CNU - Chorus

[Nor]

Aren't companies required to issue comprehensible sets of accounts?

[Snoopy]

Aren't companies required to issue comprehensible sets of accounts?

No, it is the duty of any company accountant to fulfill all legal reporting requirements, but make their company accounts largely incomprehensible to outsiders. You can confirm this by looking at their qualifications: Almost all are members of the nefarious group 'Accountants Creating Ambiguity', even if they rarely admit this is what ACA stands for.

This way, there is plenty of work for those non company accountants to gain employment - untangling it all for those willing to pay. Who says accountants don't look after their own :-)

SNOOPY

[Ferg]

This 'missing' $924m - $461m = $463m in Crown Funding for the Fibre Broadband roll out on the Chorus balance sheet that Aaron has highlighted has been bothering me.

Hey Snoopy

I think you (or we) need to further untangle the numbers. The $461m includes accrued interest which should be removed. Secondly, per note 7 the total additional funding is $1,016m (close to what you derived) but I think you need to remove RBI & Others. I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially. Note the value of $707m for UFB also includes UFB2 in the past 2 years per the notes. I too am curious why the CIP debt does not equal CIP equity - a quick search of comprehensive income and reserves did not reveal anything obvious. Lastly, I suspect not all funding for the $924m ended up in the CIP debt & equity.

My thoughts are : $924m - $360m (p6) = $564m. This $564m is possibly included in the $707m per page 7. $707m - $564m implies $143m of UFB2 + possible contract variations to UFB1...maybe?

[Nor]

Yeah it used to annoy me that you can't go to almost any company's accounts and find a detailed breakdown of what exactly they own. But I know better now.

[Snoopy]

I think you need to remove RBI & Others.

I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially.

That cashflow statement reads as though the CIP funding was only part of the Crown Funding. I thought the only crown funding that Chorus received was CIP! Maybe it is!

Clearing up a couple of points:

1/ On 'other' crown funding. From AR2012 page F9

"Chorus is able to recover the cost of other capital spend in certain circumstances. This includes replacing network damaged by third parties or instances where central or local government authorities ask Chorus to relocate or rebuild existing networks. A total of $3m was received in the current financial period and is included as part of crown funding given its modest size."

2/ On funding RBI. Again from AR2012 page F9

"Rural Broadband Initiative (RBI) funding: The Crown is contributing grant funding of about $236m towards Chorus Layer 0 and Layer 1 capital spend over the five year Rural Broadband Initiative. The grant is payable on completion of build work and will vary each year subject to the agreed build programme and the grantable network that is built. For the seven months to 30 June 2012 $18m was received."

My interpretation of this is that neither of these alternative crown funding categories are carried on the Chorus balance sheet. They are simply grants to defray specific expenses. So there are no adjustments to be made to CIP preference shares or debt. The CIP debt and CIP equity (preference shares) on the books are there purely from the USB1/USB2/USB2+ fibre roll out programmes.

SNOOPY

[Ferg]

My interpretation of this is that neither of these alternative crown funding categories are carried on the Chorus balance sheet. They are simply grants to defray specific expenses. So there are no adjustments to be made to CIP preference shares or debt. The CIP debt and CIP equity (preference shares) on the books are there purely from the USB1/USB2/USB2+ fibre roll out programmes.

Note 7 AR2020 has the numbers you are trying to work out, broken into UFB + RBI + Others. UFB is $707m, RBI is $242m and others is $67m for a total of $1,016m on the Balance Sheet under the liability "Crown Funding" (the liability in this sense is more like deferred revenue in that it has been banked but not yet released to the P&L).

Edit: to clarify, the $1,016m is the total "crown funding" funding received to date which is not part of the CIP debt/equity balance, and of the $1,016m there has been $135m released to the P&L to date, leaving a liability (i.e. deferred revenue) on the Balance Sheet of $881m as detailed in note 7 and disclosed on the Balance Sheet under current and term liabilities.

