GFH 2017 USD 314.5 MM Share Offering Unexplained Lower than Promised Pricing More than Triples Dilution

Sometimes Promises of Transparency are, well, so Transparent

You Can See Right through Them

In preparing the translation of GFH’s 2019 Annual General Meeting for Fiscal Year 2018, the lament of Abdul Muhsin adDarwiish, the representative of AlRajhi, about the drop in book value per share (dilution) caused by this transaction caught AA’s eye.

Just the first examination raised enough questions for AA to take a deeper look. So here we are again.

Summary

In 2017 GFH's Board of Directors proposed that shareholders authorize the issuance of up to USD 450.5 million in new shares to be priced at USD 0.953 each to be used to acquire certain infrastructure projects and investment funds.

Later that year GFH issued some 1,186,904,148 shares.

As per AA's calculation, these shares on average were issued at a discount to par, that is below USD 0.265 per share. “  

AA can find no explanation for this discrepancy.  

So what's the big deal?  

Well, if shares were issued at the promised USD 0.953 per share, the old shareholders to use Mr. Abdul Muhsin adDarwiish’s turn of phrase would own a lot more of GFH than they do now.  Roughly 88% versus 61%.

Interested?

AA has a typical long exposition for you right below.

Detailed Exposition   

According to GFH’s FY 2017 AR Note 18 page 44, GFH assessed the value of the assets acquired as USD 297.502 million.

According to the FY 2017 AR Consolidated Statement of Changes in Owners’ Equity, GFH issued USD 314.530 million in new shares (Share Capital), recognized USD 2.896 million in Share Premium and had an adjustment of negative USD 24.3 million in the Capital Adjustment Account for a net increase in Shareholders’ Equity of USD 293.106 million.

Doing the math, on average GFH issued the new shares at USD 0.2507 per share (using the USD 297.502 million asset valuation).  That’s roughly a 5% discount from par value of USD 0.265 per share.  Some 1,186,904,148 shares were issued.  Keep both amounts (average issue price and number of shares) in mind because we’re going to come back to them later.

AA is unable to definitively “account” (pun intended) for the USD 4.396 million (negative) difference between the increase in equity and the value of assets acquired.

But suspects that these are expenses associated with the exchange based on GFH’s 2017 AR Note 2 (u) page 26 which states that:  “Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments.”

That’s about 1.5% of the value ascribed (USD 297.502 million).

AA thought that was the end of “intriguing” information in GFH’s AR, but then at the end of the note were two facts about the acquisition of a 56% stake in MGIC (Morocco Gateway Investment Company) and a much more modest 8% additional stake in KHCB.

1. The consideration for both of these was some USD 69.1 million and net assets (at book value) of USD 36.2 million acquired. No comment on the reason for the overpayment.  Nada.  Like GH it seems GFH was still carefully considering goodwill.  Presumably, the value of KHCB is known.  If not, that’s a serious matter.  So it’s the value of a “dream” by the Atlantic in Morocco.  As AA did with GH, he will do here. If one doesn’t know the value, how does one buy something?  Adding insult to injury the missing value here is some USD 32.9 million or some 48% of the amount paid.
2. GFH paid cash for KHCB and 203,291,786 GFH shares for an additional 56% in MGIC (roughly USD 53.8 million based on par value).

The immediate question is where did these shares come from?  

Treasury Shares?

That seems a good guess given the information we have in this Note and the CSOSE. In the sense that it doesn’t support these shares as having arisen from the share issuance/asset swap.

AA believes that there should be an adequate disclosure—the information in GFH’s 2017 AR falls quite short of that modest goal--somewhere about this transaction and more importantly about the issuance of USD 314.5 million in new shares. I didn’t find one so far. Nothing at the Bahrain Bourse or DFM, besides a very short woefully uninformative notice.

If you have seen more disclosure, let me know by leaving a comment.

So what do we do?

Dr. Abu Arqala Prepares to Go Back to the Past

Back to the Past.  To early 2017 when GFH’s Board first mooted this most excellent of ideas.

Here’s the agenda for the 2017 AGM and EGM announced 6 February 2017 on the Bahrain Bourse.

Items #2 and #3 in the EGM Agenda are pertinent to this study.

Item 2 -- “To increase the authorized capital of GFH from US$1,500,000,000 divided into 5,660,377,358 share to US$2,500,000,000 divided into 9,433,962,264 share at a nominal value of US$0.265 per share.

