Make the prices rather higher than lower so that you can make a larger profit - Luca Pacioli, 16th century mathematician
The Irish media recently announced with great fanfare that Income and Profits were up sharply at Greencoat Renewables for the year 2018. On closer scrutiny, things don't look as rosy as one might think. The accounts show income of € 58m.
The majority of this income, € 46m, has nothing to do with actual wind energy or trading as most people would have assumed. It is in fact due to an accounting trick called a fair value adjustment. This boosted the income figure to produce a profit of €43m compared with a loss of € 2.5m for the previous year. Interestingly, this new profit figure did not result in any tax to be paid.
The Accountancy Standard IFRS No. 13 allows assets to be stated at their Fair Value as opposed to their cost, which conventionally would have been the case. The Fair Value is the amount that an asset (in this case the wind turbines) could be traded for, i.e the selling price. A clause in the accounting standard allows room for subjective assumptions where there is no readily available market information. Greencoat have made use of this clause by increasing the asset life assumption from 25 to 30 years which allows them to record a higher fair value for their wind farm investments. This subjective increase in the value of their wind turbine assets is then recorded in the Income Statement as if normal income.
No actual cash is generated from fair value adjustments, it is simply a bookkeeping exercise to boost profits.