nbs accounting - don't ignore the intangibles, page-4

Hi March09,

I don't find the reclassification from Goodwill to Nexcode Proprietary Technology Rights to be particularly dodgy. Australian Accounting Standard 18 Goodwill states in paragraph 7.1.1:

Where it becomes known, subsequent to acquisition, that assets or liabilities existed at the date of acquisition but were not accounted for, this would necessitate an adjustment in respect of those assets and liabilities. This may also necessitate an adjustment to the amount of goodwill or discount on acquisition.

NBS would probably have left the Nexcode rights in the goodwill bucket in the 2008 accounts as it did not have a third party valuation for those rights. If you read Note 16 of the Annual Report to Shareholders on page 82, it states:

At 30 June 2008, the accounting for the business combination of the subsidiary company was provisionally determined. This has now been finalised based on the valuation dated 19 December 2008 on the NexCode Proprietary Technology rights prepared by Covenant Equity Consulting Sdn Bhd, a professional and qualified valuer, resulting in identification of separately identifiable intangibles
and therefore reclassification of amounts initially attributed to goodwill.

So nothing wrong there that I can see with the reclassification.

My initial thoughts were that the motivation for the reclassification would be to allow a more flexible basis for calculating the amortisation charge to be made in the income statement. Goodwill must be amortised over a maximum of twenty years on a straight-line basis (or roughly 5% a year on cost). The amortisation charged against the Nexcode Proprietary Technology Rights was 4.79% ($3m divided by $62.681m) which is not very different from the minimum 5% that would need to have been charged if the asset were to be treated as goodwill. In fact the Nexcode Proprietary Technology Rights are being amortised over five years so the rate at which this asset will be amortised is fairly quick (20% a year). In this case amortisation only started in April 2009, when printing of Nexcodes began, so only 3 months worth of amortisation charges was reflected in the accounts.

As a short note, goodwill is not being amortised for Sapio, I wonder why. AAS 18 would require that the goodwill be amortised. The amount remaining in goodwill however is not material (312k).

On a separate note, note 16 also states on page 85:

In accordance with the Group’s accounting policy, Management has considered whether there are any indicators of impairment in respect of the other intangible assets held by the Group and concluded that there are none. In this regard, and despite there being no indicators of impairment. Management engaged an independent professional and qualified valuer, Covenant Equity Consulting Sdn Bhd, to assess whether these was any impairment in respect of the NexCode Proprietary Technology rights as at 30 June 2009. They concluded that the recoverable amount of this asset exceeds the carrying amount and that there is therefore no impairment in respect of this asset. Covenant Equity Consulting Sdn Bdn used forecasts prepared by management and a PE valuation method to value Nexbis Sdn Bhd and the intangible assets it holds.

If all Covenant Equity Consulting looked at was management's forecasts to value the intangible assets, without validating or challenging the forecasts, I am sorry to say, very little assurance can be placed on their valuation.