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Ann: Response to ASX Query - Half Year Accounts, page-27

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04/03/19

22:57

Post #: 37650717
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Originally posted by BertySmythe: ↑

When it comes down to the actual mechanics of determining fair value, does anyone have any insights? I will have a go to help discussion and perhaps give some insight for those finding this whole topic baffling.

Some years ago I was A CFO for a listed company and knew the applicable accounting standards. But a heck of a lot has happened with accounting standards in the last 12 years so I am out of the loop.

However, if i was to consider fair value of a Purchased Debt Portfolio I would imagine it would go something like this

1) Lets say there is a set of collectibles (series of debts and customers being the PDP) from a client with a gross collectible value of $10 million
2) The client sells that portfolio to PNC for say $5m (the client does not want the work or difficulty of collecting and knows that a chunk will not be collectible at all.
3) PNC think that they can collect $8m
4) So what is the fair value of that PDP?
5) Starting at $8m, I would discount it back for the time value of money given that it may take 2 years to collect the majority. Looking at the pattern of collections from past PDP's you could determine a likely flow of funds. The $8m may then be discounted to be worth say $7.2m.
6) Then the estimated costs of collecting the debts (eg staff wages, systems, office costs etc) could be calculated. This could be deducted from the fair value. So lets say it costs $0.5m to collect so $7.2m less $0.5m derives a fair value for the PDP of $6.7m
7) The PDP cost $5m and is valued at $6.7m so that's a profit entry of $1.7m through the P&L and the PDP sits in the Balance Sheet at $6.7m.

Perhaps an additional risk factor would be deducted from the PDP to account for any unforseen events and also perhaps some progressive margin allowance could be deducted to align the recognition of some revenue with the collection of the PDP.

Anyway, that's my thoughts.

I think this is an important issue for all of us in understanding the mechanics of how PNC reports profits so any comments or better insights to this are certainly welcome by me.

Expand

Look at a whole bunch of my past posts, I've gone into this in a fair bit of detail before... mostly on CLH mind but some on PNC.

The fair value initially will be the price paid for the parcel of debt. After that a DCF is used by PNC as there is no readily observable market price. That DCF will estimate the future cash flows based on the underlying characteristics of the portfolio etc. How much will we collect and when and then discount.

Note that the costs of collection aren't included in the valuation of a financial asset (i.e. your points in 6 aren't appropriate).

PNC Price at posting: $2.27 Sentiment: None Disclosure: Not Held
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Ann: Response to ASX Query - Half Year Accounts, page-27

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