Practical approach for consolidation of NBFIs

Tuesday, 18 March 2014 00:13 - - {{hitsCtrl.values.hits}}

With the CBSL having selected nine audit firms to assist the consolidation, the institutions were handpicked based on their capacity and capability about two years ago. PWC Sri Lanka Markets Leader Sujeeva Mudalige, a representative of one of the selected firms shared his views on the impediment factor and the practical approach that needs to be viewed by the financial sector with regard to the consolidation process. Mudalige shared that accounting firms have been given three tasks by the CBSL. The first is to help the NBFIs to prepare the Information Memorandums, to ensure they are consistent and follow the pre-greed format so all have an IM. The second is to carry out due diligence. For this the format and the required contents is yet to be agreed upon. The third is the valuation. Mudalige noted that as far as the accounting is concerned, the client of the selected audit firms is the CBSL. “We are here to assist the CBSL since our fees are paid by them. Therefore the reports will be issued through the CBSL and they will be the sole custodian of these documents. That includes the due diligence reports, the IM and the valuation. And under no circumstances will we (audit firms) issue or address the reports to respected NBFIs,” said Mudalige. As far as NBFIs are concerned there are faced with no cost. The only cost they face is the cost of providing information. However, interested companies can view these reports by expressing their interest to the CBSL who will then decide if the documents will be shared with the said firm or not. While the CBSL has reached out to the selected audit firms for assistance, they are requested to look in to five key areas which are, due diligence, accounting, tax, legal and regulatory aspects, IT, and Human Resources. On the accounting side the firms will look at the good will component of the NBFIs since they will be paying a premium in the buying books, that is the acquirer’s books. “Sri Lanka is now compliant to IFRS. Under the previous accounting standard goodwill would have been written off. While it has to be tested for impairment for every financial year the accounts have been published, this is one area where issues will come up,” noted Mudalige. For due diligence the NBFIS must ensure that the deposit requirements, deposit liabilities and promissory notes are complete. With regard to provisions the NBFIS must make sure that the hire purchase and the lease receivables get to the loan book. As per the agreement with the CBSL the firms will take into consideration numbers as of 31 December 2013. “We understand that all NBFIs have March year end and due to this we will be working on nine months old unaudited numbers, where the latest number are those that of 31 March 2013. This will require the December numbers to be adjusted. My view is that the timing is good. However this is a challenge for us because we are working on unaudited numbers that are nine months old,” Mudalige pointed out. On the tax element the model followed is similar to that used by Malaysia when it was undergoing the consolidation process. Looking at if the taxation and liability are fairly steady, the audit firms aims at ensuring that the direct and indirect taxes position are clear in the due diligence. The firms are also working closely with the Ministry of Finance to come out with a method in which brought forward tax losses can be treated. For valuation two methods have been agreed upon by the audit firms and the CBSL. It will be carried out using the Net Asset and Market Multiple basis in addition to the Residual Income methodology used on negative net worth institutions. “For the cost of equity we will use the 10 year bond rate, that is a risk free rate, and there will be a variable discount of about 20% on unlisted companies,” shared Mudalige.