In my previous post I was tempted to expand on the fact that...

In my previous post I was tempted to expand on the fact that negotiating payment arrangements uplifts the propensity to collect on the purchased debt, and hence the value of the debt as an asset could be said to have improved. However, I did not want that post to be too wordy, so I made no further comment.

Accountancy is biased towards prudence. Hence, assets are usually depreciated at a faster rate than the real life of an asset requires, and the likes of CCP may provision unsecured loans upfront a bit more generously that the facts support, and then reverse what is not taken up by actual defaults. These shenanigans do not create losses in the long term – in the interest of prudence, they shift the expenses (debits) forward, and hence delay a similar value of profit recognition (credits).

Accounting standards like AASB 9 were intended to have that same prudential bias. For example, if a firm expects trade debtors to default, then this should be recognised early by taking up the expense, and decreasing the net asset to 'fair value”. However, PDLs behave in a topsy-turvy way – the purchased debtors tend to repay more than what the PDL buyer paid for the debts, so a fair-value approach to recording them shifts profit recognition earlier, and uplifts the recorded asset value of PDLs. This is why AASB 9 may allow a firm to revalue purchased debtors that have been processed to the point where there are formalised into agreed repayment arrangements, and where experience supports an improved tendency to collect what has been agreed. As mentioned in the first paragraph, these shenanigans do not make a long-term difference – they simply effect time-shifting. What was intended via AASB 9 to encourage prudent accounting may in the PDL sector do the opposite.

AASB 9 allows a company to elect to value PDLs at amortised value, and this is what CCP does, so its accounting remains biased in favour of prudence – profit recognition occurs as the money is collected. I am not an accountant, so read this post, and others, with caution.