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Based on your comment I think you might be taking comfort from...

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126 Posts.

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01/06/17

12:48

Post #: 25039350
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Originally posted by Pioupiou ↑

In my post dated 30/05/2017, the words, “. . . engineer the NPAT to suit via provisioning.” should have been written in a vaguer way to allow for other ways to increase expenses – e.g, ramp up the expense of enhancing the outlet network to increase the number of hub-and-spoke configurations. Also, the ATO does not allow bad debt provisioning to be used as a tax expense, the expense must reflect actual debts written off, so increasing that provisioning is not an avenue TGA can use to manipulate reported NPAT, but not expensing true bad debts can. Reported NPAT and taxable income for TGA must be similar, because the tax usually pans out to be very close to 30%, and if not, the Annual Report gives the reason – e.g., Government tax incentives.

Klogg wrote, “EPS and PER are very easily manipulated by impairment provisions. The loan books grew hugely, part of this in an area that is only a few years old with horrible returns on capital, yet provisions grew very marginally. I find this extremely concerning, so much so that I can't confidently hold TGA any longer.” Although I recognise that there may be a bad-debt hit from Consumer Finance as the book run-off proceeds, what I write here is limited to Equipment Finance segment. I do not know enough about accounting practice to comment with authority, but what I wrote above suggests provisioning for bad debts may not be something that can easily be fiddled, other than by not writing off actual defaults. Because, TGA can repossess the goods, the delinquency rate may be as low as TGA has stated. If one Googled the topic, or looked at published accounts of similar firms, one may find what an apt bad debt ratio should be. The ratio would change dramatically in an economic downturn severe enough to increase SME bankruptcies, but TGA would have to wait for that to happen before the ATO would recognise the expense. Somebody more knowledgeable than I am could throw better light on this topic.

On timbowls's words, “Especially if the new CEO launches another clean out.”, I would like to inform HC readers that soon after joining TGA, Peter Forsberg was horrified (his words) to learn that no provisioning had been made for the ASIC matter, so it was he who in H1FY17 suggested keeping back $3 ($2.1m after tax) provisioning that was not required, and allocated it to the ASIC matter, and it was his decision to later increase this by $4m. James Marshall and the Chair backed him, because he probably could not act unilaterally. There may not be much left to clean up. However, by definition, black swan events are unpredictable, but they are not rare, so negatives can pop out of left field. To a degree that is why I tossed $4m unknown expense into my recent guesstimate.

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Based on your comment I think you might be taking comfort from the reconciliation of prima facie tax. But what you really need to understand to see how slippery reported profit is dependent upon provisioning is ‘origination and reversal of temporary differences.’

Because the tax accounting for leases is different to Accounting standards and provisioning is a contra account to financial lease receivables – the whole thing is messy – but you can get an idea of the scope to play from notes 9 & 10.

With such a large investment in TGA its probably worth gaining a better understanding even though its complex. At a minimum try to recreate the provision for impairment and impairment losses journals to get a feel for the makeup of what is being taken through to the P&L each period. Klogg is on the money – this year the makeup is substantially different to previous years. Knowing the makeup won’t answer the question: Is the reduced provisioning warranted or is it more about enhancing this years reported profit figure? But it’s a good place to start.

TGA Price at posting: $1.23 Sentiment: None Disclosure: Not Held
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