More on AirAsia's Deferred Tax Issue

Here is an update to an earlier blog posting, AirAsia's deferred taxes issue.

Posted on the Edge:

AirAsia has 2 sets of net profit under different accounting rules
10 Nov 2006 9:41 PM

AirAsia Bhd announced on Nov 10 that the low cost carrier would post a net profit of RM242 million for the year ended June 30, 2006 if it adopts the International Financial Reporting Standard (IFRS) but the figure was RM88.4 million when complying with the Malaysian Accounting Standard Board (MASB).

OSK had the following comments on it.

• OSK 13 Nov 2006
  
  AirAsia (Neutral)
  
  Announced that its audited net profit for FY6/06 had been reduced by RM38.5m to RM88.4m from the previous RM126.9m. This deviation arose from the application of FRS 112 2004 which does not recognize re-investment or other tax allowances in excess of normal capital allowance. Based on FY6/06 reported profit before tax of
  RM115.5m, this means that a tax charge of RM27.1m was incurred or an effective tax rate of 23.5%.
  
  We understand that the taxes incurred are not actually taxes on operating profit but rather due to the timing differences between depreciation charges on their planes and the treatment of tax charges on the planes. The previously announced M126.9m as PAT was on the basis that its 60% re-investment allowance would cancel off any taxable statutory income and AirAsia would only pay taxes on interest income. We estimate the company has some RM15bn of capex due to its firm orders on 100 A320s which would translate to huge investment allowances.
  
  Despite the RM27.1m tax charge, as this is related to defer tax charges, no actual cash will be paid. If AirAsia were to adopt International Accounting Standard 12, which recognizes the reinvestment allowance as an asset, its PAT would rise to RM242m. AirAsia has confirmed with its auditors, PricewaterhouseCoopers that this is permitted under the IFRS.
  
  Still hoping for an authority turnaround. With the SC, MASB and the big 4 auditing firms in talks, AirAsia is hopeful that the tax issue will be resolved before its 1QFY07 results. Otherwise it will provide 2 sets of net profit figures based on IFRS and MASB in future announcements. It also hinted of potential dual listing status.
  
  As this is purely due to accounting treatment and given the ambiguity under IFRS, we ignore its impact on our forecast for now and see if any resolution can be achieved. This latest announcement continues to add uncertainty to the company and we believe that much of the hoped for positive news such as the potential opening of KL-Singapore route has been priced in. With 55% of fuel requirements for FY6/07 already hedged at US$60 per bbl, any further fall in oil price may not have that great an impact going forward. We believe downside risk for AirAsia is greater and maintain our NEUTRAL call.