When news of the SIA’s “profitable” sale of Virgin Atlantic stock was announced, I found myself greatly dismayed by how one could “legitimately” buy stock at nearly four times the price one sold at and still have the gall to declare a profit based on “Generally Accepted Accounting Practices” (GAAP)1.
I would propose that a consensus be built for how we would like to have the returns for our SWFs accounted. That is to say, we should create a set of principles that spell out specific practices for the major accounting steps. This will increase the consistency of accounts and improve the accuracy of computed returns.
For instance…
(1) What valuation should we assign to a newly transferred state asset? We would like a set formula in terms to total funding inflows, withdrawals by the government, operating profit, and other relevant metrics. It may be necessary to distinguish between various cases, but these will have to be put down in that set of
(2) What valuation should we assign a newly purchased stake in a private company? How much goodwill is acceptable (if any)? If there is “goodwill”, should it be classified as a depreciating asset for the purpose of accounting?
Certainly there will be quite a number of such principles to nail down, and we need a knowledgeable group of academics and professionals in the field of accounting (and some from finance and general management) to iron these out. I emphasize that this has to be scoped to cover just the major accounting transactions relevant to computing returns for SWFs.
I encourage people to share this, and write to your favorite political party and tell them you support this. We need to know if our reserves are being properly managed, and a coherent set of accounts that do not contain accounting sleighs of hand that regular common sense would reject in spite of their being (somehow) within GAAP.
Whether you favour the PAP, DPP, NSP, PKMS, RP, SDP, SJP, SPP, or WP, inform your favorite politician and tell them you support the creation of such a set of guidelines and want it applied as soon as possible to the accounts of the Government of Singapore Investment Corporation (GIC) and Temasek Holdings (TH).
—
1. Here’s an explanation why buying at SGD 1.65 billion and selling at about SGD 440 million can be classified as profitable. It is neither surprising nor pleasing, and certainly is not within the spirit of GAAP, which was conceived to make accountants’ work less onerous. There is even more to the story, and Christopher Balding, an “investigative academic”, seems to have made uncovering such and related dealings in Singapore’s Sovereign Wealth Funds (SWFs) a personal cause. Many are already aware of these issues, but not many enough.
Jeremy Chen
* Jeremy is currently a PhD student at the Department of Decision Sciences at NUS Business School. Jeremy believes in the possibility of a beautiful synthesis of “social justice” and “the free market”. He also hopes for less politicking and more policy discussion in the political arena. He blogs at http://jeremy-chen.org.