Uganda’s electricity distributor Umeme has announced that it anticipates a more than 25 per cent decline in net profit for the year ending December 31, 2023, as it depreciates its intangible assets in accordance with the new standardised accounting methods.
On Wednesday, the company notified its shareholders that it is losing a substantial sum of money due to the classification of its intangible assets under amortisation in International Financial Reporting Standards (IFRS), which indicates depreciation of these assets as it ramps up operations next year to close its books.
IFRIS is a set of accounting rules for the financial statements of public companies that are intended to make financial statements of firms consistent, transparent and easily comparable around the world.
Umeme is required to match the costs incurred for these assets which are identified as intangibles since they are owned by government, according to its agreement with the state, with their remaining useful time under its management, which is fourteen months away given that its operations end in March 2025 after a frenzy of heavy investments over 20 years.
“The projected reduction in net profits is attributed to the increased amortisation charge for the year ,” Umeme said in a notice.
If a company, for example, purchases a piece of equipment for Shs1million and expects it to last 10 years, they can use the amortization method to spread the cost of the equipment over the 10-year period.
This means that they can record Shs100,000 of depreciation each year, which will reduce their net profits, accordingly, for the period.
This process is widely used in accounting, finance, and banking to calculate the value of an asset over time and to determine the appropriate amount of depreciation to be recorded on the company's financial statements.
Some of Umeme’s assets include power lines, software, machinery, automobiles, substations, and buildings.
Amortization is totally a non-cash expense and does not directly impact a company's cash flow. It does, however, reduce a company's reported earnings, which can have implications for valuation and investor sentiment.
“The underlying economic and operating fundamentals of the company remain strong with growth registered in electricity demand, new customer connections, reduction in energy losses, operating cost efficiencies, investments in the distribution system and string cash collections,” Shonubi, Musoke & Co Advocates, Umeme’s secretary, explained in a disclosure.
The law firm added that: “This announcement is issued pursuant to the provisions of Rule 38 (3) of The Uganda Securities Exchange Listing Rules, 2021.”
All listed companies are required by the local stock exchange to notify their shareholders in the event that they anticipate a substantial decline in profits prior to the release of their financial statements.
This allows the companies to better prepare investors and mitigate market reaction to stock price fluctuations, thereby averting even more significant price fluctuations.