Cape Town - African Bank Investments Limited (Abil) said yesterday that it had stopped the controversial practice of "upfront" accounting at its Ellerine acquisition, putting further pressure on furniture rivals the JD Group and Lewis to follow suit.
Upfronting involves substantially accounting for insurance revenue on consumer loans when they are written as opposed to over the course of the loan when insurance premiums are received.
Abil chief executive Leon Kirkinis said the bank had applied "conservative" accounting policies as it wanted to be upfront with investors, giving them a true base from which to measure the acquisition.
In terms of note IFRS3, accounting standards acquirers were compelled to re-evaluate a target's assets and liabilities, said Kirkinis.
Some assets had been boosted but overall there was a net R818 million fall in net asset value to R4.6 billion.
Included in this Abil had elected to stop "upfront" accounting for loan insurance and administration fees that were payable over the life of a loan.
Kirkinis said there was no guarantee that revenue from fees such as insurance would be paid when loans were granted, so Abil preferred these fees to only be counted when they were actually collected. This had resulted in a "front-end skewed income profile".
The bank said it had factored this in when it made the offer last year. It had reversed insurance assets by R628 million as a result.
The mass market lender's new approach will stimulate further investor questions about the way furniture rivals the JD Group and Lewis account for their loan books.
Evan Walker, a retail analyst at RMB Asset Management, said accounting for insurance fees upfront, that were earned over the course of a loan distorted revenue.
Walker said the Abil policy was an improvement in disclosure and called on the JD Group and Lewis to follow suit.
A second analyst who asked not to be named expressed outrage that accounting for revenue before it was earned was continuing in the sector.
But Abri du Plessis, the chief investment officer at Gryphon Asset Management, did not expect the JD Group and Lewis to follow suit.
Du Plessis said investors simply needed to understand the accounting policies of firms before putting in their money.
Neither Lewis nor the JD Group were prepared to comment on their accounting policies. Both are in closed periods.
Kirkinis also said Abil overpaid for Ellerine by R450 million after finding bad debts in the furniture retailer's loan book to be higher than expected when it re-evaluated the business.
But Kirkinis said the value was "small in the context of a big transaction", worth R9.16 billion.
Abil said the net asset value of its Ellerine acquisition was R450 million lower than anticipated after applying its more "conservative" accounting policies to the furniture retailer's loan book.
The bank said after gaining access to Ellerine's historical lending models and collection data on January 7 it had found it probable that loans made by the retailer to customers would "rise sharply".
Abil shares yesterday lost 3.14 percent to R25.50. The general financial sector eased 0.70 percent