it'll be quite hard to gauge actually. i'm pretty sure there are some who are confused about the 16mil contract asset write down (at least i am) and would sell the stock. but as a long term investor, i wish the stock would drop more so that i can accumulate.
Just to share my current thoughts on the write down after 2 days of thinking about how the merger accounting works. Disclaimer: I MAY OR MAY NOT BE CORRECT AS I DO NOT HAVE A STRONG UNDERSTANDING OF FRS 103, BUSINSS COMBINATION, PURCHASE PRICE ALLOCATION AND FRS 115.
FRS 115 states that revenue is to be recognised on the fulfillment of performance obligation set out in a contract (ie. in A40's case, the delivery of spod concentrate (SC) upon the loading on board of vessel as it's FOB). Contract assets are recognised if the SC are delivered but not billed, ie there will be a contract asset on the balance sheet and revenue is recorded on the P&L. Which brings me to my first confusion, the delivery of the SC as at 31 Dec should have already been billed (last delivery was in Nov) and no contract assets should have been recognised.
But having re-reading the words of the note again, it states that "A contract asset was recognised in relation to an offtake agreement held by Alliance at the date ofacquisition". I believe that they meant was the fair value of the contract with Burwill as at 31 Dec (details of how they calculated it are probably in Note 3 of ASX annoucement which is not out yet), not the "contract asset" that FRS 115 is referring to.
The price of the merger was already previously disclosed in the announcement back in early 2018 at about 200+ mil (based on the market cap back then, can't remember the exact numbers) Hence that would be used as the purchase price as the purchase price. In the calculation of goodwill on acquisition in Purchase price allocation, all assets and liabilities of the company are to be valued at fair value, including but not limited to the inventory, PPE and intangible assets. The fair value of these assets i think it was written upwards by quite a lot. Especially PPE:
Pardon me if i got any numbers wrong:
Q1 40F quarterly PPE: 24.5mil.
Tawana PPE as at 30 Apr 2018: 32.7mil, (based on merger documents)
cashflow report tawana q2+q3: negligible,
per 40F's announcement on friday (not sure why this amount doesn't match to the latest cashflow report in ASX): 13.3mil
Now assuming that the latest announcement is actually just tawana's share of the additional investments and double that to 26.6mil, total PPE only adds up to 83.8, so the PPE was written upwards by at least approx. 65mil (149mil in the latest report).
Do note that depreciation expenses will be charged on this higher base of 149mil instead, so if you are wondering in the future why depreciation expenses increased so much, this is the reason.
On the inventory side, i have no idea how much they written it up but i assume it was to fair value at USD 880/ton of SC. maybe a few million?
Now for intangible assets, that's the fun part. Alliance has a share of the offtake with Burwill. As the contract was based on a fixed price and the current market value of SC is much lower than that, giving rise to an inflow of additional profit in the future. Hence, as how merger accounting works, a fair value is to be allocated to this contract with burwill, which i assume is the 16mil that was written off. This is really just some merger accounting gibberish i have to say so i'll just ignore it
The remaining parts constitutes to the goodwill on acquisition.
On a positive note, the company now has an enlarged share capital of 300mil, which just makes me laugh when i look at it. the actual cash that was injected into the company was so much lesser and now it makes their gearing look so much lower.
Merger accounting is full of nonsense, but this is the rough understanding i have on it. Please correct me if i'm wrong and quote the standards if possible
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