Companies should use care in revaluing assets

JAKARTA (JP): Public companies must be careful when carrying out asset revaluations if they do not want to damage their financial ratios and stock performance, advises Jusuf Halim of the Jusuf Halim & Partners accounting firm.

Jusuf told members of the Indonesian Public Companies Association in a discussion yesterday that a public company should take into consideration several aspects before revaluing its assets, including costs, benefits and how it will affect accounting and financial issues.

He said that in case of upward revaluation, when a company earns capital gains after revaluation, the value of the company's total assets will increase.

A higher value will increase equity and future depreciation, he said, therefore pushing down profit margins, the rate of return on assets and the rate of return on equity.

Jusuf noted that higher depreciation after revaluation will reduce a company's retained earnings and weaken its ability to pay dividends.

"I don't think a company's shares are still interesting if the company cannot pay high dividends," he added.

Higher depreciation will cause an increase in the cost of goods sold. A decrease in profit will lower earnings per share, meaning that the price earning ratio will increase.

"When it happens, investors will regard such a stock as overvalued.

"It's worth noting that financial ratios have different meanings to different companies, so I would say that the impact of revaluation may also be different."

But in general, he said, the impact of revaluation on listed companies is different from non-listed companies.

"Unlisted companies may not care about the impacts," he said.

Jusuf also said that public auditors need more detailed guidelines on how to book capital gains or capital losses that result from revaluation in a company's financial statement.

He said that under current public accounting standards, public accountants should audit the reports of appraisers before giving an opinion about the company's financial report.

Meanwhile, the Directorate General of Taxation's director of income tax, I Made Gede Irata, confirmed that the revaluation program is not mandatory. If a company wants to revalue its fixed assets, he said, it should comply with the guidelines.

Irata warned that his office has the right to appoint an independent appraisal company to revalue an unqualified revaluation report.

Minister of Finance Decree No. 507, issued on August 13, 1996, stipulates that the Directorate General of Taxation has the authority to determine the "fair market value" of a company's assets if the revaluation done by an appraisal firm is considered unfair. (alo)