@persistentone - no that's not the way it works. Amortised cost requires the determination of the one interest rate that exactly discounts the cash flows to present value at acquisition date. The purchase price at acquisition date is known, what is not is the future cash flows and their timing. These need to be estimated. The effective interest rate is calculated by exactly discounting these cash flows which involves the use of a known (purchase price) and unknowns (future cash collections and their timing). If the estimates of the unknown exactly equal the actuals then what you would see is revenue equalling the unwind of the discount rate (effective interest rate) - under an amortised cost model revenue is essentially interest income with adjustments made for alterations in estimated cash flows. As such in my example if the actuals exactly equalled the estimates you would see revenue at 45% of the carrying amount each period (i.e. interest income) until the carrying amount was zero. Actuals never equal estimates so adjustments are required along the way.
Amortised cost is an accounting model that is best suited to debt instruments with known contractual cash flows. The problem with PDLs is that they are credit impaired at acquisition so contractual cash flows are somewhat irrelevant and estimates must be made of what the company thinks they will collect over an extended period (until they are uncollectible at the point they become statute barred). Consequently, amortised cost is essentially a modified fair value model: in a fair value model the discount rate would also change. Both models will essentially do the same job over time - take the original purchase price and as best as possible match that with the cash flows received over a long period of time - the sum of the cash received less the cash paid will over an extended period equal the revenue line.
CLH Price at posting:
$1.43 Sentiment: None Disclosure: Not Held
