Ministry tightens hold on account massaging

PUBLISHED : Friday, 28 December, 2001, 12:00am
UPDATED : Friday, 28 December, 2001, 12:00am

The Ministry of Finance has tightened rules on the valuation and accounting treatment of connected transactions by domestically listed companies.

A provisional regulation in effect since December 21 seeks to curb cash-strapped companies' ability to massage their accounts with connected transactions at inflated prices.

The rule gives detailed guidelines on the calculation of the 'fair value' of such transactions.

Listed companies are required to put any additional income - from pricing transactions at higher than fair value - into their reserve capital accounts rather than crediting it as profit.

The regulation applies to any product and asset sale, debt transfer, cost-sharing and custodian arrangement involving companies listed on the Shanghai and Shenzhen stock exchanges and connected parties.

With regulators showing a growing resolve to delist failing firms and put consistently loss-making stocks on special trading curbs, companies have frequently resorted to sham restructurings and exorbitantly priced asset sales for a year-end turnaround.

Such deals are frequently cut with connected parties.

Shenzhen-listed Fujian Jiuzhou Group, trading under the special treatment arrangement for posting two consecutive years of losses, recently disclosed a plan to sell three non-performing subsidiaries to its largest shareholder. The three were priced at 66 million yuan (about HK$61.84 million), more than 20 times their combined net assets of 2.79 million yuan, reported Beijing's China Economic Times.

The rule attempts to prevent major shareholders from diverting funds from listed vehicles to plug their own financial black holes. Many mainland firms consider their listed subsidiaries fund-raising tools.

Various listed firms have fallen into financial shambles after their parent companies or major shareholders funnelled funds into their own coffers.