Hanover Finance accounts show NZ$102 mln loss for year ended June 30 (Update 3)

Hanover Finance, which is currently operating under moratorium, has released its accounts for the year ended June 30, 2009. The accounts show the company made an operating loss before fair value adjustments of NZ$283.2 million for the year, but after fair value adjustments Hanover recorded a NZ$102 million loss. (Update 3 includes directors' comments.) Hanover's investors voted overwhelmingly in December last year to allow the company to operate under a five year moratorium plan, under which secured depositors were promised full repayment of deposits, although not interest owed. However, last week Hanover said this repayment was now estimated to be 70 cents in every dollar after "significant deterioration in the property development sector resulting in a disconnection between property valuations and the market value of assets". Hanover's Directors said application of International Financial Reporting Standards had impacted "heavily" on the company's financial results. We have included the Directors' report and the accounts below and welcome readers' insights and comments. The accounts show bad debts written off of NZ$137.1 million and provisions for credit impairments of NZ$136.9 million. On top of these, Hanover also wrote down NZ$34.6 million of investments held in non-charging subsidiary companies. Bad debs recovered over the year were NZ$405,000.Directors' comments Hanover chairman David Henry and directors Des Hammond and Mark Hotchin said the ongoing challenges of the economic environment, together with the requirements under the IFRS, had impacted heavily on the company's financial results. "Application of IFRS has resulted in significant adjustments in the reported results because of the requirement to discount future cash flow forecasts on both the liabilities and asset side of the balance sheet," they said. "Under IFRS, given that no interest is being paid to Secured Depositors and Bond Holders under the DRP, there was a large gain credited to the income statement of NZ$190.0 million. This apparent gain will be fully written back over the five years of the DRP by a series of negative adjustments to each annual Income Statement." "Also under IFRS and impaired accounts receivable loans are discounted back from their projected future cash flow recoveries at the rate originally applicable to each loan even where interest charges have been adjusted or written off resulting in a large apparent cost being debited to the income statement of NZ$62.7 million. This apparent cost will then be credited back to the Income Statement over the assumed collection time of the impaired loan regardless of whether it is actually received or not." "These IFRS adjustments produce theoretical financial statements and financial results that few of our Secured Depositors and Bond Holders will fully understand because the adjustments fail the common sense test for companies operating under approved moratoria and in an asset realisation mode." Five Mile, Kawarau Falls The directors said that realising good values from Hanover's exposures to the Five Mile and Kawarau Falls developments in Queenstown was "very important in achieving estimated recoveries for Secured Depositors". "The Kawarau Falls, Stage I hotel development, which is in receivership, is now expected to be completed in early 2010. It now appears that the stage II hotel development, being a company not in receivership, may precede given that stage I hotel development will be completed," they said. "Since early March 2009 more parties have realised the strategic value of the two Five Mile development sites. The first site had town planning approval and recently the second site has received town planning approval by the council, which has improved its strategic value." Hanover Directors' Report HanoverJune30