Thanks for your response. I was not going to reply, because I thought that we had sufficiently belaboured this matter. I only initially delved into it in an attempt to understand how PNC derives its accounting values, and why that has caused such a brouhaha. As I do not hold PNC, I decided that I did not need to know what it does. Anyhow, I went to bed very early last night, and I awoke in the wee hours of this morning, so I decided to belatedly reply to your post.
If CCP can get away with accounting prudence, it will incline in that direction, in so far as accounting standards allow. ASX companies often lean the other way, especially if they are in trouble – a matter that has caused me much grief in respect to BYL (now insolvent) and TGA (now in deep financial straits).
What you wrote about buying distressed debts at a deep discount, and potentially up-valuing them is true in principle according to AASB 9. However, because CCP analytics is accurate, what and when it collects on PDLs is known initially, and that includes knowing what percentage of the debtors will enter repayment agreements, so from a pragmatic perspective we can work on the basis that CCP values its PDLs at cost, less amortisation. Amortisation is skewed to match the originally estimated collection pattern of each PDL over six years. If CCP had a meaningful need to revalue the PDL Asset account, this would be done, and the contra entry would be to a profit/loss on revaluation account.
AASB 9 allows CCP to use the “amortised cost” basis for valuing PDLS, and determining annual profit – see
https://www.legislation.gov.au/Details/F2015L00145, and search for “amortised cost”. Also, Note 11 of FY18 Annual Report reads:
PDLs are recognised at fair value (generally the consideration paid) and subsequently measured at amortised cost using the effective interest rate method, in accordance with AASB 9 Financial Instruments. The interest rate method is applied at the level of individual tranches of PDLs by using an actuarially determined six-year cash collections forecast to determine an effective interest rate or implicit cash flow. The effective interest rate is the implicit interest rate based on forecast collections determined in the period of acquisition of an individual PDL and equates to the Internal Rate of Return (IRR) of the forecast cash flows without any consideration of collection costs.
This effective interest rate is used over the collection life cycle to apportion cash collections between the principal and interest components. Changes in expected cash collections generate an adjustment to interest income in the period of the amended forecast.
The Auditor's report comments on Note 11, and in effect states that it scrutinised the underlying facts to confirm that what Note 11 states is reasonable (that is, I assume, amongst other things, that the accounting complies with AASB 9).
The last sentence of the above Note 11 is interesting – it refers to the adjustment to “interest income” and not to the PDL Asset account, but as I wrote above, that does not mean that a material whole-of-PDL change would be similarly handled.
The ATO and the Auditor may allow the “profit emerging method” of accounting to apply, provided the underlying documentation supports it as a reasonable method of effecting AASB 9 by a PDL collection company. The only document that I have ever found that clearly articulates via words, formula and an example how accounting for PDLs within AASB 9 is handled is
https://www.classic.ird.govt.nz/tec...ual/det-s17-use-of-profit-emerging-basis.html. It allows AASB 9 to be applied via what it calls the “profit emerging method”. CCP's Note 11 reflects a similar message, except it uses six-year amortisation period, rather than five years, and CCP's explanation is not as clear.
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