JoeGambler Your post confirms what I understand, CCP accounts...

JoeGambler

Your post confirms what I understand, CCP accounts for PDLs in the traditional way they have accounted for them before the new accounting standard was mandated. That is, CCP amortises the PDLs in a formulaic way, with small adjustments if the formula is not 100% of what reality requires.

There is no concept of PDL amortisation in the new standard, one is expected to actually put a "fair value" on the asset at the end of the accounting period, and derive a profit in the same way as one does for bonds. I used the word "fudged" in an earlier post to convey that CCP has retained its accounting style, and got away with saying by aserting that it was tantamount to the "fair-value" requirement, and the ATO and auditors concur.

CCP was free to go down the same path that PNC tried. PNC's auditors objected, because they thought managerial discretion was abused to exaggerate profit, or something along those lines. That is that one buys PDLs at what one calls a bargain price, up-values them pursuant to what management thinks they are worth, and voila, one makes a profit by simply buying PDLs, brags about it, raises more cash, and buys more, and makes more profit (also without regard to collections). This is somewhat like a Ponzi scheme, and enevitably leads to tears, because it focuses on buying PDLs via debt more than collecting on them.

I want to go out to so something now that it is not raining, but tonight I might elaborate on the importance of the ratio of effective PDL amortisation to collections. Simply put, if it is consistently low, then the PDL assets are over valued, and profit has been overvalued. If you go back a decade, you will see that CCP has used 47% in most of those years, and one can assume it was conservative, so CCP would have to apply an adjustment in some years (probably when the collections were biased to old PDls that were fully amortised). This reduced the effective amortisation a percentage or so, suggesting that about 46% may methematically reconciles to CCP's target rate of return, the so-called effective rate of interest.

Then Covid raised its feasome head, CCP panicked, and reduced its PDL value via impairment. When collections held up better than expected, and the likes of Encore and Intrum reversed their equivalent of impairment (provisioning), CCP chose to let the matter fix itself when the collections came in, and that probably explains the recent 45% that is abnormally low for CCP.

Its time to lay some concrete while it's not raining.