IFRS16: The continuing confusion
I did manage to solve this issue for Skellerup at the transition date.
https://www.sharetrader.co.nz/showth...l=1#post926124
However, doing the same exercise at Vital is proving trickier.
Quote:
Originally Posted by
Snoopy
I wonder if anyone got to the bottom of the implementation of IFRS16 on leases on the Vital result from 2020? The answer to this question is not trivial as it affects the adjusted Net Profit after Tax by between 60% and 109%.
From AR2020 p4
"As with our interim results earlier this year, IFRS 16 which although non-cash impacting does impact our results. Our Net Profit after Tax at $0.734m takes into account the IFRS16 impact to Net Profit after Tax of
($0.44m)."
However, this is the only time the figure $0.44m appears in the annual report. So where did it come from?
From AR2020 p17
"For judgements relating to NZ IFRS 16 refer to the Changes in Significant Accounting Policies (Note 3a), and the disclosure notes in relation to Leases (Note 21)."
Note 3 talks about changes to the balance sheet. But in note 21 there appears the following table:
|
2020 |
2020 Leases Under IFRS16 |
Interest on Lease Liabilities |
$1.412m |
Expense Related to Short Term/Low Value Leases |
$0.219m |
Depreciation of Right-to-use Asset |
$5.619m |
2019 Leases Under NZ IAS 17 |
Lease Expense |
$6.136m |
Now what I think this table is saying is that under IFRS16, the total lease expenses are:
$1.412m+$0.219m+$5.619m=
$7.250m
WHEREAS under NZ IAS 17, the lease expenses would have been $6.136m.
OK, there is an error here of mine I have identified, brought on by the layout of a table in AR2020 p31 (reproduced in the quoted text box above). That figure of $6.136m I quote above relates to FY2019, not FY2020, - even though it appears under a column header '2020'. How do I know this? Because when I go to the equivalent page in AR2021 (p29), there is no equivalent column header '2020' (it should be there reading '2021' if the two reports were consistent).
In the AR2021 report equivalent table on p29, this time looking at row headers, the two row headers read '2021' and '2020'. Now going back to AR2020, the information along the row header '2020' p29 AR2021 is exactly the same as the information alongside the row header '2020' on p31 AR2020. IOW each report is comparing lease information of the current year with the previous year, which is kind of what you expect annual reports to do.
Then on p18 of AR2020 we learn:
"The Group applied NZ IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly comparative information is not restated ‐ i.e. it is presented as previously reported."
The fact that 'comparative information is not restated', means that the full process of transitioning from NZ IAS17 to IFRS16 remains opaque. To someone like me trying to understand this, is extremely annoying ):-(
Quote:
Originally Posted by
Snoopy
This means upon adopting the IFRS16 standard, lease expenses have increased by: $7.250m - $6.136m = $1.114m
As a result NPAT would reduce by 0.72x$1,114m = $0.802m.
That is rather more than the $0.44m reduction suggested on AR2020 p4. So I remain confused :-(
Because I misunderstood where the $6.136m figure in the above quoted calculation came from, the above quoted calculation is nonsense. Yet another factor causing confusion is that the rent due in any current year remains as an expense, and is not been capitalised as a 'right of use asset' alongside the longer term rental liabilities. When things get as confusing as this, I believe it is better to go back to what we do know for sure, rather than try guessing figures that we don't know.
One source of real world information that can by pass all this IFRS16 stuff (IFRS16 is simply an accounting construct that has little meaning in the day to day running of a business) is to look at the cashflow statement. Real money paid out as rent should be recorded there. Unfortunately in AR2020 for Vital, this information is not there in its entirety. $5.619m cash paid out is listed as "Principle Element of Lease Payments" (are these other payments that have been renamed for reporting purposes as lease payments?)
Right, 'back to the facts' that we know.....
AR2020 p4 tells us the overall 'answer' we seek - the NPAT impact.
"The IFRS16 impact to Net Profit after Tax ($0.44m)."
I believe that to mean that the Vital profit reduced over FY2020 because of IFRS16 by $0.44m. It should be possible to derive the missing annual rent information - that I will term 'R'- using this number, because the after tax difference effect in the two rent calculations (IFRS16 and NZ IAS17) we are told is $0.44m.
We also need to keep in mind that this unknown 'R' only captures the rent from the 'non current term' lease agreements. The current term lease agreement rent is still listed separately as an expense (I hope readers can now see how annoying all of these little details are becoming). Bringing all of this information together, produces an exercise in algebra to solve for the missing rent - if I haven't made another mistake which is not guaranteed! (to see where I pulled these numbers from look at the first quoted text above):
$0.44m = 0.72[($7.250m -(R + $0.219m)]
=> $0.611m = $7.031m - R
=> R = $6.420m
Add onto that the 'current period rent' and I get a 'total rent contracted' rent bill over FY2020 to be: $6.420m + $0.219m = $6.639m
The comparative figure for FY2019 under NZ IAS 17 was $6.136m (AR2020 p31). So my figure for rent payable over FY2020 of $6.639m passes the 'in the ballpark' test, even if it is 8% higher.
