0618 Taiwan High Speed Railway Corporation

This week I learned what a noncurrent asset is in my accounting class. Noncurrent asset is an asset that is not sold or converted to cash within one year, such as land, equipment, or buildings. I know the accumulated depreciation is one part of the noncurrent asset, and there are two main ways to calculate the annual depreciation. One way is straight-line depreciation, and the other way is accelerated depreciation. My accounting professor told me that the ways of calculation of annual depreciation will affect the income statement.

After finishing class, I read the news which mentioned that the Taiwan High Speed Railway Corporation, which has a BOT contract with Taiwanese government, had a financial crisis. The news also pointed out the annual depreciation and the interest expense resulted in the financial crisis. I wanted to know why the reporter made this consequence, so I found the financial statement of this company and analyzed it. In 2008 fiscal year, this company’s income was 23 billion dollars (NTD), and its depreciation expense was 19 billion dollars, and its interest expense was 17.5 billion dollars. In this situation, the company had three ways to improve its financial position: increasing income, decreasing interest expense, or changing calculation method of depreciation. First, because of the economic crisis, it is impossible to boost income twice in this year. Second, the company tried to negotiate the interest rate with those banks which loaned to it, but the interest rate was as low as the banks can do. Finally, the company explained that the straight-line depreciation was not exact, because the buildings can have been used for 100 years, but in the BOT contract those buildings’ lives are 35 years. Therefore, the accumulated depreciation has to offset in 35 years, and it makes high annual depreciation expense.

Nowadays, the company has tried to find out the solution of this financial position or it probably will face the bankruptcy. According to the contract, once the company is bankrupt, our government will buy this company. At that time, it will cause a huge impact on the national treasury.