alnby,It has to do with redundancy payments and the payout of...

alnby,

It has to do with redundancy payments and the payout of employee entitlements.

In the case of COF's DH12 balance sheet, it is entitled "Employee Benefits" under the Current Liabilities section of the balance sheet.

(In most instances these sorts of Employee Benefits are simply called "Provisions" - which is why i referred to them as such - but COF has been kind enough to be more specific)

As you can see @ 31 Dec 2012, their value was $31.460m, compared to $36.504m @ 30 June 2012.

For greater granularity into this item, refer to Note 17 (page 76) of the FY12 Annual Report.

You can see that the $36.504m value @ 30 June 2012 is comprised of the following Employee Benefits:

- Annual Leave = $10.79m
- Long Service Leave = $9.4m
- "Other" = $16.3m

These liabilities represent the value of accumulated leave balances (i.e. leave that employees have due to them, but that they have not taken) and other employee entitlements that the company “owes”.

You will also notice that the same items for the prior year-end balance date (30 June 2011) was:

- Annual Leave = $10.97m
- Long Service Leave = $8.6m
- "Other" = $8.0m

Clearly, Annual and Long Service Leave accruals remain relatively unchanged from period to period (which is not unexpected), but the item that has gone up dramatically is “Other”, by around $8m.

So what has happened here is that the company has, as part of its restructuring program during the 2012 financial year, identified a number of employees that were to be made redundant. Accounting standards require management and the auditors to book a provision, i.e., to account, for these redundancies at the time they are identified.

In other words, even though the employees in question have still not received their redundancy cheques, the costs associated with those redundancies are recognised straight away, i.e. the P&L is affected, even though the cash payout has not occurred.

Then, in subsequent financial period, i.e., the December half, the employees are actually paid their redundancy payments and other entitlements, even though the accounting treatment already brought those charges to book in the prior period.

Which is reflected in the REDUCTION of Employee Benefits from $36.5m @ 30 June 2012 to $31.5m @ 31 December 2012.
(Note that the interim balance sheets do not provide detailed notes that break out Employee Benefits into the same level of detail as the end-of-year accounts, so one has to do a bit of assuming that the leave balance accruals remain relatively constant over time.)

Clearly, while these restructuring charges had a P&L effect in JH12, but no cash flow effect, it is in DH12 that the cash actually goes out the door as the redundant employees are paid out their entitlements.

So what I was actually arguing when I initially raised this issue, is that COF’s DH12 cash flows were actually understated because of these timing differences.


Note: Be aware that it is not possible to be 100% accurate in this sort of assessment, but the cash flow impact is certainly a material one, and I guess that if it isn’t to the full extent of the $5.1m reduction in Employee Benefits between the 30 June 2012 and the 31 December 2012 balance dates, then I’d say it explains at least 70% of it, based on my experience of similar situations in the past.

A useful way to check this is to look at employee movements over the period in question: COF lost 90 staff over the course of the DH12 (this excludes COF’s International Development business, where between 75% and 80% of staff are contractors, so it’s not possible to determine full-time employees).

So, $5m-odd apportioned between 90 staff equates to some $57,000 per employee which “feels” about right, bearing in mind that the bulk of these redundant staff would have been technical or professional staff.


Hope this provides some clarity.

Cam