Friday, 11 October 2019

In the eye of the beholder

There's been a lot of focus on what looks like a large $7.5 billion fiscal surplus in the fiscal year just ended. Part of it, as Treasury explained in the financial statements for the year, is due to various one-offs, which in a nerdy fiscal policy wonk sort of way, I'd thought I'd have a look at.

I didn't come across anything earth-shattering, although personally - and this'll show why accountancy is not my forte - I wouldn't have put any of the revaluation gains arising from a change in how the rail network is valued into the surplus, which is, after all, the "operating balance excluding gains and losses". But as explained on p15, the surplus includes $2.6 billion of "Reversal of prior year impairments that impacts OBEGAL". Never mind.

Along the way I came across something interesting, and it's this. Down the back of the statements you can see the value placed on the government's ownership interest in three electricity generators, Genesis, Mercury and Meridian. The Auditor-General's audit report says (p35) that "As outlined in Note 16, the electricity generation assets, which are at least 51% owned by the Government, are valued at $17.2 billion at 30 June 2019. The valuation of these assets is carried out by specialist valuers because of the complexity and significance of the assumptions about the future prices of electricity, the generation costs, and the generation volumes that these assets will create".

Note 16 shows that the specialists' valuations are based on the net present value of future earnings (give or take), and that's fine. But then I wondered, why don't the accounts just use the market price? Maybe modern accounting policy doesn't support the approach, though I seem to remember that post the GFC, there was a move to have more investments and liabilities "marked to market", i.e. valued at what they'd actually fetch rather than on some notional basis that might flatter the real-life value of investments or minimise the real-world cost of liabilities.

So here are the valuations at market price as well as the valuations on the government's books.

The valuations on the fiscal books are (unless I've got my calculations wrong) uniformly higher than what the financial markets say. There's nothing sinister about that: I'd guess the financial accounts are required by the accounting standards framework to follow some acceptable valuation methodology, and this is how the cards have fallen.

But it's an interesting outcome. It's intriguing that the markets don't think the generators are worth what the valuers' approach shows. Now, it may be that the answer to any valuation question depends on the context of the question: a valuation to establish a regulatory asset base, for example, may have its own imperatives. But even so, you look at the two sets of numbers, and you're tempted to ask, who's right? What does one approach know that the other doesn't?.

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