By Bjorn Fehrm
March 07, 2018, ©. Leeham Co: In our February 14th article about Norwegian Air Shuttle’s operational losses, we used straightforward calculations to show the airline was losing around 2bn NOK or $300m in the fourth quarter, besides losses in 1H2107. When the airline presented the 2017 results the next day, creative accounting netted the year’s losses to 299m NOK or $32m.
This might change. The Financial Supervisory Authority of Norway (Finanstilsynet) is investigating Norwegian’s accounting methods for 2017.
Norwegian had substantial operational losses during 1H2017 and 4Q2017. These were in part covered by sales of shares in Norwegian Bank, a loyalty cardholder bank Norwegian started. After the creation, it owned 20% of the shares in the bank’s holding company, Norwegian Finance Holding (NOFI).
The owned shares in Norwegian Finance Holding formed part of the asset side in Norwegian’s balance sheet.
When Norwegian sold the first 4.6 million shares in Norwegian Finance Holding of a total of 32.6m shares, it changed the way these shares were valued on the balance sheet. Instead of an ownership of shares in NOFI, they were now regarded as a “Financial investment”.
This allowed Norwegian to sell the shares in a cash-settled “Total Return Swap” agreement, meaning it could book the cash income from the sale against the losses and still book the original 32.6m shares as a financial asset.
The same procedure was repeated in 4Q2017 to cover this quarter’s loss, this time booking the income for 2m shares. The asset value for 32.6m shares remained on the balance sheet as a financial asset.
Since December 2017 the Norwegian authorities are not sure they agree with this accounting change. As stated in Norwegian’s 4Q2017 results:
“The company is still in dialogue with Finanstilsynet regarding the accounting treatment of the company’s investment in Norwegian Finans Holding ASA. If… a final conclusion should be (the shares shall be treated as shares) … the equity method of accounting according to IAS 28 would be applied to the investment. As of December 31, 2017, this would result in a reduction of the recognized value of the investment by NOK 1,993 million with a corresponding decrease in end balance equity. Effects of a change back to IAS 28 would also reverse financial gains in net profits of NOK 1,657 million, reverse fair value changes recorded in other comprehensive income of NOK 498 million and increase share of profit from associated companies by NOK 163 million.”
In other words, the low 9% of own equity in Norwegian’s balance sheet would fall to 4.6%, an alarmingly low value. Own equity would be then at 2086m NOK.
The company’s cash position exiting 2017 would go from NOK4040m ($432m) to NOK2048m ($219m).
Using the same simple method as used for the 14th of February article, we can calculate the 2018 losses to date of Norwegian’s core flight operations:
Norwegian still has assets it can sell, like the shares in Norwegian Finance Holding. The remaining shares should be worth about 2,300m NOK. And the company can continue to sell and lease back aircraft. It can also find new investors.
For now, the liquidity is strained and there are more though months to pass before the revenue of the summer months sets in. It’s not clear when Finanstilsynet will make their final decision regarding Norwegian’s 2017 accounting change.