Shortage of Capital at PGW for FY2021: Pt.4. The Make Good Lease Provision
Quote:
Originally Posted by
Snoopy
This one caught out more than one company, but the cost of putting it right for PGW was nevertheless severe! At least this faux pas was not hidden from shareholders. It was up front in the profit and loss statement. From AR2018, Note 20 explains:
-----
Holidays Act 2003 - Remediation Costs
During the period the Group recognised an $8.06 million provision for remediation costs of historical liabilities under the Holidays Act 2003. The Group has engaged the services of an external advisor and a law firm to assist in determining the level of the provision. Work on determining the final liability is not yet complete. The provision is included within Employee entitlements above, and represents the Management’s best estimate of the remediation costs.
----
Note 20 goes on to list employee entitlements rising from $31.163m at EOFY2018 from $22.946m at EOFY2017, a rise in value of $8.217m, most likely almost entirely due to the Holiday's Act debacle.
Then one year later, from note 18 in AR2019, we learn:
-----
The Group has now completed the remediation work and has made remediation payments to current staff and those terminated staff for which the Group has been able to make contact with. Following these payments the remaining provision has been released apart from an amount of $1.20 million which continues to be held in respect of terminated employees for which the Group is yet to make contact with.
------
From the 'Statement of Profit and Loss' for FY2019, the amount written back was $2.303m. So the original provisioning was conservatively generous and the final capital used to sort out this sorry affair was:
$8.060m - $2.303m = $5.757m
Nevertheless that was a not inconsiderable capital ejection that otherwise might have been available to shore up the capital position of the company.
At EOFY2019, $16.821m was the amount listed under 'Employee Entitlements' under 'Trade and Other Payables' at EOFY2019. This represents 'Employee Entitlements' from the NZ based rural retail and livestock operation only, the 'Employee Entitlements' from the seed division having been hived off. If we take the FY2018 'Employee Entitlements' for the whole operation, including seeds, and subtract the holiday act entitlements accounted for at the time -and today's remaining total- we get:
$31.163m - $16.821m - $8.060m = $6.282m
This figure gives some indication of the 'Employee Entitlements' that might have been transferred to the 'Seed Division' after its sale.
Time for another episode in the much anticipated, controversial, yet wildly popular 'Shortage of Capital' series. This time the 'Trade & Other Payables' note throws up a brand new debt: the 'Make Right' provision for leased properties of $2.680m.
Like others I am still trying to come 'fully to grips' with the new standard for treating leased assets. $2.690m is to be "amortized over the life of the right-of-use assets". This $2.690m provision seems to be listed simply as part of the unspecified 'long term provision' in the balance sheet. 'Making good a property' is something that would normally happen at lease end. So it seems odd that the accounting treatment is to gradually write this figure off. I would have thought it would make more sense to keep this debt on the balance sheet as a 'lump sum', as a reminder that on lease end, this 'lump sum' must be spent. It is clear to me that this 'lump sum' must remain in a PGW bank account until it needs to be spent, regardless of what accounting conventions demand. This means it must end up as 'off balance sheet capital', ready to spend on termination of the lease. It is a confirmed 'future expense' that gradually becomes invisible to shareholders as it is amortized. When the lease is terminated, and the premises is vacated, then the accounts for that year will show next to nothing of the 'put back' refurbishment expenses. That doesn't seem right to me. But the upside of this policy is that PGW will have up to $2.690m of 'off balance sheet capital' to call on in an emergency. And that will have a positive, albeit transient, effect on any 'Shortage of capital' going forwards.
The above is my interpretation of what is going on. I hope if I am wrong one of the accounting gurus on this is forum will correct me!
SNOOPY