[Ferg]

Per page 51 AR2020: "The difference between funding received and the fair value of the securities is recognised as Crown funding. Over time, the CIP debt and equity securities increase to face value and the Crown funding is released against depreciation and reduces to nil."
It appears the full value of $924m is not yet recognised under the CIP heading, with the balance sitting in "Crown Funding". This makes sense in that CNU would receive funds or account for expected funding, which would sit in Crown Funding until certain criteria were met. Once the criteria were satisfied, funds would then be treated as CIP debt+equity. In other words, not all crown funding qualifies as CIP debt+equity (e.g. RBI) and not all CIP debt+equity has yet been recognised (per the quoted note).

So I wonder if there are transfers from Crown Funding to CIP that are not being shown in the accounts. For instance, there was total Crown Funding receipts in FY20 of $162m per the cash flow. This may have all gone into the Crown Funding "bucket". During the year $77m met the criteria for CIP debt+equity and was subsequently transferred from the Crown Funding "bucket" to CIP debt + equity. The transfer in/out of $77m of qualifying receipts within the Crown Funding disclosure has been netted to zero, leaving $86m disclosed per Note 7 (when maybe it should be receipts of $162m and transfers to CIP of -$77m). Just a thought.

[Snoopy]

Hey Snoopy

Per note 7 the total additional funding is $1,016m (close to what you derived) but I think you need to remove RBI & Others. I haven't read historical documents but I suspect RBI will be completely different to UFB1 contractually and financially. Note the value of $707m for UFB also includes UFB2 in the past 2 years per the notes.

I think you are right Ferg. I have the historical documents handy. So I have re-presented the table removing the 'Rural Broadband Initiative' and 'Other' funding from it. The amortisation section of the table I have likewise adjusted.

Crown Fibre Funding	FY2012	FY2013	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020
Additional Crown Fibre Funding	$13m	$94m	$120m	$80m	$94m	$73m	$77m	$80m	$79m
sums to Cumulative Crown Fibre Funding {A}	$13m	$107m	$227m	$307m	$401m	$474m	$551m	$631m	$710m
Crown Funded Fibre Depreciation	$0m	$1m	$3m	$6m	$8m	$11m	$12m	$15m	$18m
sums to Cumulative Crown Funded Fibre Depreciation {B}	$0m	$1m	$4m	$10m	$18m	$29m	$41m	$56m	$74m
{A}-{B}	$13m	$106m	$223m	$297m	$383m	$445m	$510m	$515m	$636m

Note 7 of AR2020 says fair value on initial recognition of crown funding for the UFB roll out alone is $707m, close to the $710m that I derived, As you have pointed out, the last two years also include some UFB2 and UFB2+ funding. Yet if the total of $707m/$710m is correct, it falls well short of the $924m that has been handed out to Chorus for UFB1 funding alone (AR2020 p49). What gives?

SNOOPY

[Snoopy]

This 'missing' $924m - $461m = $463m in Crown Funding for the Fibre Broadband roll out on the Chorus balance sheet that Aaron has highlighted has been bothering me.

The $461m of Crown funding is the figure recorded on the balance sheet (AR2020 p36).

Hey Snoopy

I think you (or we) need to further untangle the numbers. The $461m includes accrued interest which should be removed.

Are you sure about that? The 'CIP debt' is interest free until 2025 (AR2020 p50). If the debt is repaid like I imagine it will be (even if it is not repaid from operational profits, it would make sense for the company to re-finance this debt at low prevailing interest rates), then no CIP interest will be due. Likewise the 'CIP Equity' (Preference Shares) have an initial dividend requirement (which is in effect an interest payment) that kicks in from 2025 too. But if the Preference shares are repaid, or refinanced, before 'dividend time', then no 'CIP dividend' will ever become due. Accordingly, I can't see why you say that the $461m on the Chorus Balance Sheet for FY2020, under the collective label of CIP securities, contains 'accrued interest', when in fact no interest is currently contractually payable on either the 'CIP debt' or 'CIP equity' instruments - as I read it.

I see Note 6 p50 talks about 'notional interest'. I wish when I had a debt due where I could just pay 'notional interest'! This term suggests to me that 'notional interest' is some kind of accounting construct. I do not understand 'notional interest' and doubt that it represents any real payment. I say this because I don't see any 'real interest' as falling due.

Note, my post 2648 contains the 'CIP debt' repayment schedule.

For the 'CIP Equity' dividend requirements, my post 2646 lists those. Post 2659 shows that in the first phase of preference share interest from 2025 to 2029 inclusive, my estimate of the total 'dividend' required by the crown. In this initial period at least, potential payments don't seem that arduous.

