Write-off, impairment: YuuZoo, ISR must tell more

A tough economy can force companies to reassess the value that they had attached to their assets and businesses, and sometimes that reassessment results in a write-off or an impairment.

But as the write-offs and impairments pile up, regulators and investors must be extra vigilant against listed companies that claim an irreversible loss on an asset's value but fail to properly explain why that loss had to be incurred. In particular, social shopping network platform YuuZoo Corp and investment services firm ISR Capital are two recent examples where clarity from the companies is sorely needed.

The need for those explanations exists on a few levels. Most fundamentally, when a company says that it is not actually worth what was previously declared, shareholders need to understand why the discrepancy existed. From a prudential perspective, shareholders also need to guard against possible shenanigans, because write-offs and impairments could be the result of over-aggressive revenue recognition or improper transfers of assets out of a company.

In its Feb 28 fourth-quarter and full-year results announcement for the 12 months ended December 2016, YuuZoo restated its 2015 numbers "due to a write-off of S$16.8 million of trade receivables" that reduced its 2015 net profit to S$15.9 million from the previously reported S$32.7 million.

That was the only mention of the write-off in YuuZoo's announcement. The company did not disclose who the customers were that owed those receivables or how long those receivables had been outstanding and why the company no longer views those receivables as recoverable. YuuZoo had also given no hint previously that such a massive write-off was coming, or that it even had an issue with delinquency. There was no disclosure about any attempts, if any, YuuZoo had made to try to collect on those receivables. For a company that burned through S$8.9 million of cash from operations and investing activities in 2016 and had only S$3.8 million of cash left as at Dec 31, 2016, S$16.8 million of trade receivables is not an amount that can be easily forgone.

The lack of clarity is especially troubling for YuuZoo, which values its substantial non-cash revenue in ways that have raised concerns from its previous auditor, Moore Stephens. Moore Stephens declined to continue with YuuZoo in 2016, and YuuZoo this year appointed RT as its new auditor. Given the circumstances, that significant write-off of trade receivables raises the natural question of whether the original revenue numbers were reliable to begin with.

YuuZoo's write-off has implications on its current numbers as well. If the company has trouble collecting from some customers, is it properly assessing the credit of its customers and franchisees? What is the risk of more write-offs down the road? YuuZoo has not made any allowance for impairment of trade receivables in fiscal 2016.

Asked to comment, YuuZoo's recently appointed chief financial officer Raul Ikonen declined, saying that he wanted to wait until the company's audit was finalised, which would be "at least until end of March or early April".

While YuuZoo's write-off involves money that was supposed to appear but did not, ISR's case involves money that already existed, but was handed out and may no longer return. On March 1, ISR reported its full-year results for the year ended Dec 31, 2016. Non-current debt securities held by ISR that was worth S$2.24 million as at end-2015 was completely wiped out. "The decrease was due to full impairment of the existing debt facility" as at Dec 31, 2016, ISR said.

ISR did not say how much "full impairment" was in its review of its 2016 performance, but a look at the cash flow statement reveals that "full impairment" was actually S$3.7 million. ISR had lent the borrower S$2.2 million as at end-2015, allowed the same borrower to borrow another S$1.3 million by end-June 2016 and then wrote off everything by end-2016.

ISR has not said why that impairment was necessary. The most detail that ISR has provided regarding the debt securities was in its FY15 annual report, which described the borrower as a "third party", and the debt securities as a five-year facility due 2020 bearing annual interest of 12 per cent and a maximum draw-down of S$5 million.

Who borrowed that S$3.7 million, why does ISR believe that the amount is irrecoverable now, and what steps have ISR taken to try to retrieve that money?

ISR did not reply to queries.

The company is currently operating under the shadow of an investigation into the trading of its shares and the management of the company prior to Nov 24, 2016. Prosecutors allege that Malaysian businessman John Soh Chee Wen, who is awaiting trial on charges related to the 2013 penny stock crash, was manipulating the shares and business decisions of ISR before he was arrested on that date.

Questions have also been raised about a planned acquisition of certain mining assets in Madagascar, particularly about the valuation of the asset and conflicts of interest related to the financial adviser on the deal and former director David Rigoll.

Those circumstances demand that ISR provide more information about that impairment to shareholders who need assurance that money has not been improperly transferred out of the company. ISR, which recently loaned S$3.5 million to the mining asset-holding business in which it plans to invest, also needs to assure shareholders that it is able to properly assess the credit quality of borrowers.

When a company writes off or impairs an asset, it destroys value that shareholders had been told existed. Companies that take that route owe their shareholders a proper explanation on why these losses have to be incurred. When companies refuse to provide that explanation, shareholders and regulators should take that as a red flag and tread with extreme caution.

Kenneth Lim

23 March 2017