Item 3 -- “To discuss and approve GFH’s new strategy to acquire financial institutions, infrastructure investments, and investment assets by swapping the shares of the investors and shareholders of those companies with GFH shares through issuance of new shares by increasing the issued and paid up capital from US$ 597,994,604 to US$ 1,498,994,604 subject to obtaining all relevant authorities’ approvals, as follows:

1. Increasing the capital up to US$ 450,500,000 by way of issuance of up to 1,700,000,000 new share at a nominal value of US$ 0.265 in addition to a share premium of US$ 0.688 (total share value of US$ 0.953 – equivalent to 0.36 Bahraini Dinar / Emirati Dirham 3.5/ Kuwaiti Dinar 0.29) allocated for the acquisition of a number of infrastructure projects and investment funds.
2. Increasing the capital up to US$ 450,500,000 by way of issuance of up to 1,700,000,000 new shares at a nominal value of US$ 0.265 in addition to a share premium to be determined by the Board of Directors as per market conditions, to be allocated for the acquisition of a number of financial institutions and strategic assets.  If you look at the Arabic language EGM agenda, “strategic assets” are described as “and other investment assets (  واصول استثماریة اخرى).

So what GFH’s Board is proposing as of 6 February 2017, is to issue additional shares at USD 0.953 to acquire “a number of infrastructure projects and investment funds” as the first step. And then in second step issue an additional 1.7 billion in share at par plus a premium to be set by GFH’s Board as per market conditions.  

Why does AA say these are two steps?  

Well in the first case, GFH's Board has determined the premium so this step must proceed the second step where the premium is to be decided.  It would be "mighty strange" (to use a technical financial term) for the Board not to know what the premium is for an issuance today, but know what it will be in the future.  

Also if both steps were concurrent, it would seem "mighty strange" that the premium could be different.  What would the investors who paid USD 0.668 in premium think, if other investors were offered fine GFH shares at a premium of only USD 0,334 a month later?  Or offered shares at a discount?  Or either occurred concurrently with the USD 0.688 premium?

In neither of the proposals is there a mention of issuing at par or at a discount.  The use of the word premium implies to AA and AA would bet as well to the shareholders at the EGM that shares would NOT be issued a par or below par.

As noted above, according to information in GFH FY 2017 AR Note 16, during 2017 GFH issued some 1,186,904,148 shares and received according to AA’s analysis USD 297.502 million before assumed expenses (see above).  That is an average per share price of USD 0.2507, a 5% discount from par of USD 0.265.  After the expenses are deducted the average price per share is USD 0.244.

Now there is a share premium shown of USD 2.896 million.  If we assume that represents shares issued at USD 0.953 that would mean that roughly 4.2 million shares were issued at USD 0.953 per share resulting in an increase in share capital of USD 1.116 million with USD 2.896 million allocated to share premium for a total of USD 4.012 million. 

Pretty small beer. Roughly 0.35% (that is, 0.0035) of the total share issuance.  That is probably not what shareholders expected when they voted for this proposal. 

Based on GFH’s Board proposal they were expecting to issue up to USD 450.5 million. If they only needed one-one hundredth of that amount, surely they would have asked for a much smaller tranche.  Wouldn’t they?  That would be in the spirit of Chairman AlMutawa's statement about the new Board and management being "keen" on transparency. You'll see that just a bit further below. 

One more interim stop before we go to the minutes of the 2017 EGM. 

That is, press clarifications of an earlier clarification issued by GFH to both the DFM and Bahrain Bourse about the planned issue.

“The bank intends to increase the capital by way of issuance of new share in order to acquire infrastructure assets. The settlement (payment) to the shareholders of the infrastructure assets will be by way of issuance of new shares of GFH at rate of AED 3.5 per share. The entitlement for the new shares of GFH will only be for the shareholders of the infrastructure assets; hence the current shareholder of GFH will not be the ones subscribing to the new share issuance. It is to be noted that the new shares will be issued at fair value of the company at rate of AED 3.5 per share – as per the valuation of independent third party.”

There are two key points here:

1. Reaffirmation of the issuance of new shares at the USD 0.953 per share price.  Here expressed in AED. Now if GFH's intent was to issue only 4 million shares at this price and over 1 billion shares below par certainly they would have said something.  Wouldn't they? 
2. Even more importantly that the USD 0.953 per share price is “fair value” as determined by an independent third party.  The Board as stewards of shareholders’ interests would not issue shares at a price lower than fair market value.  Would it?

