• Don’t forget the ‘footnotes’



    “RETAINED earnings” are found as an entry under equity in a financial filing. It is an accumulation of net profits of a stock corporation, which may be either a holding company or any of its subsidiaries or units.

    However, losing companies don’t report retained earnings. Instead, they place their losses inside a pair of parentheses to indicate deficits.

    A holding company and its subsidiaries, which may all be listed on the Philippine Stock Exchange (PSE), file quarterly and audited annual consolidated financial statements.

    Public investors who trade on listed stocks know that Ayala Corp. (AC) is an example of a holding company with a number of units, which are identified in the filings as “significant subsidiaries, associates and joint ventures.”

    In turn, AC’s “significant subsidiaries, associates and joint ventures” have under them various units, which may also follow the similar ownership pattern that makes these units “significant subsidiaries, associates and joint ventures.”

    In this country, the ownership profiles of stock corporations are unique but are confusing.

    For public investors to become knowledgeable about listed companies, they should get familiar with the terms “subsidiaries, associates and joint ventures.” The question is, who should do the teaching?

    Help needed
    It is unfortunate that more often than not, public investors do not have any one to turn to for help with their market dealings. By this, Due Diligencer means as buyers and sellers of the listed shares of companies, the public cannot rely on the Securities and Exchange Commission (SEC) alone for protection. Neither could they ask the PSE for assistance because its shares are also listed.

    Being public traders, they are on their own. They are expected to be more cautious against any kind of activities that may affect the shares they hold.

    Because they are investors, they may be wealthy. In fact, a few of them may be much richer than any of the majority stockholders of listed companies.

    Yet, public investors still need the kind of help that should come from regulatory authorities, such as the SEC. Their major concern is full disclosure of material facts, but which under the rule may not really be “full” or total at all.

    Why, for instance, does a listed company name its majority stockholders but not its allies and associates, whose holdings are, instead, attributed to the PCD Nominee Corp.? As used in this piece, “allies and associates” are stockholders who are closely identified with the majority owners but are not named.

    How can the majority own only 55 percent? Who hold the remaining 35 percent, if the public only gets an allocation of 10 percent of outstanding shares as the minimum required by the law?

    The more curious ones among the public investors read the financial filings and other postings on the PSE website. Perhaps, they also read the footnotes provided in the quarterly and audited annual reports.

    That should be good, because sometimes, the missing information that they need are in the footnotes. Why companies hide some data is a good question. It is up to the traders to look into the individual filings of listed companies and find the essential data that could help them chart their investment decisions.

    As elucidated in a previous Due Diligencer piece, which was aptly titled “The ART of full disclosure,” material facts may be determined by their accuracy, relevance and timeliness.

    What the footnotes contain may be the information that the public investors need more to guide them which stocks to buy and which to unload.

    Try looking for retained earnings and chances are, you would not easily find which of the total belongs to the parent company alone, and which should be credited to the subsidiaries. Go to the footnotes for answers.

    In fairness to a number of listed companies, many of them file separate reports for their parent firms. This enables the public investors to distinguish which among the listed holding companies are ripe for declaration of stock or cash dividends.

    Due Diligencer’s take
    The SEC should consider strengthening the functions of its Brokers and Exchanges Department if it still has it. Having undertaken a major overhaul as a result of the securities law – which took the legislative process four years to amend until 2001 – the commission needs a separate entity to focus on compliance by listed companies with the market’s full disclosure rule.

    In addition, the SEC could also review which among the market rules have become ineffective in policing the market players from the majority owners of listed companies to traders and the brokers. This it could do without proposing any amendment to the 2001 securities law but by incorporating changes into its implementing rules and regulations.

    Why not require the naming of the other significant stockholders who may be allies of the majority owners or families? This is one way of making the application of the full disclosure rule more effective in checking any suspicious activity on the stock market.

    If the PCD Nominee exists to make market transactions much easier, should it be allowed to act as a record stockholder for unidentified stockholders who own a significant number of listed common shares? Just asking.



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