Hi Byron08,I'm more than happy to have a debate about accounting...

Hi Byron08,

I'm more than happy to have a debate about accounting standards. I've done enough transactions and impairment tests over the years to understand the nuances for recording acquisition transactions and what AASB 136 requires for impairment testing.

If you want to debate some of the Dot.Com or Enron accounting policies I would also be happy to do so. Its been a little while since I've had a discussion about Enron's Raptor structures.

(By the way, for anyone interested, Raptor structures would never have "worked" in Australia and were a result of the strict USA "rules" based accounting standards [that only required a 3% investment of at risk money by "external" parties] vs Australian and international "principles" based accounting standards).

I've never really seen anything quite as bad as the Raptor structure in Australia, but I've seen a few structures (mainly around debt and equity classifications) that definitely play to the "rules" for classification. I've also seen a few instruments that give unusual and VERY complex treatments (eg Convertible Notes that are part equity, part debt, with an embedded derivative included for good measure! and where a loss recorded in the underlying business results in that same company recording a profit under the instrument, and where a profit recorded in the underlying business results in that same company recording a loss under the instrument - go figure that one out! Did my head in at the time.).

Anyway, back to HTC...

You need to read the business combination note (note 9) to the accounts. The actual acquisition cost per accounting standards for Anittel was $9.3m as the share price was 3.8 cents at the date of control, not 2c as was used for the deemed price on the issue of stock. Also the 100m shares and 50m options transferred to PK need to be taken into account (this represents the other $5.2m of other equity.

Anittel had net liabilities at the date of change of control of $11.6m, resulting in $20.9m of goodwill (being the excess of the acquisition price over net assets). Whilst it looks strange, this is not an uncommon situation and I have seen it numerous times before.

It seems clear from announcements that in the month of June, the business had positive EBITDA of $500k. I'm sure the directors and auditor have gone over the financial forecasts in a lot of detail to assess the carrying value of goodwill.

I'm pretty sure this positive cashflow will result in the ability to repay the PK loan. (or alternatively the business will be able to obtain other finance to repay the PK loan, which is effectively a working capital loan).

Re your comment that PK "demanded" preferential treatment as a creditor, I think you will find it is extremely common where there is proposed to be some form of vendor finance on the sale of a business to obtain some form of security. In fact, it is more commercial to provide the security (and without providing the security there could be an "unusual" accounting treatment due to having to use an unsecured interest rate for discounting purposes to determine the carrying value of the liability resulting in a "profit" on the creation of the liability and an increased interest charge over the life of the convertible note [if you want to get technical!])

I could discuss the difference between a proforma set of accounts and actual accounts months later, but I don't think it is really worth it as it doesn't add any value to the debate.

I'm looking forward to see your comments on your claim that TLS shareholders lost over $600m from their investment in Kaz. I would be surprised to find that there was a $700m loss elsewhere that I forgot to include in my figures, but I'm happy to see your calcs.

Regards
Marvin

DISC: I hold