Of course, fair value could change.

While fair value and market value are not necessarily the same, let’s look at trading data from the Bahrain Bourse.   GFH’s price per share declined from USD 0.76 in early February to USD 0.50 on 14 August 2017.  A 34% decrease.

If we assume intrinsic value went from USD 0.953 in early February to USD 0.265 in August, that would be roughly a 72% decrease.  

AA’s experience with fair value theory and practice is that fair value is expected to be fairly accurate (accurate as any estimate can be) over a long period of time absent significant events.  It is an estimate of intrinsic value unaffected by market movements which are often if not always driven by sentiment as opposed to rational consideration, particularly in retail dominated markets such as those where GFH is listed.

AA would be surprised to see a drop of this nature because he is unaware of any dramatic non transitory event that might have caused this. It would have had to be quite an event to cause a drop in fair value by 72%.

Is anyone out there aware of such an event? Did AA miss something big, really big?

We’re still not finished because we know from GFH’s 2017 AR that they acquired TIBC and certain Indian assets as part of the share issuance/asset swap.  But do we know if these are the specific assets that GFH had in mind when it drafted point one to Agenda Item #3.  That is, which assets would be acquired by issuing shares at USD 0.953 per share.

Let’s take a look at the minutes for GFH’s 2017 EGM.  These are available on the Bahrain Bourse’s website, but in Arabic only.

Turn to page 5.  In the third paragraph, Mr. AlRayes, GFH’s CEO, says that the share issuance will be used to acquire infrastructure assets and investments funds similar to (a) the energy city fund in India, (b) Royal Ranches in Marrakesh, and (c) Tunis Financial Harbour Tunisia by issuing shares at USD 0.953 per share composed of par value of USD 0.265 and a premium of USD 0.688 and then goes on to give equivalents, e.g., KD 0.29, AED 3.5, and BD 0.360.  That seems crystal clear.

Looking back at GFH’s FY 2017 AR Note 18 page 44, the assets identified as having been acquired with the share issuance are:  TBIC (Tunis Bay Investment Company) and “India Projects”.

In Note 1 page 14 “India Projects” are defined as Energy City Navi Mumbai Investment Company and Mumbai IT & Telecom Technology Investment Company.PPThese seem to be just the assets Mr. AlRayes mentioned at the EGM.

No doubt some of you out there are saying. GFH got the fine assets they wanted. Stop quibbling over accounting entries.  Besides you told us that accounting and reality often don't coincide.

Quite.

But here there is a practical consequence in the real world. 

If the shares issued to purchase these assets were issued at USD 0.953 composed of USD 0.265 par value plus a premium of USD 0.688 then:

1. GFH would have issued only 312 million shares instead of 1,186.9 million. That is, it would have issued 26% of what it did issue.
2. “Old” shareholders to use Mr. Abdul Muhsin adDarwiish’s turn of phrase would own a lot more of GFH than they do now.  Roughly 88% versus 61%.  
3. BVPS would be higher. 
4. The "Old" shareholders share of future profits would be higher.

So the question is what happened?

How did USD 0.953 per share become roughly par value (USD 0.2505)?

It seems to AA that in order to issue the shares for these acquisitions at a price lower than USD 0.953 per share, GFH would have needed to call a second EGM to obtain shareholder approval.  GFH’s Board in their role as stewards of the shareholders’ money would have had to request another approval and as part of their keen adherence to transparency (شفافية) explained the unique circumstance or circumstance which caused “fair value” to change and therefore justified the change in price. Wouldn’t they?

But AA can’t find record of another EGM held by GFH prior to the August 2017 closing of the deal.

Nor do the EGM minutes appear to give the Board discretion in changing the USD 0.953 price.

And two final bon mots from the 2017 EGM, Mr. Ibrahim Salaah adDiin—apparently a long suffering shareholder since 2009 at least—noted that the previous management had in his view misled shareholders regarding GFH upcoming net losses and shareholders had endured a capital reorganization which cost them 75% of their shares in 2010 or 2011.  He noted that in 2015 the Board had stated it had no intent to increase capital.

Dr. Ahmed Mutawa, GFH’s Chairman, noted that there was a new board and new management that was (حريصين على شفافية).  Quite! The truth of that statement is evidenced in GFH’s annual reports, press releases, etc.  And, perhaps, just perhaps, on this topic as well.

