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FMA looking into Pyne Gould's accounts after company says most of 2014 profit wasn't received

Pyne Gould Corp's 2014 accounts are being looked into by the Financial Markets Authority after the asset management firm controlled by managing director George Kerr recognised $22 million as profit, the bulk of earnings for the year, which it never received.

The company reported profit of $26.6 million for the year ended June 30, 2014. Notes to its accounts, which were released more than a month late on Nov. 3 resulting in the shares being temporarily suspended, show that the profit was largely the result of a $22 million gain on the sale of Perpetual Trust which was apparently due once new owner Bath Street Capital listed the business on the NZX. That hasn't happened.

"FMA has been engaging with PGC concerning its continuous disclosure and querying the treatment of an asset in their accounts," the regulator said in a statement. "We were pleased to see PGC updating the market on Friday about the accounting treatment of this particular asset (previously valued at $22 million). We continue to engage with PGC about these matters"

A spokeswoman for NZX said the market operator was aware the FMA was looking at PGC's treatment of an item in its accounts and declined to make further comment.

In its 2014 accounts, PGC said the one-time gain "could be materially lower" if market conditions at the time of an initial public offering "dictate that the price earnings multiple is not reflective of market expectations at the time of completion" of the sale deed. Still, the directors "consider $22 million an appropriate carrying amount for this receivable" given Bath Street has "contractual obligations which meet the conditions for this receivable to be recognised within this financial period."

On Friday, PGC said it planned to pursue Bath Street and its owner Andrew Barnes for the outstanding amount, including potentially through a lawsuit.

In the meantime, the $22 million will be reclassified as an "available for sale financial asset" in the company's first-half accounts and would have the 'asset' revalued by an independent valuer.

"The impact of this on PGC's NPAT for the year to 30 June 2014 will be reported once the valuation is complete," it said.

Accounting firm PwC signed off on the 2014 accounts, with a rider that the basis of its qualified opinion including accepting the carrying value of Torchlight Fund, of $52.3 million, held by a PGC subsidiary, Torchlight Group, which itself was carried at just $43.4 million. PwC noted it was unable to obtain sufficient information about Torchlight as its audited accounts weren't available. No specific mention was made of the Perpetual gain.

PGC shares fell 4.8 percent to 40 cents on the NZX today, valuing the company at $83 million. The stock soared 17 percent to 42 cents after the announcement on Friday, when there were six trades amounting to about 27,000 shares.

Kerr fell short of his target when he attempted to take PGC private in 2012. At the time of his offer he had warned that the company wouldn't contemplate paying dividends as it sold assets and that retail investors could face a bumpy road as he took PGC in directions that wouldn't necessarily generate quick profits. He retains David Lewis, a one-time adviser to Prime Minister Helen Clark, to handle his public relations.

The business is characterised by complex agreements between related parties and associates, which attracted the attention of the FMA in 2012, the year KPMG resigned as auditor, citing "unresolved differences" over the treatment of some transactions, and concerns about "adequacy of governance and management of financial reporting."

Kerr became involved in Pyne Gould in 2009, taking a cornerstone stake after the company faced large writedowns on the value of its Marac finance unit's property loan book, which has since been divested.

In the past 12 months, PGC has twice been publicly censured by the NZ Markets Disciplinary Tribunal - once for the overdue 2014 annual report and once for failing to comply with rules to have two directors resident in New Zealand. The company completed its relocation to Guernsey from New Zealand in February last year.

In his comments issued with the 2014 annual results, Kerr said that after a five-year transformation PGC's main investments were "at their core, large and valuable real estate businesses" and that the improving position of the group mean it may be able to restore regular dividends "within the next year."