LETTER: Transnet’s solvency calculation

Tiisetso Motsoeneng’s most recent column refers (“Unorthodox solvency shortcut in Transnet’s R11bn tender”, September 9).

I am not surprised that the situation is one where opinions differ, as the usual answer in finance is that it depends on the circumstances. I agree with the writer, though, that this solvency question properly belongs in the realm of corporate finance and not in the realm of accounting. 

Accountants look backwards and report only once or twice a year. A benefit of this is more stability because the information is so outdated. Any corporate finance textbook will show that market information is preferred to old accounting information when answering the question of what the current capital structure of a firm is.

One should also keep in mind that accounting does not always capture the truth of the underlying economic reality. Take the failure of Silicon Valley Bank (SVB), where US accounting rules allowed a portfolio of bonds to be kept on the balance sheet at inflated values. The market value of the equity of SVB was a far more accurate representation of the true state of the bank.

Finally, where accountants and finance agree is that solvency should never be confused with liquidity, as Motsoeneng did when stating “meticulous assessment of a company’s assets, liabilities and cash flows” and “on a world where cash is king, Transnet seems to be saying ‘who needs cash when you have market cap?’”

Transnet should have specified in its call for proposals how it wanted solvency calculated.

Phillip de Jager
Professor, UCT department of finance & tax; associate editor, Meditari Accountancy Research and the Journal of Accounting in Emerging Economies.

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