Wow, Ferg what can I say? I nominate your post for 'pointy head post of the year', Even I can't compete with a post like that! However, although it may go over the heads of many, I have read your post from start to finish to try and get the answer to my question(s). For those that have forgotten, I wanted to know how a simple two line entry under the old accounting standard....
Originally Posted by Ferg
HGH Lease Liabilities - Old Method
A) Pay Lease
Debit
Credit
Source
Notes
Lease Expense P&L
2,005
p9
Last year $1,807 p21
Bank Account
2,005
....turned into a whole page of entries that had be be worked on under the new IFRS16 regime. The first question I have is in regard to the balance sheet implications below.
HGH Lease Liabilities - New Method
B) Lease Liability Position
Debit
Credit
Source
Notes
1/7/19
ROU Asset
10,728
p13, p38
Deferred Tax Asset
274
p13 says $0.3m
Retained Earnings Adj.
751
p7, p13
Lease Liability
11,753
p12
Now I don't know the ins and outs of every detail of converting from the old standard to the new standard. But am I correct in saying that the $0.751m 'balance sheet adjustment to retained earnings' (see quoted text above) is a 'one off' that won't have to be repeated 'in kind' in coming years? Has the $0.751m capital change effectively been added as a 'fudge factor' to make sure the 'Right of Use Assets' balance sheet entry (that did not exist before) is exactly balanced by the 'lease liabilities" (which did exist before, but which has not been represented on the balance sheet up to now)? I have been puzzled why the 'Right of Use Assets' did not -automatically- equal the 'Lease Liabilities' without any fudging. But if there will be no more fudging happening in the future, perhaps I have nothing to worry about?
Before the adoption of IFRS16 there were two kinds of lease contracts that were recognised separately, directly or indirectly, in the financial statements. 'Finance leases' were assets that Heartland would take over the ownership of at the end of the lease contract. 'Operating leases' were rental agreements where ownership of the assets were retained by the lessor. The 'finance lease' assets were always on the books of Heartland because they were contracted in such a way that it was clear that Heartland would end up owning these assets. OTOH the 'operating lease assets', while critical to the operations of Heartland's business, were never on the books at all. Of the very large lump of new assets recognised for FY2020,, $9.958m (p38 of Annual Accounts for FY2020 AND your reconciliation below Ferg) are very likely almost entirely previously classified 'operational assets'. Assets now being brought onto the books at Heartland for the first time.
Reconciliations:
ROU Assets:
Opening Balance
10,728
p13, p38
Add New Leases
9,958
p38
Less Depreciation
-2,324
p38
Closing Balance
18,362
p8, p38
If we now move to the reconciliation of the liabilities.....
Reconciliations:
ROU Liabilities:
Opening Balance
11,753
p12, p13
Add New Leases
10,138
derived
Less Payments
-2,005
p9
Add Interest
570
p38
Closing Balance
20,456
p8, p38
.....the actual cash payment that was made of $2.005m (remember that was the only number we had to worry about under the old standard) is in there (highlighted in bold). However, I am none the wiser on my previous post question
"Where does the 'Interest on right to use lease liabilities' on the bottom of page 38 of HGH Accounts for FY2020 of $570k come from?"
From your reconciliation of liabilities you are indicating this $570k of interest is accumulating and not being paid (?) Could this be interest that is accumulating as part of the finance lease portfolio? That doesn't sound right, as if true it would have accumulated under the old standard as well. But I will have to leave things there. It is late and my brain is starting to hurt!
SNOOPY
Last edited by Snoopy; 09-10-2020 at 10:06 PM.
Watch out for the most persistent and dangerous version of Covid-19: B.S.24/7
Wow, Ferg what can I say? I nominate your post for 'pointy head post of the year', Even I can't compete with a post like that!
Cheers - although I'm not sure if such a nomination is a good or a bad thing!
Originally Posted by Snoopy
However, although it may go over the heads of many, I have read your post from start to finish to try and get the answer to my question. For those that have forgotten I wanted to know how a simple two line entry under the old accounting standard turned into a whole page of entries that had be be worked on under the new IFRS16 regime.
My post highlights the absurdity of IFRS16. All the more reason to support why I left the profession years ago. This sort of nonsense shows why the industry is broken. IMO it has been captured by the likes of US merchant bankers & private equity firms, and not for the better.
