RE:RE:RE:RE:RE:RE:RE:RE:You Ain't seen nothing yetAccounting is essentially an interesting methodology of trying to make sense of what is otherwise a very complicated set of facts, circumstances, and assumptions.
Accountants are generally decent at making sure that the "Liabilities" section of the financial statements are reasonably accurate; however, the "Assets" section often is a much greater mystery than anyone really suspects as it is the assets that drive the return of the business and that return profile is inherently unknown and this becomes increasingly subjective as you move down the asset list from cold hard cash to "long-term assets".
Forgetting about Goodwill and Intangibles, the highest degree of uncertainty for Melcor is the properties division and the returns this will generate. The land is valued at cost but you still have to take a reasonable assumption of the cash flow timing and return profile. Having a decade (plus) of land banking is highly risky and the time value of the money is key. Along the way you have all kinds of market conditions you need to contend with as well as a volatile supply & demand model of both the lending markets and underlying real estate market. Throw the municipal, provincial, and federal governments into the mix and this thing can go haywire quickly!
The investment property provides a bit more visibility into cash flow based on rents. Where I think financial statements do a disservice is that the auditor never actually comments on the historical accuracy of managements key assumptions. If you are the independent valuator and external auditor on a real estate investment company, I think you should have to include a public disclosure regarding Management's achievement of their historical forecasts on some sensible timeline (3 years, 5 years, etc.). I think that evaluating the assumptions of the in-house prepared valuation model is highly important, but it is also extremely valuable to understand and communicate Management's track record to the public shareholders.
My experience in valuation is that the Liabilities are usually all there but the Assets can vary significantly from what the accountants will tell you (for better or worse).
When it comes to the valuation of Goodwill and Intangibles, the accounting profession has essentially thrown its hands up and says that the only time they should care is if there are impairment indicators. Maybe that is for the best but the "annual" test for impairment indicators isn't exactly a win.
The moral of the story is that I like Management that is conservative and financial statements that reflect Management's sentiment. The market can decide what something is worth and the financial statements should put an investor in the position to decide what the company is worth. If you look at the goal of Berkshire's annual letter, they are attempting to provide shareholders with that exact information in a manner that the financial statements do not.
Melcor's Management is no doubt shrewed and I would classify the current Management as conservative (I did not consider the former CEO as such). However, the valuation practices within the company and the corresponding disclosure either through the annual report or the financial statements are not as friendly as they could be. One example is the practice of relying almost entirely on an income based approach to the investment properties without contemplating what the comparable transaction basis is. The bond market has the same problem with Held to Maturity Vs Held for Sale. I believe that they could do a better job of disclosing how far off the Income Based Approach deviates from the Comparable Transaction approach. For example of the Income Based Approach is $100 but the Comparable Transaction approach is $75 then that needs to be at least acknowledged. Investors can then make their own decisions.
Sorry for the rant, but I have long felt that the "Financial Statements" of a company are never as forthcoming as people believe them to be and you have seen it time and again in the Enron's of the world.
LR