Following that Mr. AlRayes, GFH’s CEO, made an argument for shareholders to approve the new strategy (Agenda Item #3) by noting the many achievements over the past few years.  And ended his comments by stating that the board’s new plan included reaching USD 4 billion in market value by 2019.  Note that is not a promise or a guarantee but merely the contents of the plan.

Could it be that the USD 0.953 issue price was also included in the board’s plan in the same way?

Kidding aside I’m sure there must be a good explanation.

Clearly, the CBB, MOICT, and authorities at the Bahrain Bourse, DFM, and Kuwait Bourse are not asleep at the switch.  They wouldn’t have allowed GFH to fail to implement the EGM resolution.

The problem is AA can’t find the explanation.

Sadly, sometimes when you’re looking for (شفافية) it is hard to find.  Perhaps, the explanation is the difference between (حارس الشفافية) and (حريص على الشفافية) (ولكن اَللّٰهُ أَعْلَم).  

That leads as you might expect to a rant.  Uncharacteristically in a separate post.

America's Greatest Leader Ever Hosts Massive 4th of July Celebration - Overflow Crowds and Gratitude

Overflow Crowds Throng Highway Between Washington DC and Baltimore Maryland

Overflow Crowd in Baltimore

Today America’s Greatest Leader Ever (AGLE) presided over the definitive 4^th of July parade demonstrating that he has Made America Great Again. The outpouring of honor, respect, and gratitude from the crowd for the AGLE is unprecedented in American history.

So great was the number of participants in Washington DC that there wasn’t enough room for everyone who wanted to join in honoring the AGLE and the USA. 

Pictured above are the overflow crowds along the 65 kilometers of highway between Baltimore and the District of Colombia.  Plus additional participants in Baltimore.  

Clearly there were more people present today than at the AGLE’s Inauguration.  

A conservative estimate by Faux News put the crowd in DC and along the road to Baltimore and in Baltimore at more than 100 million people.  

According to questions asked by Faux anchors and militia volunteers all the participants were US citizens.

Gulf News Puzzler: How Old is a "Boy" in India?

You are only as young as you feel or as the old timers call you.

The GCC’s newspaper of record, the Gulf News, had an article under the headline “Indian boy who sells snacks cracks difficult GATE exam in first attempt”. 

AA expected to read the inspiring story of a precocious 11 or 12 year –old “boy” who cracked the GATE.

Instead to AA’s surprise, Mr. Shah appears to have completed his undergraduate studies and is ready to move on to graduate school.  Yet, as per the article, he remains a “boy”, “young boy” or “youngster”.

  

Obviously, this must be a cultural thing.

How old does Mr. Shah have to be before he’s called a man? 

Or to stop being called a "young boy" or "youngster"?  

Or perhaps “How many roads must a man walk down before you call him a man?”

Paging R.A. Zimmerman.

GFH 2019 EGM – A Timely Accounting Lesson for Shareholders of All Companies

Not Available, You'll Have to Make Do with AA's Tuition

Note this post concerns the EGM held in March 2019 for FY 2018.

As promised earlier, AA has prepared a translation of the EGM Minutes which are available elsewhere in Arabic only.  

The contents of this meeting are certainly interesting in their own right.  

But AA thinks there’s something more significant here. 

That there is an important lesson for shareholders of all companies to learn.  That is, shareholders need to look at more than just the Balance Sheet and Income Statement.

According to the formal published minutes of the EGM, there does not appear to have been any shareholder comment or discussion, except on two points. And that discussion was in AA's opinion sorely off point.  

So AA will focus on those two and draw the lessons to be learned from the second point – the discussion or lack thereof on the cancellation of Treasury Shares.  

You can use the English or Arabic very brief summaries of the EGM available on the GFH or DFM website for the other points.  

First point:  Mr. Ali Tariif asked why HSBC acting as representative of investors holding 1.68% of GFH’s shares had objected at last year’s EGM to the proposals in Agenda Items #2 and #3 to amend the Memorandum and Articles of Association to comply with changes to Bahrain Company Law and requirements of the Central Bank of Bahrain with any such changes subject to CBB approval (#2) and authorize the Chairman or CEO to delegate authority to another person to implement such changes (#3).  Agenda here.  

AA couldn’t find 2018 EGM or AGM minutes for FY 2017 to see if these would shed any light on the topic.

