Malaysiakini News

Flaws in EPU's apparent methodology

LJ Wong  |  Published:  |  Modified:

Typically, a company starts operations with paid-up capital based on par value that remains at this level for a long time. It doesn't need to increase paid-up capital (so long as it is not short of new capital injection) because the accounting and business fraternities value the shares on market value.

Par value of shares have little significance except for a archaic company law disclosure requirement. For example, a company starts with paid-up (par value) capital of RM1 million in 2006 and is awarded a 10-year contract to build a bridge.

Say, it makes a profit of RM10 million for the duration of the contract and keeps the profits intact. The market value of the company in 2016 is RM11 million but its par value remains intact at RM1 million. The shareholders can extract the profits through directors' emoluments, dividends, management services, etc

The methodology used by the Economic Planning Unit (EPU) in calculating bumiputera equity is shrouded in secrecy. From what has been disclosed in the press, it can be gathered that the methodology uses the par value of shares and exclusion of government-linked companies (GLCs).

Par value accounting has inherent flaws and if EPU uses the par value system without redeeming adjustments, then this would suffer from inherent flaws. Until there is clarification, I'll term this as 'EPU Apparent Methodology'.

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