WIP writedowns

Now Mel’s statements on wip are interesting, ‘profits rolling in’ because of some WIP adjustment?

Certainly this paints a picture of SGH with such a dazzling future, but is that all real?

Take this observation: “WIP written off will deliver a supernormal gross profit margin   and  a material +ve net cash contribution.”


Gosh, will it really? Well I cannot expect someone as clever as Mel to be bothered explaining this very complicated stuff to a lowly punter like myself, so I had a little browse around.

All I can see is that there is a new Australian accounting standard on this WIP business. So when introduced, work-in-progress at the year end will only be recognised if it is highly probable that a significant reversal will not occur

For a no-foal, no-fee business that seems very sensible. Anyway SGH are going to be early adopters of the new standard and will backdate it to 1 July 2014

WIP is expected to be 15%-20% lower, so when the WIP in June 2015 is written down, it looks like 2014-15 profits take a once off hit there or maybe they will write it off against previous year’s profits.

Ouch! Another hit, but it doesn’t affect cash flows of course, as it is just an accounting entry

And the WIP in June 2016 will be valued on the same new basis, and so on and on ad infinitum, to be consistent

Well then if opening day WIP is written down, and the closing year end WIP has to be valued on the same reduced basis as well, then there is no effect on profits at all for any year going forward, it just washes out.

It is just a once off write down and that is the end of it. So no effect on profits going forward and no effect at all on cash flow.

Is that right or is that right? Of course it is.

Well you learn something every day, not sure if our Chief Financial Wizard Mel has missed this point, but if he has missed it, then that must be a first.