ZIP +$300M ONE-OFF WRITE DOWN

For any of you that want to understand what this loss was on the Half year report, I will make it clear for you now, because it will appear again on the Full year financial report. It'd be particularly good for any new investors to understand this so they don't get spooked for something that isn't a concern.

It might be repetitive because I lost track of writing haha Also if you already understand it, then great, but I see confusion about it still, and it's for those people. Also I might have got some stuff wrong haha, So point that out if I did please.

I'll emphasize right now that this loss will not, and has not affected the operating expenses of the business. It was a one off write-off on the Half yearly balance sheet, that was done to clean it up basically and not have this goodwill premium sit on the books.

If you can't be bothered reading, then just know the "loss" was simply the removal from the Zip balance sheet of the extra premium payment made to Quadpay owners on-top of the actual value of the Quadpay business itself. It was an accounting trimming of the balance sheet.

I'm not going to use specific numbers, because I can't be bothered looking it all up. But they're close enough!

Now pay attention!

First things first. "Goodwill" on a balance sheet, after an acquisition like Zip with Quadpay, is the premium of which was added onto the actual value of Quadpay and paid on-top of that by Zip to Quadpay owners. Exactly like the $30 premium added onto the Afterpay shares by the Square deal.

This premium (goodwill) is now listed on the Zip balance sheet under what's called an "intangible asset". It has no real worth, and yet was technically apart of the purchase price of Quadpay, and so is called an asset of sorts. It by itself doesn't generate cashflow because obviously it's just the inflated part of the purchase price of Quadpay that was needed to seal the deal with the Quadpay owners.

The $400M acquisition of Quadpay will be split in two on the balance sheet. The Quadpay business itself will be listed as it's own asset class (roughly $300M), and the premium that was paid will be listed separately (intangible asset), at roughly $100M (it could have been more? I don't remember).

So because it holds no real value to Zip, and it's only worth it's cash value to the Quadpay owners themselves, it must be eventually written off as an expense for Zip because Zip got literally nothing in return for this money.

This write off is sometimes done over a long period of time, as to avoid such a massive one off loss. However, in the case of the Quadpay write off, it was done in one go, AND also after it had gone through a re-evaluation of the original deal of which in turn ballooned the premium to quite a large number. Which I'll explain now.

Like I said, Zip originally purchased Quadpay for $400M.

The premium (goodwill) Zip paid on-top of Quadpay's actual worth was in fact re-evaluated just prior to the Half yearly.

A third party was used for this evaluation and it would have been a clause within the original acquisition documents that it be carried out some time after the take over.

The third party company determined that Quadpay was actually worth significantly more than what Zip paid for it. They came to this conclusion by using Zip share prices between specific dates up to and including the date of the finalized acquisition of Quadpay and starting from the announcement that Quadpay would be taken over by Zip. Meaning that the market actually determined the overall value of Quadpay in the end, and not Zip management. The fair value share price they landed on was over $9. Originally, Zip paid something in the low $6's per share for Quadpay.

They determined Quadpay was in fact worth over $700M (inclusive of the premium) at the time of acquisition, and not $400M.

So this increase in value of the premium (goodwill) is actually beneficial to the Quadpay owners because now they are paid more in higher valued shares.

However, it's important to note that if Quadpay had fallen in value after the acquisition. Then this re-evaluation clause would have instead slightly protected Zip, because the adjustment would have meant they owe Quadpay owners less money for a depreciating asset. Obviously this is still not an ideal situation because they now own a less thriving company. Luckily that never eventuated. Anyway...

Zip must now list on it's balance sheet this new premium valuation (+$300M) as an even greater "goodwill" than the original premium it would have paid Quadpay of about $100M before the re-evaluation.

So back to what I said earlier on... They now have to write this off the books because it is listed as the only part of the Quadpay acquisition which has no potential to yield cash generating ability. Therefore the purchase price of this so called "intangible asset" must therefore be completely classified as an "expense".

Once they write it off, it's done away with the same as all other one-off expenses and we never see it again.

Summary:

The premium Zip paid for Quadpay was the goodwill write-off. However it was hugely increased due to a re-evaluation done 6 months after acquisition. It needed to be taken off the balance sheet, and it was.

.....

Technically there was more to it than that, because Zip owned a stake in Quadpay also and that re-evaluation was factored in too. However, that is mostly irrelevant and would overcomplicate this explanation. So forget that bit haha.