Originally Posted by Snoopy
The first question I have is in regard to the balance sheet implications below. Now I don't know the ins and outs of every detail of converting from the old standard to the new standard. But am I correct in saying that the $0.751m 'balance sheet adjustment to retained earnings' above is a one off? Has the $0.751m capital change effectively been added as a 'fudge factor' to make sure the 'Right of Use Assets' (that did not exist before) is exactly balanced by the 'lease liabilities" (which did exist before, but they have not been represented on the balance sheet up to now)?
I have been puzzled why the 'Right of Use Assets' did not automatically equal the 'Lease Liabilities'.
A good question which, sadly, forced me to read up on IFRS16. I too assumed the ROU asset would equal the liability at inception...until I read a PWC guide on it. The liability is calculated using the net present value of future cash flows which is pretty standard stuff. But here comes the interesting part, although IFRS16 can never be described as interesting of itself,...
The ROU asset is the ROU liability plus and minus a bunch of adjustments. Quote from PWC : "the right-of-use asset is initially recognised at the commencement day and measured at cost, consisting of the amount of the initial measurement of the lease liability, plus any lease payments made to the lessor at or before the commencement date less any lease incentives received, the initial estimate of restoration costs and any initial direct costs incurred by the lessee." (bold emphasis added by me). Source = p10 of https://www.pwc.com/pg/en/publicatio...pth-ifrs16.pdf
Given the ROU asset for HGH is less than the liability then a deduction has been made - quite possibly a lease incentive or inducement that was paid in advance to HGH, hence the deduction would be in accordance with the bold section. Given this was pushed into retained earnings it suggests it is reversing income that has previously been recognised in the P&L and so yes it is a one off. Note the deferred tax component is circa 28% of the gross value ($751k + $274k) * 28% = $287k (which is close to the $274k deferred tax adjustment). I'm no expert on deferred tax but to me this also suggests there has been an impact on the P&L previously. Alternatively, it could be a deduction was made for either estimated restoration costs or direct costs incurred by HGH. Either way it is a one off adjustment to retained earnings on inception. Notice the other new lease also had a deduction of sorts - I tagged the balancing line of $180k with Adj. (DTA/RE?) so it appears the new lease they included also had some sort of one off deduction. Edit : on reflection this could be a deduction for contracted future restoration of premises.
Late update:
Originally Posted by Snoopy
the actual cash payment that was made of $2.005m (remember that was the only number we had to worry about under the old standard) is in there. However, I am none the wiser on my previous post question
"Where does the 'Interest on right to use lease liabilities' on the bottom of page 38 of HGH Accounts for FY2020 of $570k come from?"
From your reconciliation of liabilities you are indicating this $570k of interest is accumulating and not being paid. Could this be interest that is accumulating as part of the finance lease portfolio?
HGH are required to disclose the derived interest cost of the lease payments per IFRS16. I assumed the payment of $2,005k that was disclosed in the cash flow included $570k interest. If it is included then the principal component of the ROU liability payment is $2,005k - $570k = $1,435k. Rather than introduce this new number on the reconciliation I showed both numbers given it has the same effect. But this does not imply the interest component is not being paid.
However (and this is where my brain starts to hurt) further reading of IFRS16 suggests the payment of the interest component is shown separately from the principal component of the lease payment in the cash flow. If that is the case, then IFRS16 is truly broken and that would suggest the total lease payments were $2,005k + $570k = $2,575k which is a lot higher than last year (and does not seem right). If that is the case then the $570k deduction is to be removed from the liability reconciliation and the derived figure amended accordingly. To add further complication to the liability reconciliation, any revaluation of the lease liability due to a changing discount factor would also impact upon the liability balance.
Last edited by Ferg; 09-10-2020 at 10:01 PM.
Reason: Additional information
Got my DRP allocation, but no email from Link detailing the calculation, had to log into \link to find it. Is this standard Link practice now, or am I being to quick?
Got my DRP allocation, but no email from Link detailing the calculation, had to log into \link to find it. Is this standard Link practice now, or am I being to quick?
My e-mail with the dividend details came through at 9.19pm!
Got my DRP allocation, but no email from Link detailing the calculation, had to log into \link to find it. Is this standard Link practice now, or am I being to quick?
You are not too quick, but ways to impatient ; What exactly is the rush and excitement?
I have not yet seen allocated shares disappearing ... and do this sort of book keeping normally once a month. If you wait long enough all your statements of accounts will magically show up. The link accounts typically arrive once per week (if there was a change).
----
"Prediction is very difficult, especially about the future" (Niels Bohr)
Originally Posted by Ferg
Reply With Quote
; What exactly is the rush and excitement? 
Bookmarks