Ann: Chairman's Letter to Shareholders, page-11

In terms of reviewing the valuation on the books for the software it isn't the standalone value of it that is important in terms of the accounting requirements.

Firstly, assuming that they met the 5 criteria for recognising the intangible in the first place (including they could demonstrate its economic viability), then it would have been booked at cost. This would include the total value incurred in directly building the software (including an allocation of internal staff time spent that could be directly attributed).

What subsequently appears to have happened is that part of the software modules built were never used. Given they could separately be identified at the individual component asset level as not contributing value to the business these would need to be written off. One has to question why they built this part of the system in the first place - i.e. the rationale for that business decision.

In terms of the broader carrying value of the software they would then need to have determined its recoverable amount. For something like software that contributes to the overall business' collection activities it is likely that it was deemed as supporting the whole business or a large chunk of the cash generating units. Consequently, they would have performed two different valuations and determined the highest (fair value less costs to sell and value in use - two different concepts). Those valuations would be expected to have incorporated the cash flows from the majority of business activities to determine the valuation. If that value was higher than the carrying value of all of the assets supporting that cash generating part of the business then the software would have been deemed to have been supportable. Such valuations are performed on a pre-tax basis and are agnostic of capital structure (discount rate is included in the valuation specific to the asset set so capital structure is irrelevant). Obviously they decided that other than the amounts already written off the carrying value was supportable.

What is of interest is that at the current market cap the market is currently valuing the business at a discount to book. This is often a trigger to consider whether there are impairments in the business and consequently the market appears to be voting that the business is worth less than the book value. The largest non-financial asset on the balance sheet is the intangibles. Consequently, the market cap is suggesting that either the intangibles are over valued or the debt ledgers are carried at too high a value, or the market has got it wrong.... My personal view, opinion only, is that the share price is at the toppy end of what I think is fair value without clear evidence of operational improvement (when factoring in what I think is an appropriate risk factor given operational performance, shrinking core PDL book and required change strategies that carry a reasonable degree of risk). With a contraction in purchasing activity in the last two periods combined with my thoughts on business value, if we are going to see a write-down in PDL values or an acceleration of PDL amortisation (or further write-off in intangibles), then I would expect to see this in the next 12-18 months. A contraction in cash inflow from a shrinking PDL book will highlight any issues surrounding support of carrying values.

DYOR, just a bunch of mad thoughts