Saturday 8 June 2019

Greencoat Renewables and the Magic of Fair Value Accounting

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.



3 comments:

  1. The Greencoat Renewables web site tells us that it is focused on the acquisition and management of operating wind farms in Ireland and has the Irish Strategic Infrastructure Fund and Allied Irish Banks as "Supportive Stakeholders". This is said to be underpinned by a stable and supportive regulatory regime which guarantees an index linked floor to the power price for the REFIT period (15 years). If the asset life assumption is 25 years, does the fair value hit a fiscal cliff at 15 years and will we be looking at Allied Irish Bank needing yet another bailout?

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  2. A wind farm has an output on average of 24% in a good wind year and 20% in a calmer year. At 24% it takes 76% of income to pay the running costs leaving 24% to pay interest and installments on the capital cost. When the interest is paid the remaining funds are not enough to pay off the capital cost. It will take 42 to 400 years to repay the capital cost and the wind farm only has a lifespan of 20 years at best. Shortly after commissioning lenders find they are getting their interest but not all their principle so the facility is sold on. Buyers are getting thin on the ground so Greencoat is set up with government backing to buy them out at a profit. Greencoat is now facing bill demands from their new subsidiaries to pass up of money they are owed and in some cases losses are so high that Grencoat will have to send money to them to keep them going. They are putting off the evil day when Greencoat itself will need a bail out from the carbon tax.

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  3. Its only a matter of time before the big turbine makers go bust: http://www.eco-imperialism.com/germanys-green-transition-has-hit-a-brick-wall/ ...and then there's going to be carnage in the Irish wind industry. Its all so predictable.

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