Bullish Sign? - Bounced off 200 EMA, page-2705

AASB starts for each company from the start of its financial year within calendar year 2019, so for NWH it is 1/07/2019.

For those who do not know, leasing aint leasing. I use “amortisation” and “depreciation” below – both mean the value of an asset is reduced, and the contra debit entry is treated as an expense in the P&L accounts. Things like plant are depreciated, whereas other things like goodwill and patents are amortised. The word “impair” is used when management decide to take a large write-down of a Balance Sheet asset.

Operating leases are what the man in the street would call hiring, or renting – the goods remain the property of the firm supplying them, and the other party pays a rental for the usage. Until 2019, this had no impact on the Balance Sheet, and the rental was an expense recorded in the P&L accounts. This is the area that AASB 16 would impact. In loose terms the value of the usage must be debited to the Balance Sheet as an asset, and the commitment to pay must be credited to the balance sheet as a liability. How the amortisation of that asset, and the accounting for the payments is done is something I do not know, but the noise in the media suggests the net effect is going to increase the expense in the early years, and thus lessen FY20's NPAT.

Finance Leases are what the man in the street would know as borrowing to purchase, or purchase of goods by instalments. Ownership in the asset passes to the buyer, and the price of the goods are debited to the Balance Sheet, and depreciated according to a formula that management elects. Depreciation is the expense we see in the P&L accounts in subsequent years. The ATO allows for generous early depreciation, so even if management prefer to report depreciation differently, their tax returns would apply for the maximum that the ATO allows. AASB 16 would I think switch the bias in favour of Finance Leases.

On the games played with depreciation, in the earthmoving game firms use either time-based depreciation, or usage based. When BYL was spiralling down the gurgle of ineptitude, to make things look better, it switched to usage-based depreciation, which was lower, so things seemed a bit better. When NWH was in strife at the same time, it went the other way, and impaired equipment. Accounting is a very flexible art, which makes FA style share evaluation difficult.

As a rule, I prefer management to be conservative in respect to accounting for NPAT. That is, expense as much as is reasonable to lower NPAT, and thus hold back value to handle the vicissitudes of commercial life. I would, therefore not be too concerned if NPAT was understated because of accounting conventions, provided the intrinsic value remained.