TTNGL DIVIDENDS: Now you see them, then you…won’t?

27 August 2015


I want to tell you a story…

On the 24th March 2014 a small recently formed company with big aspirations made an investment in a gas processing plant located in the Republic of Trinidad and Tobago.

The company – Trinidad and Tobago NGL Limited (TTNGL) – through a complex transaction beyond the scope of this blog entry acquired a 39% ownership interest in the shares of Phoenix Park Gas Processors Limited (PPGPL) for $3,870,000 (all figures in this blog entry are rounded to the nearest thousand Trinidad and Tobago dollars).

TTNGL recorded the investment in PPGPL in its balance sheet at a value of $3,870,000 treating it as a joint venture.

Everything seemed to be going well…or was it?

Things can get a little technical – try not to lose the plot!

This is a complex story, and to understand it fully you have to have a basic understanding of how joint ventures are accounted for in accordance with International Financial Reporting Standards (IFRS and sometimes also referred to as IAS). It also helps if you have some understanding of Trinidad and Tobago’s Companies Act.

Don’t worry. As we go through the story we will try to explain what you need to know.

How TTNGL accounts for dividend income from PPGPL

Anyone who makes an investment (or at least a good investment) expects something in return. For TTNGL that return (hopefully) comes in the form of regular dividends paid by PPGPL.

For the purposes of our story let us assume that TTNGL’s share of PPGPL’s dividend for the year ended 31st December 2014 was $336,191.

When PPGPL declares a dividend TTNGL reflects that dividend in its accounts through the following double entry:

Debit:     Dividend receivable 336,191 (creates debtor in balance sheet)

Credit:   Investment in joint venture 336,191 (dividend deducted from cost of original investment in balance sheet)

Both of these entries are recorded in the balance sheet of TTNGL.

When PPGPL pays a dividend then TTNGL has to reflect the receipt of the cash in its accounts through the following double entry:

Debit:   Cash 336,191 (recording receipt of cash to the bank account)

Credit: Dividend receivable 336,191 (cancelling the debtor in the balance sheet)

Both of these entries are also in the balance sheet. In other words we have not accounted for any of the dividend income in the profit and loss of TTNGL.

So far so good? Are you keeping up?

How TTNGL accounts for its share of the profits of PPGPL

I mentioned earlier that in this story we will have to get a little technical and make some reference to IFRS and the Companies Act.

Every quarter TTNGL will have to prepare accounts as a prospective public company quoted on the TT stock exchange. Under the terms of IFRS 11 which is entitled “Joint Arrangements” it must equity account for its share of the profit of PPGPL in its accounts.

So in order to understand the story we have to have some understanding of the process of equity accounting.

Let us assume that TTNGL’s share of PPGPL’s profit for the year ended 31st December 2014 amounts to $345,288.

TTNGL will record its share of PPGPL’s results with the following double entry:

Debit:   Investment in joint venture 345,288 (the same account we referred to above)

Credit: Income from joint venture (profit and loss account) 345,288

The debit side of this entry is a balance sheet entry and is debited to the same account we used to record dividend income received from PPGPL above, and the credit side flows as income through the profit and loss account.

So how does this leave our investment in PPGPL?

How TTNGL’s investment in PPGPL looks as at 31st December 2014 …at least initially

Taking account of all of the above entries TTNGL’s investment (at least initially) would now reflect a balance comprising of the following:

 

150827 TTNGL Dividends MS - Image

 

 

 

 

This amount would be recorded in the balance sheet of TTNGL as at 31st December 2014.

That is it would have been the amount recorded on the balance sheet if something bad hadn’t have happened at some point between the 1st January 2015 and the 6th May 2015 (the day TTNGL signed its accounts for the year ended 31st December 2014.

A nasty case of impairment

If you’re wondering what impairment is we covered it in some detail in an earlier blog entry and if you wish to read that entry it can be found here.

Suffice to say that for our story impairment is not a good thing.

If you compare the balance I have recorded above of $3,879,097 with the information contained on TTNGL’s prospectus on page 97 you will see something very similar.

In the prospectus two additional items need to be accounted for. The first is an impairment loss on the investment in PPGPL amounting to $1,097,880. The second is an exchange rate adjustment of $50,313.

The exchange rate loss arises because PPGPL prepares its accounts in United States dollars while TTNGL prepares its accounts in Trinidad and Tobago dollars.

As at 31st December 2014 after taking account of the impairment loss and the exchange rate adjustment TTNGL’s investment in PPGPL actually stands at:

150827 TTNGL Dividends MS - Image 2

 

 

 

 

 

 

 

 

What is the purpose of TTNGL?

TTNGL is a holding company. This means that it holds shares in another company (PPGPL) with the intention of paying dividends to its own shareholders.

