Petronas hit by staggering RM23bn ‘impairment losses’

While the nation’s attention was focused on 1MDB’s sensational unaccountability, Petronas quietly slipped in a bombshell. It wrote off RM23.3bn in net “impairment losses” in its accounts for 2014.

The gross impairment losses written off in 2014 added up to RM25.3bn (see below) but there were also write backs credited to the accounts totalling RM2.0bn to arrive at a net figure of RM23.3bn.

Of this RM23.3bn in net impairment losses for 2014, RM21.6bn was booked into the fourth quarter of 2014. Because of this massive hit, Petronas sunk into the red with a loss of RM7.3bn in the fourth quarter of 2014 (compared to a profit of RM12.8bn in the fourth quarter of 2013).

Petronas said in its fourth quarter 2014 financial report that the RM7.3bn loss was due to “significant assets impairment losses recognised as a result of reduced crude oil price forecasts as well as lower revenue generated for the quarter”. This vague explanation for such staggering impairment losses is completely unacceptable.

A closer look at Petronas’ financial statements shows that the bulk (RM21.9bn) of the gross impairment losses of RM25.3bn was from “property, plant and equipment”.

So which specific assets have had to be provided for? Had depreciation been provided for the plant and equipment? If so, then the impairment must have occurred at a much faster rate than the depreciation provisions, which in itself should set off alarm bells.

Provisions for impairment of assets are usually made to “ensure that an entity’s assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use)”.

Apart from goodwill and certain intangible assets (which require an annual impairment test), companies are required to conduct impairment tests “where there is an indication of impairment of an asset”. The test may even be “conducted for a ‘cash-generating unit’ where an asset does not generate cash inflows that are largely independent of those from other assets”.

So now we have a mysterious RM23.3bn in net impairment losses. This is not chicken feed. Petronas and the government must tell us which assets had to be written off and why exactly – and who was responsible for this.