The Securities and Exchange Commission (SEC) has issued a warning on Eastern Merchants Plc and its Directors for non-compliance with the Sri Lanka Accounting Standards in the preparation of the audited financial statements of the Company for the financial year ended on 31 March, 2009.
The Company’s non-compliance is a violation of Rule 7.5 (a) of the Listing Rules of the Colombo Stock Exchange which requires listed companies to prepare financial statements in compliance with Sri Lanka Accounting Standards.
SEC said rules issued by it make it mandatory requirement for every company listed to comply with the Listing Requirements.
Sources said that Eastern Merchant has not complied with several of SLAS in addition to under-stating assets.
Established in 1945, Eastern Merchants specialise in the export of Sri Lanka’s traditional commodities such as tea, natural rubber, desiccated coconut, coconut fibre as well as non-traditional goods such as spices.
SEC ruling and warning of non-compliance were despite the Company’s auditors, chartered accountants D.H.P. Munaweera and Company certifying Eastern Merchant’s 2008/9 Annual Report as fine.
“In our opinion, so far as appears from our examination, the company maintained proper accounting records for the year ended 31 March 2009 and the financial statements give a true and fair view of the company’s state of affairs as at 31 March 2009 and its loss and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards.
In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31 March 2009 and the Loss and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards, of the company and its subsidiaries dealt with thereby, so far as concerns the members of the company,” the audit firm had said.
It couldn’t be confirmed whether SEC or the Sri Lanka Auditing and Accounting Standards Monitoring Bureau will rap the audit firm concerned following the latest development. The Directors are also responsible for the preparation of the Financial Statements of the Company to reflect a true and fair view of the state of its affairs. In the 2008/9 Directors of Eastern Merchant had admitted that they are of the view that these Financial Statements have been prepared in conformity with the requirements of the Sri Lanka Accounting Standards and Companies Act No.07 of 2007.
Whilst in 2008/9, the Company’s and Group assets had come down there was a massive increase in the subsequent year (2009/10). In 2008/9, company’s assets amounted to Rs. 285.9 million, down from Rs. 457.3 million of which fixed assets amounted to Rs. 121.8 million, higher compared to Rs. 107.7 million in 1008/9. Group total assets in 2008/9 were Rs. 367.2 million, down from Rs. 510.6 million in the previous year.
Group fixed assets had increased from Rs. 141.6 million to Rs. 155 million.
However in 2009/10, fixed assets rose to Rs. 827.8 million at Company level and Rs. 872 million at Group level increasing the total assets figure to Rs. 1.3 billion at Company level and Rs. 1.38 billion at Group level.
Eastern Merchants Chairman J.B.L. de Silva in his review in 2009/10 Annual Report told shareholders that in keeping with the Rules and Regulations of the Stock Exchange, “we have revalued our Land & Building to show a revaluation reserve of Rs.679, 427,832.28 in the Balance Sheet.”
This perhaps explains the increase in fixed assets with property, plant and equipment increased to Rs. 768.5 million (Company) and Rs. 811.2 million (Group). Capital and Reserves too had increased to Rs. 850.7 million (Company) and Rs. 860 million (Group) on account of Rs. 695 million of revaluation reserve. Incidentally the revaluation had been done on 31 March, 2010, the last date of the 2009/10 financial year.
Eastern Merchants land and property include land and buildings at 341, Union Place, Colombo, No. 101 Gonawela Road, Sapugaskanda and at Atakalana Estate, Ampegama. Group firm Asia Brush Ltd’s land and buildings were revalued a few days before the close of 2008/9 financial year as well.
The Company’s Board of Directors has adopted the fair value model to value the investment properties of the company. Consequently the property at No. 341, Union Place, Colombo 2 was valued by Dr. Gaminda Heagoda, who is an incorporated valuer.
Several of the properties are mortgaged for borrowing. Short term interest bearing borrowings in 2010 was Rs. 407.6 million, up from Rs. 144.4 million in 2008/9. The latter amounted to 50% of 2008/9 assets and the increase in borrowing would have been difficult if not for the revaluation in 2009/10.
The head office property had a primary mortgage with HSBC for a facility worth Rs. 218 million and secondary mortgage with Seylan Bank for a Rs. 170 million facility apart from Sapugaskanda property mortgaged for a Rs. 85 million facility with HNB. The Company had also mortgaged stocks and book debts for a Rs. 100 million facility from NDB Bank in addition to Rs. 50 million from NTB. The same mortgages applied in 2008/9 when properties weren’t revalued.
Of the short term borrowing Rs. 177.4 million was repaid in the first quarter 2010/11 financial year and as at end first half as at 30 September, the interest bearing borrowings amounted to Rs. 190 million at Company level.
Performance wise, after a Rs. 15 million loss in 2008/9, and Rs. 27.8 million loss at Group level, Eastern Merchants saw a turnaround in 2009/10 with a net profit of Rs. 61.8 million and Rs. 60 million respectively. But this was boosted by Rs. 47.5 million positive contribution following the change in fair value of investment property. Profit from operations grew from Rs. 14 million in 2008/9 to Rs. 38 million last year at Company level and to Rs. 41 million from Rs. 9 million at Group level.
In the current 2010/11 financial year’s first half, net profit attributable to equity holders was Rs. 36.5 million, up by 33% from Rs. 27 million a year earlier. Second quarter figure however was down by 17% to Rs. 20.3 million from Rs. 24.5 million in the corresponding period of last year. Group turnover was up 75.7% to Rs. 1.8 billion in the first half and by 76% to Rs. 1.1 billion in the second quarter. Group profit from operations though grew by 44.6% to Rs. 48.5 million in the first half, in the second quarter it had declined by 6% to Rs. 26.4 million from Rs. 28.1 million.
Eastern Merchants has 202 shareholders with a public float of 13.6% as at March 2010. Chairman J.B.L. de Silva owns 27.5% followed by Directors H.J. de Silva 13.7% and C.I. Tilakaratne 13%.
Auditors qualify Eastern Merchant Group accounts of 2009/10
Whilst the SEC’s ruling and warning were on 2008/9 Annual Report, the auditor however has qualified the 2009/10 Group accounts.
Chartered Accountants D.H.P. Munaweera and Company said in 2009/10 Annual Report that an investment in Asian Woodware Company Ltd which is an associate company of the group has not been recognised under the Equity Method as required by SLAS 27, Investments in Associates.
The Auditors of Asia Brush (Pvt) Ltd. a subsidiary Company of Eastern Merchants Plc has modified their report on the grounds that,
1. The recoverability of the amount due from Asian Woodware Company (Pvt) Ltd amounting to Rs. 25 million is doubtful. No provision has been made against possible losses that may arise there from.
2. The Company had incurred a Net Loss of Rs.1, 399,805 during the year and recorded on accumulated loss of Rs.23, 299,210 as of 31 March 2010. The Company’s Current Liabilities exceed its Current Assets by Rs.16, 737,901. These factors raise doubts as to the company’s ability to continue as a going concern.
“In our opinion, except for the adjustments which might be necessary due to the matters stated in the preceding paragraphs, so far as appears from our examination, the consolidated financial statements give a true and fair view of the state of affairs as at 31 March 2010 and the profit and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards, of the company and its subsidiaries dealt with thereby, so far as concerns the Shareholders of the company,” auditors D.H.P. Munaweera and Company has said in their report.
Asia Brush deals in manufacture and export of coir and rubber wood brushes.