the final position.

The adjustments in the revised income statement only affected the item on share of profit of associates and consequently the tax paid and the net profit.

This means that the accounting error was hinged on the treatment of Bramer as an associate while in fact the land is owned by Britam through its 100 per cent interest in the subsidiary.

The revision also affected Britam’s balance sheet, pulling down the total assets value from Sh72.9 billion to Sh72.4 billion, a difference of Sh527.3 million.

The company says it was made aware of the error by its auditors upon publication of the results which had already been audited by the two firms without any reservations expressed.

PwC was the auditor of the parent firm British-American Investments Company while Deloitte audited the insurance unit British-American Insurance Company (Kenya) Limited.

Britam says it acted on the advice as a matter of commitment to excellence and prudence. The Capital Markets Authority (CMA) said Britam made a prompt decision to consult the market regulator, which approved the restatement of accounts.

“The company explained to the authority the rationale of the restatement ahead of the re-publishing of the restated financial statements,” CMA’s director of market operations Wycliffe Shamiah said in a statement.

Mr Shamiah said that the external auditors also notified Britam of the error.

Britam said PwC has rotated out and has asked shareholders to ratify the firm’s replacement with Deloitte at its upcoming AGM, a move that will expand Deloitte’s audit mandate to the holding company.

Restatement of financial statements, for reasons including change in accounting policies, has become common among publicly traded firms, making it difficult for investors to use current disclosures in making decisions.

In some cases, such as in Mumias Sugar Company, long-running fraud has been exposed after the firms received a clean bill of health from auditors.

The audit firms have defended themselves against accusations of failing to enforce integrity of financial statements, arguing that their role is to ensure “reasonable assurance” that books have no material misstatements.

The consultancy firms insist that management and board of directors, who provide documents the auditors rely on, are the first line of defence against financial malpractice.

This has placed a premium on reputable management with a long track record of looking after the interest of both majority and minority investors.

For Britam, accurate accounting of the Ngong’ land will see the company book earnings from the property directly at the group level. The company plans to build commercial and residential units on the land, targeting demand for properties in the area that is about 25 kilometres away from Nairobi’s central business district.