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    SEPANG, 22 JUNE 2015 – We refer to the recent press reports where there were adverse comments about AirAsia Berhad (“AAB”) emanating from a report (“GMT Report”) written by GMT Research Limited (“GMT”), a research firm incorporated in the United Kingdom.

    Our review of the GMT report can be analysed into 2 segments:

          i.        An analysis of the business of AAB Group (AAB, its subsidiaries and associates); and

         ii.        An opinion that AAB should consolidate its Associate companies, with an unsubstantiated statement that, to quote, “Of course AirAsia management will try to avoid consolidating associates if it leads to materially lower reported profits and without duress auditors are unlikely to push for it”. The GMT Report refers to “accounting gimmicks’ and corporate governance abuses.

    We, the Audit Committee, would not comment on the analysis of the business of AAB, suffice only to add that GMT would not have been able to carry out such analysis of the business if there were insufficient disclosures in AAB’s audited and quarterly financial statements.  Our role as an Audit Committee is to ensure integrity of published financial statements and therefore our concern is in respect of the comments in segment (ii) above. Management will and have addressed the matters in segment (i)

    Of particular concern to the Audit Committee therefore is the allegation of improper accounting for Associate companies, “accounting gimmicks” and corporate governance abuses, together with a “side shot” that AAB’s Auditors, PricewaterhouseCoopers (“PwC”), are malleable.

    The facts are as follows.

    AAB (The Board, Audit Committee and management) are of a clear opinion that it should consolidate its Associate companies. It has for at least over 12 months, had a whole series of meetings with PwC, legal advisers, management of the Associate companies and aviation regulators to effect consolidation of its Associate companies.  These meetings were not mere discussions but supported by board papers and opinions from our Auditors and legal advisers from the territories in which the Associate Companies operate.

    AAB has expressed a clear view to PwC that it is exposed to or has rights to variable returns from its involvement with its Associate companies.  In fact it is involved to the extent that AAB does affect the returns over its Associate companies. AAB believes this is a critical criteria and the “raison” for consolidation of Associate companies. It should therefore be allowed to consolidate its Associate companies as it does reflect the actual performance and financial position of AAB.

    Power in practice is however not legal control. Whilst in practice there is control in substance, due to aviation regulations in Indonesia, Philippine, Thailand and India, AAB cannot have legal control or legal power over its Associate companies.  Any change in our present relationship with the Associate companies, be it in equity shareholdings or Shareholders Agreement, that gives AAB legal control will result in loss of the Associates’ Airline Operating Licenses.

    PwC has however taken the strict interpretation of power in MFRS10(Consolidated Financial Statements Accounting Standard)and advised that AAB cannot consolidate its Associates Companies because it does not have legal power .Their view is power  in substance is insufficient to meet the criteria for consolidation,as such substantive power can be withdrawn at anytime by the Associate companies.Therefore contrary to the GMT report that AAB did not want to consolidate its Associate companies ,we  were compelled not to consolidate as a result of the opinion of our Auditors. Consolidation would have attracted an audit qualification.

    So whilst we are of the view that consolidation would present a true and fair view of AAB’s relationships with its Associate companies, we have been advised to do so would be a breach of MFRS 10 and in addition the ‘true and fair’ override would also  not be allowed.Due to  its inability to consolidate AAB presented full disclosure of the Associate companies financials and also its operating statistics,as given in the Quarter1 2015 announcement,for stakeholders to have information on the performance and financial position of the Associate companies.

    The Audit Committee, the Board and Management are therefore somewhat distressed and peeved to have been accused of corporate governance abuses and condoning accounting gimmicks. The Audit Committee wishes that statements are verified with those responsible before they are put out in the market place to ensure that they do not unfairly tarnish the image of AAB, the Board of Directors, Management and Auditors.  

    On Behalf of the Audit Committee

    VU Kumar


    22 June 2015

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