This article first appeared in The Edge Financial Daily on December 11, 2018

KUALA LUMPUR: Lembaga Tabung Haji failed to recognise a total of RM549 million in impairment losses of investments in several associate companies and subsidiaries as well as fair value losses in investment properties and impairment of investment in available-for-sale (AFS) debt security, according to a report by PricewaterhouseCoopers (PwC) made available yesterday.

This comes days after the 2017 Auditor-General’s Report revealed that the pilgrims fund board had failed to report an asset impairment totalling RM227.81 million from its investment in three subsidiaries and three associates, including a RM164.58 million investment in TH Heavy Engineering Bhd (THHE).

The PwC report, which was included in Tabung Haji’s 2017 Financial Position Review, showed that there was no impairment of investment in THHE to the tune of RM326 million. There was also no impairment of investment in Pelikan International Corp Bhd (RM152 million), impairment of financing receivable from Marine 1 (L) Inc (RM25 million), and fair value losses in investment properties (RM77 million). This totals up to RM580 million.

PwC said that the impairment assessment is based on information made available to the company. “We have not been able to verify the appropriateness of the impairment losses as the management has not provided us with the necessary information or workings for the impairment assessment to support the exposures other than for Pelikan,” it said.

In a separate statement, PwC reported a reduction of impairment for THHE at RM31 million, which came from RM29 million of THHE sukuk repaid on July 16, 2018 and RM2 million from higher market unit price per share of THHE, resulting in an adjusted proposed adjustment of RM549 million.

Breaking down the investment in THHE, PwC in the report noted that Tabung Haji chief financial officer had guided that the fund has an investment in THHE’s Islamic irredeemable convertible preference shares of RM274 million issued in 2015, an investment in THHE’s sukuk amounting to RM50 million (whose maturity date was June 7, 2018), and also a RM2 million overstatement in carrying value of Tabung Haji’s investment in THHE.

On the impairment of its associate Pelikan, PwC noted that there was a shortfall between the carrying value of RM287 million and the market value of RM135 million as at Dec 31, 2017, which led to a potential impairment of investment of RM152 million.

Meanwhile, based on the valuation reports provided by the management, certain investment properties had not been remeasured to fair value, which resulted in a fair value loss on investment properties of RM77 million.

Notably, this goes against Tabung Haji’s policy to recognise its investment properties at fair value. As at Dec 31, 2017, the carrying value of the investment properties stood at RM6.76 billion.

Under its investment properties, Platinum Park has a negative fair value of RM55 million, while TH Perdana, TH Selborne and others have fair value losses of RM12 million, RM8 million and RM2 million respectively.

PwC noted that the management had guided that the Platinum Park property was intended to be used for Tabung Haji’s own occupancy and will be reclassified to property, plant and equipment in financial year 2018 (FY18).

Hence, PwC opined that as the property was still classified as investment property in FY17, it should still be recorded at fair value in accordance with its accounting policy.

Meanwhile, for the investment properties (TH Perdana and TH Selborne), PwC said the fair value loss had not been recorded because the management suggested that there was an expected increase in occupancy in the future.

“However, the valuation report should have considered this factor. Therefore, the negative fair value should be adjusted in the 2017 financial statements,” said PwC.

Additionally, on the impairment of AFS debt security issued by MRCB South, a loss of RM7 million should be recognised as at Dec 31, 2017, said PwC, explaining that the fair value had declined by RM18.46 per unit or 19% from the issue price as at Dec 31, 2017.

PwC added that the decline was because the debt security had suffered a significant drop in ratings and had a history of missed coupon payments.