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Less than zero: How companies can end up with negative revenues

Even savvy investors are often puzzled at how some companies arrive at the bottom lines on their income statements. Now, as a result of ever more elaborate new accounting standards and complex corporate structures, the top line can be just as bewildering.

A case in point: Halifax-based Bell Aliant Inc. , which operates networks in Atlantic Canada, Quebec and Ontario. It lost $404.5-million in 2010, putting it at the bottom of The Globe and Mail's annual Top 1000 ranking of Canadian companies by profit. It was also one of eight companies to post what looks like financial antimatter: negative revenue, totalling minus $397.6-million.

How can a utility with more than three million customers paying for phone, Internet and TV service report proceeds of less than zero? "Accounting rules are so complex and every company has its idiosyncrasies," says Zeda Redden, Bell Aliant's vice-president, investor relations. "Even I find it hard to explain, and I'm an accountant."

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Yet explain it she does, cheerfully and thoroughly. Like many other companies, Bell Aliant had two major financial reporting hurdles to clear this past Jan. 1: the switch back from an income-trust structure to a corporation, and Canada's changeover to new accounting rules under International Financial Reporting Standards (IFRS).

On an operating basis, Bell Aliant had a solid 2010. Operating revenue totalled $2.8-billion, and earnings before interest, tax, depreciation and amortization (EBITDA) were $1.4-billion.

BCE Inc. and Aliant Inc. created Bell Aliant in March, 2006. Technically, it was a handful of operating entities, with Bell Aliant Regional Communications Income Fund at the top of its corporate organization chart.

The income fund's revenue was the total profit or loss from the operating entities. In 2010, that was a loss of $397.6-million. How did a telecommunications system with such hefty EBITDA post a loss?

Almost all of it was owing to a $1.5-billion writedown of "finite-life intangible assets," a non-cash charge.

When Bell Aliant drew up its first balance sheet in 2006, it recorded a value for customer relationships. Those relationships are an intangible asset, a valuable one for a utility, in particular, because customers represent a reliable stream of continued revenue.

In preparing a balance sheet for the conversion on Jan. 1, Bell Aliant conformed to IFRS standards that require companies to record assets at fair market value, not historical book value. Like a lot of corporate assets, customer relationships are worth less these days than they were in 2006.

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Last year, Bell Aliant knew it had a lot of explaining to do to its investors. The company announced a detailed plan for the conversion in May, 2010. The explanations apparently worked. The impact on Bell Aliant's share price has been minimal – it's held between $26 and $28 for two years.

Resource exploration companies also face unique accounting challenges. Calgary-based Petroamerica Oil Corp. (No. 915 on the Top 1000), launched in 2009, focuses on drilling in Colombia. Like many juniors, Petroamerica has raised a lot of money – $124.3-million – from share issues. It's also made investments, incurred drilling expenses and entered into a large joint venture at a site called Balay.

But the company didn't actually sell a lot of oil in 2010. "Obviously, we had no revenue coming in," says chief financial officer Colin Wegnum.

Petroamerica started extracting oil at Balay last year, but it takes time to meet accounting standards – both old Canadian GAAP rules and IFRS – before it can record proceeds as revenue. "You have to have contracts, a set price, a cost of the sale, a commitment that you're actually going to receive the revenue," Mr. Wegnum says.

The top lines of Petroamerica's 2010 income statement were mostly expenses and some gains and losses on investments, including a $17.8-million loss on the sale of some assets. To derive a number to compare with other Top 1000 companies, analysts in The Globe and Mail's financial data division distilled those items into a revenue figure of minus $14.7-million.

Mr. Wegnum wasn't impressed. "I fail to see how combining our loss on the disposal of assets with our interest income, a gain on marketable securities and the equity loss comes up with anything that resembles real-world revenue, especially for an oil and gas company," he says.

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However rigorous the accounting rules, sometimes numbers don't tell the whole story.

View and download tables featuring Canada's top 1,000 public companies ranked by profit, the top 350 private companies ranked by revenue, and many more at

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