Lastly, I suspect not all funding for the $924m ended up in the CIP debt & equity.

My thoughts are : $924m - $360m (Note 6 p50) = $564m. This $564m is possibly included in the $707m per Note 7. $707m - $564m implies $143m of UFB2 + possible contract variations to UFB1...maybe?

p50 talks about 'fair value on initial recognition' of the 'CIP debt' and 'CIP equity' (preference share debt) facilities. This is the bit I am having trouble understanding. I thought a debt of $X was a debt of $X and couldn't be reduced in value on the balance sheet because it does not have to be paid back until some time in the future. But reading this page 50 (AR2020) suggests to me that I am wrong about this?

Note 7 AR2020 has the numbers you are trying to work out, broken into UFB + RBI + Others. UFB is $707m, RBI is $242m and others is $67m for a total of $1,016m on the Balance Sheet under the liability "Crown Funding" (the liability in this sense is more like deferred revenue in that it has been banked but not yet released to the P&L).

If you are referring to:

1/ the crown funding being gradually 'released' as it is amortised away AND
2/ The amortised amount of the crown funding being used to offset depreciation.

THEN I can understand how you see the crown funding as 'deferred revenue'. But what about the portion of crown funding that has to be paid back? That surely cannot be seen as deferred revenue, even though it resides in the same 'crown funding' pot cooking away on the balance sheet that the 'amortised funding depreciation credit' was released from.

Edit: to clarify, the $1,016m is the total "crown funding" funding received to date which is not part of the CIP debt/equity balance, and of the $1,016m there has been $135m released to the P&L to date, leaving a liability (i.e. deferred revenue) on the Balance Sheet of $881m as detailed in note 7 and disclosed on the Balance Sheet under current and term liabilities.

All of the content of the above quote is in AR2020 under Note 7 titled 'Crown Funding'. $135m is laid out as the portion of the $1,016m of total crown funding that has been amortised to date, Thus the net amount of crown funding on the Balance Sheet that remains is:

$1,016m - $135m = $881m = $855m (non-current) plus $26m (current)

I now turn to the Balance Sheet and see the non current portion of this crown funding, $855m of non-current crown funding is listed separately alongside $461m of CIP funding (also non-current). It is the CIP funding that is closely tied to UFB1/UFB2/UFB2+ fibre rollout. This would suggest you are right Ferg. The whole of Note 7 titled 'Crown Funding', specifically excludes the separate 'crown funding ' that is the 'CIP debt' and 'CIP equity' (preference shares) taken out by Chorus to help fund the fibre roll out. This would be 'case closed' on the disambiguation of the various categories of crown funding taken up by Chorus, except for one point. If the CIP funding is the crown contribution towards rolling out fibre broadband, then why does the 'other' crown funding also specifically include $707m of funding specifically allocated to rolling out UFB 'Ultra Fast Broadband' (fibre by any other name)?

SNOOPY

[zspoon]

Are you sure about that? The 'CIP debt' is interest free until 2025. If the debt is repaid like I imagine it will be (even if it is not repaid from operational profits, it would make sense for the company to re-finance this debt at low prevailing interest rates), then no interest will be due. Likewise the 'CIP Equity' (Preference Shares) have a dividend requirement (which is in effect an interest payment) that kicks in around the same time. But if the Preference shares are repaid, or refinanced, before 'dividend time', then no 'dividend' is due. Accordingly, I can't see why you say that the $461m on the Chorus Balance Sheet for FY2020, under the collective label of CIP securities, contains 'accrued interest', when in fact no interest is contractually payable on either the 'CIP debt' or 'CIP equity' instruments - as I read it..

Note, my post 2648 contains the 'CIP debt' repayment schedule.

For the 'CIP Equity' dividend requirements, my post 2646 lists those. Post 2659 shows that in the first phase of preference share interest from 2025 to 2029 inclusive, my estimate of the total 'dividend' required by the crown. In this initial period at least, payments don't seem that arduous.

SNOOPY

Note 6, shows how balance includes notional interest.
Note 20, contractual cash flows showing >5 year ultimate cash flows equals the current carrying value of the liability - which includes accumulated notional interest.