As a double check, I took the $6.136m of 'rent' from FY2019 that was back referenced from AR2020 and tried to find it in AR2019. But I couldn't find it :-(. And that leaves me feeling both stupid and annoyed at the same time. ):-(
SNOOPY
P.S. Just in case any readers are wondering why any of this matters, unless I solve this, it means that I can't adjust the profit figures from FY2021 and FY2022 back to pre-IFRS16 figures either. And why do I need to do that? Because the banks do not accept IFRS16 compliant profit reporting, even though it is the current accounting standard!
From AR2021 p28
"The secured bank loans are subject to various covenants such as debt coverage and interest coverage. Throughout the year the Company has complied with all debt covenant requirements. With the implementation of NZ IFRS 16 all covenants are calculated exclusive of NZ IFRS 16."
IFRS16: A confusion untangling lifeline? (Part 1)
Quote:
Originally Posted by
Snoopy
Just in case any readers are wondering why any of this matters, unless I solve this, it means that I can't adjust the profit figures from FY2021 and FY2022 back to pre-IFRS16 figures either. And why do I need to do that? Because the banks do not accept IFRS16 compliant profit reporting, even though it is the current accounting standard!
From AR2021 p28
"The secured bank loans are subject to various covenants such as debt coverage and interest coverage. Throughout the year the Company has complied with all debt covenant requirements. With the implementation of NZ IFRS 16 all covenants are calculated exclusive of NZ IFRS 16."
It looks like I have been thrown a lifeline by Vital itself, in my quest to get around IFRS16 distortions
From AR2022 p6:
"The Company’s results are complicated by IFRS 16 Accounting for Leases, which means that rent expense on the sites leased is predominantly shown under Depreciation (and partly in Net Interest) in the Financial Statements. The following Summary Financial Performance restates the composition of the Income Statement to reflect what the directors believe better represents the economic performance of the Company in the sense of EBITDA in relation to free cash flow (noting that EBITDA is a non-GAAP accounting measure)."
This is effectively a two fingered salute to the current accounting standards, as my translation from the above paragraph written in 'accounting speak' into plain English will reveal.
"The published accounts are bollocks and give an inaccurate picture of the business. So we have gone back to the old accounting standards and redrafted the accounts 'as they should be' ourselves."
So how does the 'new' income statement presentation compare with the accounting body sanctioned one?
Income Statement FY2022 |
Vital Presentation {A} |
IFRS Sanctioned Presentation {B} |
Difference {A}-{B} |
Revenue |
$31.456m |
$30.719m |
add Other Income |
|
$0.737m |
less Staff Costs |
$9.878m |
|
less Other Selling General/Admin Costs |
$8.264m |
|
less Administrative Expenses |
|
$12.494m |
less Operating Costs (excluding D&A) |
|
$8.283m |
less Lease/Rent Costs |
$7.691m |
|
equals EBITDA |
$5.623m |
$10.679m |
-$5.056m |
less Depreciation |
$6.745m |
$6.258m |
$0.487m |
less Amortisation on Right of Use Asset |
|
$5.072m |
equals EBIT (operating) |
-$1.123m |
-$0.651m |
less Impairment Charge |
$17.038m |
$17.038m |
equals EBIT (reported) |
-$18.161m |
-$17.689m |
less Net Finance Cost |
$0.673m |
$2.194m |
-$1.521m |
equals Net Profit Before Tax |
-$18.834m |
-$19.883m |
add back Income Tax refund |
-$0.503m |
-$0.790m |
equals Net Profit After Tax |
-$18.331m |
|
less Lease Adjustment Accounting Loss after tax |
-$0.762m |
|
equals Net Profit After Tax (reported) |
-$19.093m |
-$19.093m |
Discussion
Both sides add up to the same ultimate number, which is always a good start.
EBITDA is considerably greater on the IFRS side. This is to be expected, because IFRS16 introduces an artificial construct called a 'Right of Use' asset that is amortised. This 'right of use asset' may be thought of as a reflection of a capitalised rent contract (IFRS16 requires companies to captalise any long term rental contracts in this way) . Through the years, this long term 'Right of Use' asset is amortised annually. However, in the 'Vital' way of looking at things, this 'Right of Use' asset does not exist. And because it does not exist, there is no long term asset relating to 'rent' to amortise each year. This explains why the EBITDA (where 'A' stands for the amortisation that we have been discussing) is so much higher on the IFRS approved side of the table.
Depreciation is $0.487m different from each perspective. I do not understand why this should be so.
Moving on to 'net finance cost', the operating cost of 'rent' in the Vital view is seen as a 'lease expense' (a financial 'interest cost' under IFRS16). This 'Interest expense on lease liabilities' of $1.588m may be found under Note 11 of AR2022. Nevertheless $1.588m is not quite the same difference in 'net financial cost' as found in the table above of $1.521m. I am unsure why there is a discrepancy.
The FY2022 'Amortisation of the Right to Use' of $5.072m when added to the 'lease expense' of $1.588m comes to $6.660m. This adds up to less than the $7.681m rent charge on the Vital side of the table. This surprises me, because although both methods of treating rents over the length of any rent contract are equal, the IFRS16 method tends to see these costs front loaded. That in turn reduces company profits in the early years of a rent contract. I can think of two possibilities to explain this unexpected result.
