I have not looked at what results would occasion bonuses, so I'll not comment on that. Rather, although covering things that I have mentioned in past posts, I'll repeat what I have written in the past about CCP's accounting for PDLs. This may be helpful to some readers who did not read my posts of old, or those who have forgotten the gist of those posts.
Fair Value accounting Model (FV)
The current FV accounting model that PDL firms nust use is based on the model used for bonds, and it requires that financial assets be constantly revalued. Bonds are often traded in an open market, or their value can be reasonably deduced by the prevailing rate of interest. PDLs are not like bonds that can be realistically revalued, so management of a PDL firm has leeway to be inventive when revaluing PDLs. CCP's very formulaic way of valuing the PDL assets over their lifespans based on collections mitigates the risk of managerial inventiveness (covered later).
If PDLs are up-valued at managements' discretion, then managements of PDL firms could do so when repayment plans are agreed, and profit recognition would occur ahead of collections. This can incline firms to focus on acquiring PDLs and signing repayment plans, and give less attention to collections. In this setting, statutory profit drops if the tempo of PDL buying eases, so these firms may buy PDLs in a less disciplined way, and to do so, borrow funds or use inflated past performance to justify capital raising.
Conservative accounting
CCP's Management tweaks NPAT as far as conservative accounting can be applied that auditors and the ATO accept. Conservative accounting may be used to delay profit-recognition to be in step with collections, and hence it delays when tax becomes due. For any given stream of collections, the cash flow is the same for both accounting styles (aggressive or conservative).
For CCP, the maximum PDL life is six years from the date of PDL acquisition, which is the statutory collections barrier. In effect, CCP attempts to amortise each PDL in a time-series pattern that matches what CCP originally estimated should be collected. FV has done away with the concept of PDL amortisation, but CCP applies FV in a way that mirrors the erstwhile amortisation-based accounting standard.
The old PDL-amortisation model
Because CCP's Management goes through the motions of following FV to produce much the same reported statutory profit that would have been reported when the erstwhile PDL-amortisation model was used, it is worth knowing how CCP applied the amortisation accounting model.
When a PDL was bought and its repayment pattern estimated, then the price offered to the seller was the discounted value of the collections, using a discount rate that CCP regarded as an apt return. Amortisation was applied via a factor applied to collections based on the initial estimates, which included the timing of collections. Naturally, the estimated collections pattern did not exactly reflect reality, but if the original pricing was generally realistic, then offsetting errors would tend to net to a very low value, which was handled by relatively small accounting adjustments.
If a PDL were opportunistically offered to CCP at a low price, all that CCP would have needed to do is increase the effective rate of interest that would bring the estimated collections to a present value equal to the price asked for.
It the ruling provides the following formula, which I tweaked to use the acronym PDL, to derive the the income to be taxed (AI) in any year, and in doing so it shows the PDL amortisation that is linked to actual collections, which is (PC x OF)/TECC for any income year.
AI = AC - (PC x OF)/TECC
AI = assessable income of an PDL for an income year
AC = actual cash collected from the PDL during the income year
PC = purchase costs of PDL
OF = original forecast cash to be collected during the income year
TECC = total expected cash to be collected over five years, forecast at date of purchase
Once the cost of the PDL is fully amortised, cash collected after the five year period will be treated as derived in the income year in which it is received.
The last sentence means that collections on fully amortised PDLs are taxed at the value collected, as one would expect. CCP does not use five years, but it never uses over 6 years.
Accounting for Loans
For loans, CCP amortises a fair chunk upfront. It started off at 20%, but it is now a bit lower. This means that the first thing that happened when a loan was given, is that the cash decreased, and the loan book increased. However, a provision for doubtful debts of not less than 18% was created (credit Balance Sheet), and the contra was an expense. Consequently, in a year of rapid growth of the loan book, statutory NPAT tended to suffer.
The ATO does not allow provisions for bad debts as an expense. It only allows a deduction if the debt is written off as lost. When that actual loss is expensed as bad debts, the accounting entry is credit provision for bad debts (an expense), and debit the provision for bad debts, which reduces the provision in the balance sheet.
If CCP invests heavily in the loan book in H2FY21, it will look bad – lower cash, and lower NPAT. The shallow-witted Mr Market will panic and sell the SP down, and savvy traders who know his mood swings will get in before then. Then the momentum traders and bots jump in and exaggerate the trend. I have no idea where the SP may go when FY21 EOY Financial Reports are published.
CCP Price at posting:
$28.42 Sentiment: Hold Disclosure: Not Held
(20min delay)