Write-off of liabilities added 2.8B to Jollibee’s net income in 2021

For the year 2021, Jollibee reported a net income of 5.5 billion. But around half of that came from the write-off of liabilities amounting to 2.8 billion.

The income from the write-off of liabilities is buried deep in the other income section of Jollibee’s financial statement. Jollibee had the income from the write-off of liabilities disclosed in Note 23 of its financial statements.

In Note 23, Jollibee justified the recognition as income of the write-off of liabilities through the following explanation:

“In the normal course of business, the JFC Group accrues liabilities based on management estimate of costs incurred, particularly in cases when the JFC Group has not yet received final billings from suppliers and vendors. There are also ongoing negotiations and reconciliations with suppliers and vendors on certain liabilities recorded. These balances are continuously reviewed by management and are adjusted based on these reviews, resulting to write-off of certain liabilities as other income.”

This is quite bothersome because the said accounting maneuver of recognizing income the liability write-off tends to overstate the expenses or assets associated to the liability. In addition, it tends to overstate the net income.

The said type of accounting maneuver could easily be used to manipulate net income.

Isn’t Jollibee supposed to offset the liabilities written-off with the liabilities’ associated expenses and assets? For example, if Jollibee was constructing a warehouse, it initially thought to be costing 1 billion. In the end if it only cost 800 million, is Jollibee right to reduce its liability to just 800 million from 1 billion and recognize the savings of 200 million as income? Or is Jollibee supposed to reduce the value of the warehouse and the liability to their correct values of 800 million and recognize no income?

Please do consult your accounting friends on this matter. This issue may have serious governance repercussions for Jollibee.

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