Did accounting standards kneecap the HY2019 result?
Quote:
Originally Posted by
Snoopy
I see in the HY2019 accounts that 'Impairment provision expense' was (3,951) up from (2,276) in the previous year. However to check out the actual 'impairment expense' for the period we have to look at the what has happened to the total provision over HY2019 . And that part of the accounts has not yet been released.
There is also something on the change of treatment of impairments in HY2019 result notes, referring to NZIFRS 9 and 15. An extra (2.160m) impairment charge seems to have arisen from that. But is this just in relation to debt collection services? Or does in apply to all loan contracts? Anyone care to offer an opinion?
Quote:
Originally Posted by
winner69
Snoops ....that 2.160m you mention is part of the 1.839m adjustment to March 18 Retained Earnings (see the Changes in Equity part of the accounts)
Effectively reduced Shareholder Equity with no impact on the Income Statement (ie profit) this financial year
The new standards do mean they need at what’s provided for differently than in the past - probably more detail in the full half year report and then you can work out if there is a real impact or not.
My copy of the HY2019 report has finally arrived and I am pleased to see that it was bound properly this time. The 'cheap staple in the corner' used to hold the FY2018 report together ended up being 'not so cheap' for shareholders who took the route of getting the report professionally rebound within leather covers!
From p33 in relation to IFRS15 'Revenue from Contracts with Customers'. The core principle behind this reform is to "recognise revenue to depict the transfer of goods and services to customers in amounts that reflect the consideration (payment) to which the entity expects it to be entitled in exchange for those goods and services." The effect of this is to split what was a one off transaction into separate 'performance obligations' and only tick off the contact revenue when those obligations are met. Prior to this, the previous policy was to recognise revenue when "it is probable that economic benefits will flow to the group." After reading this, I am none the wiser as to what this change means in terms of booking day to day profits on sales.
Could the difference in a finance contract be a simple as waiting until the money is in the 'Oxford Finance' bank rather than just relying on a customer having signed a contract? Looking at the actual numbers on p34, the ' balance sheet effect' of the changes mean an historic reduction of just $284,000 in net assets. The main changes making up this number come under the headers "Change in collection income" and "Change in collection expense." Does this mean that the changes in IFRS15 only apply to the 'EC Credit' division of Turners? If the answer to this question is 'yes' and EC Credit revenue was $18.667m over FY2018 and 'operating profit' was $6.069m then for FY2018:
$0.284m/$6.069m = 5% of operating profits for this one division: Nothing of great consequence for the whole group.
I see:
"The group elected to apply the cumulative effect method with no restatement of comparative period amounts."
This does make it difficult for shareholders seeking transparency. Do the adjustments relate to just the prior period or is there a cascading effect across many past years? If the latter, then the IFRS15 adjustments are even less significant than I think!
Now moving on to IFRS9, on Impairment of Financial Instruments. The significant changes here relate to impairment of the 'finance receivables' loan book. Interestingly the change is in the opposite direction to IFRS15. The new requirement is to make a forecast on impairments that might happen on the balance of probability at the time a basket of loans is taken out (based on historical default rates), rather than waiting for a loan to actually become impaired before declaring it impaired. The impairment adjustment is taken off the balance sheet assets from the end of the previous full year accounting period. This is a real loss which must be taken to comply with accounting standards. But it is a loss that has never been part of any Turners profit and loss statement. Once again transparency is limited, because Turners have chosen not to restate comparative period amounts.
The extra loss incurred (change in impairment provision) at EOFY2018 was $2.160m, offset by the associated deferred tax gain of $0.605m ( $2.160m x 0.28 = $0.605m ). This gives a net loss of $1.555m.
How significant is an extra impairment provision of $2.160m? At EOFY2018 the total loan impairment provision, before adjustment, was $11.294m.
$2.160m / $11.294 = 19%
A 19% increase in provisioning is very significant. This extra provisioning is not in relation to any particular time period of loans. So IMO this extra provisioning increment must apply not only to the balance, but also the annual loan impairment expense. In the case of FY2018 the 'impairment provision expense' was $6.380m. The adjusted figure becomes $7.592m. And that change ($7.592m-$6.380m = $1.212m) would have made a significant difference to NPAT over the FY2018 financial year. And there would be a similarly significant effect, this time accounted for, in FY2019 half year result.
So to answer the question I posed:
"Did accounting standards kneecap the HY2019 result?"
For NZIFRS 15 the answer is 'no'. But for NZIFRS 9 the answer is 'yes'.
SNOOPY