For the year ended 31st December 2014 TTNGL paid an interim dividend of $142,993. It has yet to declare a final dividend.

Two questions arise in this story so far. First should TTNGL have paid a dividend in the year ended 31st December 2014, and second can it pay dividends moving forward.

What dictates whether a company can pay a dividend – is it IFRS?

IFRS are (for the most part) silent on the issue of when a company can or cannot pay dividends. Therefore you need to fall back on the Trinidad and Tobago Companies Act.

Where IFRS does address this issue it is as part of specific and technical accounting requirements that do not apply to TTNGL and are beyond the scope of this blog entry.

Is it accumulated profits – can a company pay a dividend if it has accumulated losses?

The short answer to this is yes a company can pay a dividend if it has accumulated losses brought forward but it makes a profit in the current year so long as it is paying the dividend from current year’s profits and those profits are realised profits in accordance with section 55(2) of the Companies Act. Section 55(2) states:

“A company shall not pay a dividend in money or property out of unrealised profits”

Is it something else in Trinidad and Tobago’s Companies Act that governs dividends?

In respect of TTNGL the short answer to this question is yes, and it is section 54 that we have to look at.

Section 54 states:

“A company shall not declare or pay a dividend if there are reasonable grounds for believing that –

  • A. The company is unable, or would, after the payment, be unable to pay its liabilities as they become due; or
  • B. The realisable value of the company’s assets would thereby be less than the aggregate of its liabilities and stated capital of all classes.”

Subsection A by definition excludes share capital in the form issued by TTNGL since the shares issued by TTNGL never fall due.

Since TTNGL is a holding company it should have little in the way of expenses/liabilities moving forward and therefore it is hard to imagine a scenario in which it falls foul of section 54(a).

But in our story as at 31st December 2014 does TTNGL satisfy section 54 (b)?

The position as at 31st December 2014

As at 31st December 2014 is we apply the test to the financial statements of TTNGL we get the following:

150827 TTNGL Dividends MS - Image 3

 

 

 

 

 

 

 

 

 

 

Does this mean that as at 31st December 2014 TTNGL made an “illegal dividend”?

As mentioned above at some point in the year ended 31st December 2014 TTNGL paid an interim dividend of $142,993. The question is whether this dividend was “illegal” in accordance with section 54(b) of the Companies Act?

Again the short answer to this is probably not. In all things especially investments timing is everything.

To understand further one has to read the financial statements of TTNGL for the year ended 31st December 2014 very carefully.

Note 10 of TTNGL’s financial statements for the year ended 31st December 2014 states that “management engaged an independent valuation expert to conduct an impairment assessment of its 39% shareholding investment in PPGPL as at 31st December 2014.”

This means that the impairment exercise must have taken place at some point between 31st December 2014 and the signing of the accounts on the 6th May 2015. In other words the impairment exercise (the main cause of the erosion of the assets of TTNGL) took place sometime after the dividend was paid (for it to be marked as paid in TTNGL’s accounts to 31st December 2014 it must by definition have been paid before 31st December 2014).

If you follow the timeline at the time the dividend was paid the management of TTNGL would not have known about the impairment losses because that exercise had not been conducted yet and so at that point in time there is no breach of section 54(b).

Also remember that at the time the dividend was paid TTNGL (according to the prospectus) had no management.

So in conclusion retrospectively there is a breach but at the time the payment was made TTNGL would have passed the benchmark test set by section 54(b).

Will TTNGL be able to pay a dividend moving forward?

If nothing else had happened subsequent to 31st March 2015 applying Section 54(b) in the short to medium term the answer would have to be a resounding no.

However TTNGL did subsequent to the finalisation of the accounts for the quarter ended 31st March 2015 take the step of reducing the share capital of the company on the basis that the stated share capital was no longer fully supported by assets of the company.  In the prospectus on page 137 can be found the following statement:

“Subsequent to the approval of the financial statements for the quarter ended March 31st 2015, the company, pursuant to and in accordance with section 48(1)c of the Companies Act, passed a special resolution (which was effected by a unanimous written resolution of the shareholder) approving a reduction in the stated capital of the company by the amount of $1,097,880 as the amount of the stated capital which is not represented by realisable assets of the company. The resolution provided that such amount, which represents the impairment loss recorded in the financial statements for 2014, will be deducted from the stated capital account of the company.”

Assuming that there is no further impairment of assets in the year ended 31st December 2015, TTNGL should, ceteris paribus, be able to pay dividends moving forward. The assumption that there will be no additional impairment is, however, an assumption to ponder further upon.

Is TTNGL insolvent?

TTNGL is not cash or asset insolvent and is unlikely to be in the future.

This is because the impairment losses are not considered to be realised losses either by Trinidad and Tobago’s Companies Act or IFRS.

Is that the end of the story?

Stay tuned; wait and see…

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