Ann: FY2020 Unaudited results update, page-58

Adrianp2424

You are right, just because an asset is impaired, does not mean it is abandoned. A functional bulldozer that has been fully impaired would still be used, and CCP will attempt to collect on PDLs that have been impaired.

CCP is likely to collect less than initially expected, but more than what it thought it would collect when it applied the recent impairments. It is not only a question of what is collected, the “when” and at what cost of collection is also significant, and part of the impairment is to cover delay and extra effort. For tax-payment timing reasons, it makes no sense for CCP to have under impaired, and it makes sense to have generously impaired, so my belief is that it has over impaired. If CCP has over impaired, then there is hidden value, the PDL carrying value is understated.

On your second point, you are right too. CCP will on average pay less for PDLs in future, but whatever it pays, it will attempt to collect the face value. Experience informs CCP that it will collect less than face value. The impairment matter relates to the above two paragraph, as does the $11m provision for forward-flow agreements at the old price, which is why I wrote "on average" in the first sentence of this paragraph.

Madtrader

I think “irrelevance” is a matter of semantics. Cashflow is cashflow, it is not a factor of things like depreciation and impairment. However, the reverse may be true, but not always. If originally expected cash inflow is deemed to be unlikely, then it makes sense to impair to reduce tax, and to allow the balance sheet to have greater fidelity. However, because of tax advantages, firms routinely impair and depreciate in ways that diminish fidelity, and that is what I want to consider for CCP.

Accounting “fidelity” is worth much thought. How much fidelity was there in PNC's balance sheet, considering it had such a low effective PDL amortisation rate, and an incentive to put its best foot forward in respect to profitability? If firms avail themselves of “instant asset write-off” (see https://www.ato.gov.au/Business/Bus...m-business/Instant-asset-write-off-expansion/ ), then balance sheet fidelity goes out of the window to the extent of the over depreciation, and genuine profitability is not truly reflected because expenses are exaggerated.

Impairment, depreciation, amortisation, other expenses and revenue are often either overstated or understated. That is why I often use the word “time-shifting”, and it can be done for reasons both honourable and dishonourable. That is why empathy is important, because it facilitates the ability to understand managements' agendas. I'll mention some examples of time-shifting to show the guises it can take.

A man I knew was appointed to run the Australian arm of an international company, and because of my historical nexus with him, my employer received a large service contract. In the part year of his first year, he lashed out on multiple expenses like stationery, and he asked me to arrange our company to invoice his company to the maximum possible – work in progress, and whatever. He probably retarded booking some revenue too. Via time-shifting he set the scene to exaggerate his first full year as CEO, and thus enhance his reputation, and probably his performance bonus.

Years ago both BYL (Brierty) and NWH (NRW Holdings) were struggling. Both had fleets of earthmoving equipment. BYL in an attempt to hide the problems, changed its depreciation from straight-line to the usage model, so the idle fleet attracted little depreciation. NWH was going to have a bad year, so its management seized on an allowable practice of impairing idle equipment, thus turning a bad year into a horrible year, but in subsequent years, NWH did well, because the the fully impaired equipment used did not attract depreciation. Further, NWH did not have to pay tax for years, thanks to the huge tax loss it built up in annus horibilis. The point is that the two companies were in the same sector facing the same idle-equipment problem, but BYL time-shifted depreciation to later, and NWH time-shifted future depreciation expenses into annus horibilis. Their respective management had different agendas. BYL collapsed a year or two later.

Investors have to look through these games that management plays. Did CCP for the benefit of shareholders impair PDL carrying value generously? I think it did, because that is what Management should have done to delay paying tax, and hence improve cash flow in FY21. If more money is collected in the life of those impaired PDLs than the impairment envisaged, then CCP over impaired, although timing and collection costs must be considered too. CCP does not have to overtly reverse those impairments, it can effect the same result by moving collections into revenue without any effective amortisation.

PS

Because I specifically addressed things raised by two posters, that required drifting off into the elastic art of accounting, thus diluting my core interest, the impairment. One reason why I think CCP has over impaired is the following words in the 13 July Announcement.

This initially produced a sharp decline in collections and rising loan book arrears. More recently, an increased willingness to make one-off repayments has brought PDL collections for May and June back to pre-COVID levels and, with the exception of auto and SME pilots, has restored loan book arrears.

I changed my sentiment to "hold", because I have relatively recently bought as much of CCP as I care to hold