Mr. al Seddiqi responded that the majority of shareholders present at the EGM voted for the proposals.  

Essentially he did not answer the question directly.  Perhaps, he did not know. In any case these actions were forced on GFH by operation of law and changes were subject to CBB approval.  

Second point:  Regarding the cancellation of 207,547,170 Treasury Shares, Mr. Tariif asked about the mechanism for deleting the shares.  Mr. al Seddiqi responded that GFH’s lawyers would provide him a complete explanation about the mechanism after the meeting in the case the shareholder needed more details. 

That's the end of AA's translation of the EGM Minutes.  

It’s clear to AA from this that shareholders did not understand that GFH had purchased the Treasury Shares using GFH’s cash (ultimately shareholders’ money) and that by cancelling them the money “invested” in Treasury Share would be lost. 

Why is it so clear to AA?  

In the AGM the shareholders evidenced a serious concern about “money points”, e.g., the increase in expenditures, Board remuneration, dividends, etc. So it’s unlikely they would be indifferent to this spending of their money.  Thus, they must not have known. 

Given the amount concerned, they missed the elephant in the room. 

1. That is, a cancellation of Treasury Shares would cost them perhaps between 12x and 20x the USD 3.5 million proposed as 2018 compensation for the Board. 
2. Or that it is an amount equal to 1.4x to 2.3x the USD 30 million cash dividends to be paid in 2019. 
3. The two data points used to compute those ratios are the FYE 2018 USD 0.33 average price per Treasury Share and an estimated 1Q19 USD 0.22 average price. 

Why?  (Tuition bit starts here). 

Because the gain or loss on Treasury Share transactions does not appear in the income statement. 

And because the decline in equity due to purchasing Treasury Shares occurs upon purchase. It occurs gradually over time.  Not all at once. 

Cancellation of Treasury Share involves accounting entries within the equity account alone.  There is a credit to the Treasury Shares sub-account offset by a debit to Retained Earnings.  There is no net resulting change in the amount of shareholder equity. Thus, the loss is “invisible” to shareholders. Cancellation may, therefore, appear as a “costless” transaction.  It is not. 

Earlier in the AGM meeting Mr. al Seddiqi mentioned the purchases of Treasury Shares as one reason why shareholders’ equity declined along with dividends. Clearly, the implications did not register sufficiently with shareholders.  

AA’s observations. 

1. Investors would be well served by knowledge of the information available in the various financial statements provided in an annual report. One doesn’t need to be a CA or CPA to glean information from these. 
2. Paying close attention to what is said in meetings can also be of benefit. 

To address the first point AA will provide some tuition about sources of information in financials that can help shareholders and others track and understand the impact of non income statement events.  

AA sadly is unable to help on the second as Madame Arqala will testify. 

As noted the Income Statement and Balance Sheet do not provide the information that would be useful to shareholders in analyzing the cost of cancelling the Treasury Shares or the profit and loss earned from trading in them. 

However, the Consolidated Statement of Changes in Owners’ Equity (CSCOE)--also known as the Consolidated Statement of Changes in Shareholders’ Equity--and the Consolidated Statement of Cash Flows (CSCF) do contain useful information.  Information that can be used to analyze other non income statement transactions that affect the value of a company not just those involving Treasury Shares. 

In the CSCOE the total value of purchases and sales of Treasury Shares during the reporting period are clearly stated.  Also one can determine the profit or loss on sales of Treasury Shares during the period.  The value (cost of acquisition) of all Treasury Shares held by the company as of the statement date is also clearly stated. 

Information on how many Treasury Shares are held is disclosed in the Equity Note, at least in the FYE report.  One can use that information to compute an average purchase cost of a Treasury Share and then compare it to the market price to see if there are potential losses or gains in the Treasury Shares account and their magnitude.  And, perhaps, whether Treasury Share transactions appear to have been in the shareholders’ interests. 

To start some accounting basics. 

Entries on the liability and equity side of the balance sheet are the mirror opposites of those on the asset side.  This is to maintain the logic of double entry bookkeeping.  Assets = Liabilities + Equity.  

A purchase of a Treasury Share is recorded as a negative (a debit because it decreases equity). 

A sale is a positive number (a credit because it increases equity).  

A loss on a sale must therefore show up as a negative entry because like any loss it decreases Shareholders’ Equity.  

Keep these basic points in mind as we proceed. 

To make this clearer via some examples.

