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Update: Noble's mark-to-market approach complies with relevant rules, industry practices: PwC
IN a highly anticipated report by PricewaterhouseCoopers (PwC) on its review of Noble Group's accounting practices, PwC said that the individual valuations and the overall valuation of contracts included in Noble's consolidated balance sheet as at June 30, 2015 comply with relevant accounting rules and industry practices.
Those "relevant criteria" that PwC used to access Noble's accounting practices were developed by Noble's management based on the relevant requirements of fair value measurement under International Financial Reporting Standards (IFRS 13) and standard practices for deriving mark-to-market (MTM) valuations.
"Overall, we note that Noble has adopted an approach to valuations which is consistent with the Relevant Criteria in all material respects," PwC said in its report.
"Indeed, in some aspects of the model construction (such as the development of discount rates and development of counterparty credit risk curves), Noble has an approach which is more sophisticated than that of many non-financial companies. We also note a strong segregation of duties between the different teams that provide key inputs into the models."
The accounting firm also pointed out that observable inputs are used where available and the application of production volume adjustments and allocation of reserves for uncertainties in the valuation are consistent with market practice.
But PwC flagged that there is "a high degree of reliance on key individuals, who have a deep understanding of the contracts as well as the informal guidelines and practices that have been developed outside the formal policy framework".
It has hence recommended steps to reduce the company's dependence on these key individuals, in addition to improving its presentation of information and steps to formalise policies and practices further.
PwC analyses of Noble's accounting processes peered into how Noble arrives at its MTM valuations, the compliance of these processes with relevant accounting standards and standard industry practice, and the governance structure around these processes. Its scope of work was restricted to valuations of the contracts on Noble's balance sheet as at June 30 and did not consider classification, disclosure or recognition of income.
The contracts reviewed by PwC represented 81 per cent of the value of derivative contracts with a duration of at least two years, and 98 per cent of the value of the level 3 net assets (unobservable inputs for the asset or liability) under IFRS13.
Noble, which released the full report of PwC on Monday, said that the recommendations for further improvement, set out in the PwC Management Report have been reviewed by the Committee and the Board, who support them and are taking steps to ensure their implementation.
"The Committee and the Board consider that the reports demonstrate clearly that the accusations of bad faith on Noble's part in the preparation of its MTM valuations have no basis," said chairman of the Board committee Paul Brough, an independent director of Noble.