Johannesburg - State-owned arms manufacturer Denel continued to make losses in financial year 2006 with the announcement on Thursday that it had reduced its loss to R1.37bn from R1.56bn the previous year. The loss comes on the back of reduced revenues and an increase in provision for contract losses. Revenue dropped 24.3% (R880m) to R2.73bn in 2006.

Denel's group chief executive Shaun Liebenberg attributed the slack performance to a failure to achieve its sales target (without saying what the target was), high interest costs and low production at certain plants.

The losses continued despite a R2bn recapitalisation by the government in early 2006. But there is something more disturbing about the results.

The bottom line would have been R840m worse had the company not adopted the International Financial Reporting Standards (IFRS).

The reduced loss then lends false hope to the state of affairs at the parastatal.

Can't be accused of misleading the public

By its own admission, Denel says in its statement the performance is due to "the impact of IFRS implementation, more specifically the revaluation and review of the useful lives of property, plant and equipment."

Denel group accountant Janita Kempen says the results would have been different as the revaluation added R840m to the balance sheet.

The IFRS revaluation method of property, plant and equipment is different to the Generally Accepted Accounting Practice (GAAP) used previously in South Africa.

This change in reporting systems, together with the R2bn recapitalisation has helped lift the company out of insolvency. Denel was technically insolvent before Liebenberg joined in June 2005 and now it says it has restored solvency to R600m.

Although the improved loss could be misleading, it should be stated that Denel couldn't be accused of misleading the public with the migration to IFRS, as the country as a whole is migrating GAAP.

Will be selling most of the land it owns

Denel also raised R450m from the disposal of non-core assets like its 26% stake in Arivia and Irenco Electronics.

Other assets like Bonaero Park were sold outside the 31 March year-end and will be accounted for in financial year 2007.

"We have sold most of them (non-core assets) and have offers and some deposits in the bank on the other assets (not yet sold)," says Denel spokesperson Sam Basch.

Basch says after getting rid of all the non-core assets the group will be selling most of the land it owns.

He said some of the land is next to the Johannesburg International Airport and in Potchefstroom but would neither give its value nor size.

With acknowledgement to Sikonathi Mantshantsha and Fin24.