Open your textbooks (GFH’s FY 2018 AR) and turn to GFH’s 2018 CSCOE on page 9.  

During 2018, GFH purchased Treasury Shares in an aggregate amount of USD 160.973 million (shown as a negative). This is the total price paid for Treasury Share purchases during fiscal 2018 and is recorded in the Treasury Shares sub-account in Shareholders’ Equity. 

GFH also sold an aggregate of USD 133.966 million of Treasury Shares (shown here as a positive number).  Similarly recorded in the Treasury Share sub-account.  This amount ascribed to sales is the original purchase cost of the Treasury Shares sold not the cash received for them. It therefore does not reflect profit or loss but merely the equivalent of the cost of goods sold. Keep that point in mind.

The net of these two resulted in the value of Treasury Shares increasing from USD 58.417 million to USD 85.424 million as shown in the opening and closing negative balances of the Treasury Share sub-account. 

How did GFH do on the sales of Treasury Shares in 2018?  Did it sell them at a profit?  Or a loss? 

It had a loss which was recorded as a decline of USD 3.058 in Share Premium and USD 24.818 million in the Statutory Reserve Account (SRA). Note both figures are presented as negatives in the CSCOE because a loss on the sale of Treasury Shares is the same as any other loss it reduces equity.  

Side comment:  AA is puzzled by use of the SRA to reflect the loss on sale of Treasury Shares.  AA also notes that starting in 1Q2019 GFH began reflecting losses on Treasury Share sales directly to Retained Earnings. This is certainly more transparent regarding profit and loss than the previous year’s entries. There’s that word again (شفافية ). Keep it in mind.  I’m sure we’ll hear it again. It often comes up in regard to GFH. 

From this information we see that the total loss in FY 2018 was some USD 27.876 million.  Or in other words, GFH sold Treasury Shares it previously purchased for USD 133.966 million but only received consideration (presumably cash) of USD 106.090 million. 

You will note that this amount appears in the “Total Change Attributable to Shareholders of the Bank” (TCASB) (on the right on the page) on the line for Treasury Share sales. Looking at the amount shown in TCASB and comparing it to the amount shown as "sales" in the Treasury Shares column gives a very quick insight whether there was a profit or a loss.  If the number in TCASB is less than "sales", there has been a loss.  If it's greater, there is a profit..  

Note: The sub-accounts are displayed vertically as columns, e.g. Share Capital, Share Premium, Treasury Shares, etc.  

We can use a similar method to analyze the cost or loss of cancelling the Treasury shares.  There will be a positive number shown (remember this is the cost of the shares)  in the Treasury Shares sub-account and the same amount though a negative number shown in the Retained Earnings sub-account.  No cash received.  No revenue. The loss equals the cost of shares that are being canceled.  This should appear in GFH's 2Q19 interim financial statements. 

But we can estimate the "loss" now.   Calculate an average price per Treasury Share and multiply times the number of shares to be canceled.  See earlier post here.

This technique can be used with other sorts of transactions. 

Take a look back in the CSCOE in GFH’s 2017 AR to examine the issuance of USD 314.530 million in new shares in exchange for GFH assuming ownership of certain infrastructure and portfolio investments.  That amount (USD 314.5 30 million) appears in the Share Capital sub-account. You’ll notice in the Total Change (again attributable to bank shareholders) column for the line “Issuance of Share Capital” that GFH received value of USD 293.106 million which indicates that shares were issued at a discount. More on that in a post to follow. In the interim some preliminary thoughts from an earlier post.

Here’s another way to think of a Treasury Share sale to understand losses and gains. 

Recall that the original cost of the purchase of a Treasury Share is recorded in the Treasury Shares sub-account (within Shareholders Equity).  When the company sells a Treasury Share it must remove the cost of that share from the Treasury Shares sub-account.  Think of this operation as the equivalent of determining the Cost of Goods Sold (COGS).  Cash or consideration received is the Revenue.  If COGS is greater than; Revenue, there is a loss equal to the difference Revenue – COGS.  If Revenue is greater than COGS, there is a profit equal to the difference Revenue – COGS. 

But unlike other gains or losses which flow through the income statement, including the "comprehensive statement of income" which usually follows the traditional income statement in financial reports, the gain or loss on treasury share transactions is  directly deducted from equity in the case of a loss or added to equity in the case of a profit.  

