Asset changes threaten to cut company profits

PROFITS at some UK companies could fall by up to a third, placing their dividend payments in jeopardy, if proposed changes to controversial accounting practices are introduced, analysts warned yesterday.

Worst-hit could be hotel groups such as Forte and Stakis, though other companies with large property portfolios could also be affected.

Shares in brewers such as Bass, Whitbread and Vaux came under pressure last week amid reports that the Accounting Standards Board would recommend companies be forced to depreciate their freehold and leasehold property assets. "Such a move would affect brewing company assets, thereby reducing earnings per share substantially," wrote broker UBS in a research note.

At issue is the way these assets are treated on the balance sheet. The ASB is in talks with the Institute of Chartered Surveyors and other parties about the best way to harmonise valuation of fixed assets such as property. A discussion paper is due out early next year.

Reaching agreement on a uniform practice will not be easy because the useful life of a building is very difficult to determine. While some companies mark their properties down every year to reflect their real market values, others keep them on the books at the original purchase price.

Supermarkets recently bit the depreciation bullet by amortising their out-of-town shopping centres at 2 per cent a year. But hotels have resisted following their lead. Although budget lodges probably have a limited life, prestige London hotels such as the Grosvenor or the Savoy have resale values as high as or higher than indicated in the accounts.

Takare, Britain's largest nursing home operator, recently bowed to institutional shareholder pressure by adopting a more conservative accounting policy. Buildings will be depreciated by 2 per cent a year, while the interest cost of funding new nursing home developments will be charged against profits instead of being capitalised (added to the balance sheet with no effect on profits) for the first three months of the home's operation.

The changes will reduce Takare's profits this year by pounds 3.5m, or 15 per cent. But one highly-rated City analyst was unimpressed. "Takare operates in a lowly rated sector so it does not set a big precedent." Larger companies still have not faced up to the issue. "There is no full and proper debate."

A spokesman for the ASB admitted present standards did not amount to a level playing field. "Accounts are meant to give a true and fair view of a company's financial position, but there is a degree of inconsistency in reporting at present. We are trying to make sure there is comparability and predictability."

However, a mandatory requirement to change accounting standards is still two or three years off, the spokesman added.