For starters, I am not an accountant, so please correct me if anything I write is not correct (I mean it).
I am not sure if I agree with your "Its just an accounting thing, not necessarily errors." statement.
Given that the intangible asset write-down is said to result in a $3.6m reduction in D&A, I assume the intangible write-down relates exclusively to "software" and not at all to "goodwill" [which is not amortised].
Now, some - conservative - companies immediately expense all software development costs. Others take a more aggressive financial accounting approach, whereby they assign software development costs [to win a new contract] to be an "intangible" that is then being amortised over the term of the contract [invariably these companies will say that they are compelled to adopt this practice to comply with the accounting standards, though sometimes they suddenly are able to change].
Now, let's say two companies (A and B) spend $1m in software development to win a $10m revenue contract that runs over 5 years. The company applying conservative accounting (company "A") will take a $1m expense up-front, while the company that amortises this software development cost over 5 years (company B) only amortises $200k in year one, resulting in an $800k higher PBT compared to the conservative company.
The quid pro quo is that company B will have to book a $200k amortisation charge for the subsequent 4 years as well, while company A will now not have to expense or amortise anything. So for each of the next 4 years, company A will report a $200k higher PBT compared to company B.
"No big deal" I hear you say, as over the term of the contract the two companies will generate the same PBT. However, what if a contract gets terminated early or does not generate the initially expected level of revenue?
Makes no difference to company A, while company B now has to write down the software intangible on its balance sheet.
To me that reads like pretty bad news. UNLESS, company B takes the writing down of the intangible to actually declare that it is changing its accounting treatment of software development costs and is going to expense all of these development costs going forward [no such statement was made in the ASX release].
What I find a bit concerning is that EPD appears to be writing off the entire software development intangible ($22m to $25m), though the write-down might also include some goodwill. However, no comment has been made about the accounting treatment of software development costs going forward - except that the amortisation charge will come down by $3.6m.
"Galling" is a bit of a strong word, but I actually find it displeasing, that the company tries to tart-up the intangible write-down as good news, when they talk about the $3.6m reduction in the amortisation charge going forward.
Again, I am happy for anyone with a different view to correct me, but to me this looks like a "clearing the decks" announcement, taking the loss of the Main Roads WA contract as an opportunity to take a raft of other measures (i.e. intangible impairment and restructuring costs) to start with a clean sheet for 2020 - though usually this is done when a new CEO starts his/her tenure, rather than the existing management team inflicting the additional pain.
Anyway, it looks like institutions have recently increased their holdings and the share price has been pushed up following this announcement. I have taken the opportunity to trim my holding and look to add to my position should the share price weaken between now and when the company can actively buy back shares post the results announcement.
All imho
EPD Price at posting:
31.5¢ Sentiment: Hold Disclosure: Held
