On accounting standards versus value creation

With the transition of Bittnet Group to the main market of the Bucharest Stock Exchange in 2020, we also took the step towards reporting under IFRS accounting standards. Thus, in view of various other IFRS standards that have come into force over time, the investments made by us through M&A transactions and a few other elements specific to our business have, in my opinion, made the consolidated financial statements of the Group deviate quite a bit from the essential objective of accounting – namely to give a true and fair view of the company’s situation, both in terms of revenues and expenses, but also in terms of financial position.

The Group’s consolidated financial statements will continue to bear the “stamp” given by the unqualified audit – we have always chosen to publish unqualified financial statements, rather than change the auditor or implement various other methods that would put us in a favourable light. However, it is important to note that the application of various IFRS standards leads to accounting statements that are not in any way similar to the understanding of any investor who analyses potential companies in which they want to invest. Not even with the accounting statements of the same company, if it were listed on AeRO instead of the main market!

To give a clearer picture of the differences I mentioned above, I give you some examples below:

  • Recording the monthly rent of ONE premises as depreciation of an asset: according to IFRS16, ONE building is shown in our accounts as an asset of Bittnet, as opposed to, for example, the employer brand with the ability to attract educated and high performing people. Thus, to consider our premises in One Cotroceni Park as an asset is obviously irrelevant to us as we cannot sell this building (which IFRS standards consider essential to decide whether something is an asset in any other case than this one). In addition, clearly this building is no more valuable to shareholders than the ability to attract employees. Because this rule applies to all companies reporting under IFRS, some issuers, including those listed on the BVB and included in the BET index, particularly those with a significant proportion of leased assets, report results both with IFRS16 and without IFRS16, the latter of which is used by management as a benchmark.
  • Recording as an expense (lost revenue) the notional premium for the issuance of CALL options on own shares, offered to key persons, regardless of whether the options expire or are exercised; as if the Company is a derivatives trader who has not received the amount from clients, regardless of whether the settlement of the options is made by capital increase! This is the only case where the discount offered in a capital increase is accounted for as an ‘opportunity cost’, following the principle: “maybe the company could get more money in the increase if it sold the shares more expensively”. This theoretical / hypothetical difference should be counted as a real LOSS”.
  • Revaluation by P&L of minority shares held in other companies, regardless of the intention to sell them or not, while the actual transactions made with the shares of companies where we are not minority are accounted for by equity. In other words, buying shares 5 years ago for RON 700 and selling them this year for RON 7000 in cash is not profit, while buying shares 2 years ago for RON 120 lei, which we still hold today, which are listed and worth RON 1200, is accounted for as a loss because at the beginning of the year the market value was RON 1600. In total, a natural person investor would have an income statement with RON 630 profit, and IFRS accounting shows the above situation for Bittnet as a loss of RON 300.
  • Testing the goodwill from transactions according to the allocation of invoices between companies: if an investor buys two companies that together achieve revenues of RON 10 million for RON 40 and reorganizes the activity, integrates the teams, and after 3 years the two companies make revenues of RON 20 million, but focusing on only one of the companies, the accounting of this situation is not that “we have increased our business twice and the prospects are very good” but “we have lost part of the initial investment”.
  • If a group of companies with revenues of RON 1 million acquires a company with revenues of RON 1 million in December of a year, that “extra” revenue amounting to RON 1 million cannot be added to the consolidated revenues. If, however, in the following year, the total revenues generated by the group and the new entity amount to RON 1.6 million (as opposed to RON 2 million which could not be consolidated), according to IFRS consolidation rules, the year-on-year evolution will be a 60% increase, even though there is actually a 40% loss of revenues for these entities.

Taking into account the above examples, in the next chapter we provide the accounting results of the group companies according to the Romanian Accounting Standard (RAS), based on the closing balances of the year, as submitted to NAFA on 25 January 2023. Through this entire report and the presentation of these accounting results (which are to be audited in view of the submission of the final annual statements to the Ministry of Finance) we intend to provide to investors a clearer picture of the size of our organization and our activity, as well as the profitability and value generated for shareholders.

Attention! The value referred to in the previous paragraph IS NOT the stock market price of the shares! Price is what you pay, value is what you get. Investors should always seek to buy present or future value of X (however calculated/estimated) at a price lower than X.

In terms of the investment thesis for our group, the principles remain the same: Bittnet Group is aimed at medium and long term investors who want exposure in the Romanian IT&C sector, which is characterized by a very accelerated growth, together with a management team that has achieved in over 15 years of activity results above the industry average, both at operational and equity management level. At the same time, investing in an entrepreneurial company where the founders are and will continue to be involved in its operational activity is an asset, because Mihai and I will always make decisions that will bring long-term value for all stakeholders, not only for the next quarter or the next report.

In the following pages, we provide a few areas where this approach can be seen, and where IFRS financial results generate a very different picture from the idea of “value creation”: