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Nothing misleading with the term ‘debt laden’

The Oxford Dictionary describe laden as: a tray laden with plates, loaded, burdened, weighed down, overloaded, weighted, piled high, fully charged, encumbered hampered full, filled, packed, stuffed, crammed.

There is nothing wrong legally, accounting wise or grammatically with the use of the word ‘laden’. This is the problem of accounting issues being commented on by non-accountants or PR spin masters.

The confusion here is the word ‘laden’ being interpreted as ‘insolvent’ which it is not. When liabilities are more than assets, then the company is insolvent, if asset more than liabilities then it is solvent but it can still be laden with debts. There is no confusion to those who are using the word laden. The confusion is fully on the side of the spin masters.

For example, if a company has RM100 billion cash, RM80 billion debts, it is not wrong to describe it as laden with debts, it is also not wrong to say it is laden with cash. These are normal everyday accounting terminology. What will be wrong is if a company has RM10 billion debt and RM200 billion cash or assets is described as laden with debts.

Moving on, if it is described that total group shareholder equity is RM1.7 billion then all it means is that assets is higher than liability by RM1.7 billion which is not much if your debt level is high. Given that many have claimed that asset injected have been re valued and assets purchased have been overpaid, then this shareholder equity is precarious. A small erosion or impairment in asset value will drive you into an insolvent position.

These are hypothetical given that one need to study latest accounts before commenting accurately but in broad terms all of the above are accurate accounting wise.

In the past, 1MDB’s debt was stated at RM42 billion, which means assets should be RM43.7 billion, given that asset cover on debts is only 1.04 times which is extremely low and risky. Again this is a general ratio explanation given recent numbers are not available.

Previously these numbers were made public ( Malaysiakini June 3, 2015)

Based on the above, RM5.8 billion of the debts were spent on interest and expenses and can’t form part of assets as these should be profit and loss expenses items, unless of course these costs were capitalised into the assets as they are in development or work in progress stage.

In summary, the mere existent of shareholders’ equity (positive number) as opposed to shareholders deficit does not mean that the term debt laden is misleading. In my opinion it is accurate and spot on. One needs to revalue the assets or check its current valuation (both in terms of what price it will get if being sold or the ability to generate future cash) flow to see where all the numbers fall into what category.

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