Now open your other textbook (GFH’s 1Q19 interim statement) and look at the CSCOE on page 4 at Treasury Sales, the negative number appearing in the Retained Earnings Column means the GFH had a loss on a sale of Treasury Shares of some USD 9.574 million.  GFH sold USD 40.86 million of Treasury Shares (COGS) but received only USD 31.286 million (USD 40.86 million less USD 9.574 million) in Revenue (Cash). Notice that USD 31.286 appears in the Total Column Attributable to Shareholders of the Bank (appearing on the right side of the page). 

Let’s turn to the Consolidated Statement of Cash Flows.  In the CSCF one gets the net flow for the year – purchases offset by any sales.  The point here is that if one can see the net cash going out of the company (a net purchase) or cash coming into the company (a net sale).  One can compare the amount to the other cash inflows and outflows during the year. One can do this with Treasury Share transactions and other non-income statement items. 

But of course, you’ll want to look at the detail shown in the CSCOE as a net of USD 10 million could be that there were only USD 10 million in purchases.  Or it could be the net of USD 1,010 million in purchases and USD 1,000 million in sales.  

For example, in GFH’s 2018 AR the CSCF shows net purchase of Treasury Shares of USD 54.883 million in the section “Financing Activities”.  Referring to the CSCOE, we see there were USD 160.973 million in purchases and net sales (after loss) USD 106.090 million.  Confirming our earlier analysis that GFH lost USD 27.876 million on the sales. If you were to merely look at the Treasury Shares sub-account and ignore this number, you'd think that net purchases were USD until you remember that the "sales" shown are cost of goods sold not revenues or proceeds of sales. 

Other Uses:  Under accrual accounting, a firm recognizes income when earned (creating an account receivable) and expenses when incurred (creating an account payable). These recognition events often occur prior to the movement of any cash.  So it’s not uncommon for revenue and thus income to be recognized in one period and received in another in the future.

The CSCF will also show which revenues have been received in cash during the reporting period and which expenses have been paid in cash.  One can also look at revenues that have not been collected to determine whether there will be a cashflow in the future. 

Let's start with expenses and then turn to revenues.

For example, a provision for a legal case is a non-cash charge for estimated future cash payments which may or may not occur. 

A reversal of a provision, e.g., the USD 35.3 debt settlement gain on AHC in FY 2018 (a reversal of a previous legal provision), will never result in a cash inflow. 

A loan provision is established to cover the possibility that the borrower will not pay the loan in full.  It is an estimate of the amount of non-payment.  

A depreciation charge is not paid in cash during the reporting and won’t be paid in the future.  It is the expensing of a purchase of a machine or other “hard” asset made in the past.  That cost is expensed according to estimates of the useful life of the “hard” asset. And there may be more than one depreciation method.  Methods that stretch the charges over many years make income higher.  Methods that accelerate depreciation will make income lower. 

To track receipt of revenues one can use the CSCF to if there are any adjustment to net income.  For example in GFH's 2018 AR, we see that USD 113.1 million in "debt settlement income" was not received in cash.  We can also see adjustments for other items, such as depreciation which is added back.  In general when income is recognized, an account receivable is created.  As the money is collected, the receivable will decrease.  Of course, if there is new income recognized, then that decrease may be partially or fully offset depending on the amount collected and the new amounts recognized. 

How does one dig further?   

One should go to the notes to the balance sheet to see if money was collected. 

Looking at GFH’s 2018 AR we see they booked some USD 121 million in revenue in 2017 for Investment Banking Fees.  A look at Note 16 indicates that this was either all or largely received in 2018 – the receivable for IBF is down some USD 100 million from FYE 2017.  If one looks at GFH’s 2017 AR, Note 11 there is a footnote that USD 104.6 million was received in January 2018. 

If there is a decline in receivables, one can’t just assume that cash was received.  One needs to read the Note (usually Other Assets) to see if there was an impairment provision that accounts for the decline.  Or that these receivables were settled for non-cash consideration, e.g., shares or other investments.  

And then one might want to look at just what that non cash consideration is and whether there is any question about the “value” of these non cash assets both in terms of their credit/investment quality or the time it will take to realize them, that is, to receive cash from them.  

Delayed receipt of payment is a discount in present value terms.  A $100 receivable paid today is worth a lot more than $100 paid five years from today as AA expects the hapless shareholders of Dubious Gas know all too well. 

Knowing these additional sources of information and how to use them can help shareholders and others better understand the performance and health of companies.  And help guide them as to questions to pose to management.