1/ On average we are in the latter years of these rent contracts, not the early years.
2/ It is a fact that for some reason this IFRS16 treatment of 'right of use assets' excludes 'current year rent contracts' that are separately expensed (AR2022 note 23a ii. - Why this is allowed to happen, I do not know). So it may be that such contracts need to be added back separately to get a like with like comparison between methods.
Finally there is the 'Lease Adjusted Accounting Loss' that squares up both the totals on the second to last line. But is it the lease that is being adjusted? (IOW changes in leasing arrangements were renegotiated during the year). Or is it the way that information is being fed into the accounts that is being adjusted? I find this adjustment ambiguous.
Regardless of how or why all this tabled information fits together, Vital have given shareholders a clear message that the representative after tax profit (excluding the goodwill adjustment) for FY2022 was:
-$18.331m + $17.038m = -$1.293m
There are still a few unanswered questions in this analysis. Fortuitously Vital have done a comparative redraft for FY2021 as well. So I am going to look at that too, in the interests of trying to learn more.
SNOOPY
IFRS16: A confusion untangling lifeline? (Part 2)
There are still a few unanswered questions in this analysis. Fortuitously Vital have done a comparative redraft for FY2021 as well. So I am going to look at that too, in the interests of trying to learn more.
Income Statement FY2021 |
Vital Presentation {A} |
IFRS Sanctioned Presentation {B} |
Difference {A}-{B} |
Revenue |
$35.239m |
$34.559m |
add Other Income |
|
$0.681m |
less Staff Costs |
$9.117m |
|
less Other Selling General/Admin Costs |
$8.208m |
|
less Administrative Expenses |
|
$11.386m |
less Operating Costs (excluding D&A) |
|
$7.920m |
less Lease/Rent Costs |
$8.057m |
|
equals EBITDA |
$9.858m |
$15.934m |
-$6.076m |
less Depreciation |
$7.824m |
$7.306m |
$0.518m |
less Amortisation on Right of Use Asset |
|
$5.642m |
equals EBIT (operating) |
$2.034m |
$2.985m |
less Impairment Charge |
$0m |
$0m |
equals EBIT (reported) |
$2.034m |
$2.986m |
less Net Finance Cost |
$0.618m |
$1.822m |
-$1.204m |
equals Net Profit Before Tax |
$1.416m |
$1.164m |
less Income Tax |
$0.397m |
$0.323m |
equals Net Profit After Tax |
$1.019m |
|
less Lease Adjustment Accounting Loss .after tax |
-$0.178m |
|
equals Net Profit After Tax (reported) |
+$0.841m |
+$0.841m |
Discussion
Both sides add up to the same ultimate number, which is always a good start.
EBITDA is considerably greater on the IFRS side. This is to be expected, because IFRS16 introduces an artificial construct called a 'Right of Use' asset that is amortised. This 'right of use asset' may be thought of as a reflection of a capitalised rent contract (IFRS16 requires companies to captalise any long term rental contracts in this way) . Through the years, this long term 'Right of Use' asset is amortised annually. However, in the 'Vital' way of looking at things, this 'Right of Use' asset does not exist. And because it does not exist, there is no long term asset relating to 'rent' to amortise each year. This explains why the EBITDA (where 'A' stands for the amortisation that we have been discussing) is so much higher on the IFRS approved side of the table.
Depreciation is $0.518m different from each perspective. I do not understand why this should be so.
Moving on to 'net finance cost', the operating cost of 'rent' in the Vital view is seen as a 'lease expense' (a financial 'interest cost' under IFRS16). This 'Interest expense on lease liabilities' of $1.203m may be found under Note 11 of AR2022. $1.203m is the same difference in 'net financial cost' between the two reporting scenarios as found in the table above of $1.204m (within the bounds of rounding error).
The FY2021 'Amortisation of the Right to Use' of $5.642m when added to the 'lease expense' of $1.203m comes to $6.845m. This adds up to less than the $8.057m rent charge on the Vital side of the table. This surprises me, because although both methods of treating rents over the length of any rent contract are equal, the IFRS16 method tends to see these costs front loaded. That in turn reduces company profits in the early years of a rent contract. I can think of two possibilities to explain this unexpected result.
1/ On average we are in the latter years of these rent contracts, not the early years.
2/ It is a fact that for some reason this IFRS16 treatment of 'right of use assets' excludes 'current year rent contracts' that are separately expensed (AR2022 note 23a ii. - Why this is allowed to happen, I do not know). So it may be that such contracts need to be added back separately to get a like with like comparison between methods.
Finally there is the 'Lease Adjusted Accounting Loss' that squares up both the totals on the second to last line. But is it the lease that is being adjusted? (IOW changes in leasing arrangements were renegotiated during the year). Or is it the way that information is being fed into the accounts that is being adjusted? I find this adjustment ambiguous.
Regardless of how or why all this tabled information fits together, Vital have given shareholders a clear message that the representative after tax profit for FY2021 was $1.019m.
SNOOPY