CDL & CDI ... Another Great Result

[Snoopy]

The $4m arises from the creation of a deferred tax liability (which hits the P&L in the form of tax expense) which is calculated as the the tax effect at 28% between the difference in accounting carrying value of the commercial buildings owned and the tax base of the commercial buildings.

I am either going off on a wild tangent or starting to understand this better, hopefully the latter.

Despite me doubting its existence in a previous post (649), there is no doubt a deferred liability does exist, as CDI in its press release on 1st August 'says so'. A deferred tax liability is brought into existence when the reported tax payments are time shifted from the actual tax payments due dates. Yet as I explained in post 649, there is no time shift between reported and IRD tax due dates as a result of the removal of structural building depreciation as a tax deduction. So why does the deferred tax liability NEED to be there? It doesn't make sense!

Then I had my 'ahah' insight. I think I am right. The deferred tax liability does not NEED to be there. But the deferred tax liability is there because CDI management have CHOSEN to put it there. And why would CDI management choose to do that? Because by taking the big hit ($4m) up front, that means they are no longer required to take a series of smaller hits down the track in subsequent years. They are effectively removing the depreciation tax changes from the reported operational figures in all future years, by ring fencing them in a separate 'deferred tax' bucket today. If I am right about that, I don't like it. I would much rather CDI management front up with the actual tax bill every year to to declare to shareholders, rather than hide the incremental part of it away. But I guess the headline profit figures will look better going forwards if CDI report their profit figures in this way?

SNOOPY



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[Southern Lad]

OK, we will go with this as the explanation for now, and I will see if I can understand the process.



Note 9 from AR2023.

Investment Property Balance @ 31-12-2023	$37.376m
less depreciation charge for FY2021	$0.071m
less depreciation charge for FY2022	$0.538m
less depreciation charge for FY2023	$0.933m
equals Carrying Value of Investment Property	$35.834m

That is not the complete story, because it is only the depreciation of the structural elements of buildings that has been stopped. Depreciation of, for example, of built in fittings like air conditioning systems ('Building Services') or floor coverings ('Building Surfaces and Finishes') is still allowed (see AR2023 p38). However, for the purpose of this reply, and not drawing attention away from the main point being discussed, I will ignore this and go with your definition of depreciation, meaning 'no depreciation on buildings is allowed'



...which is 50 years (AR2023 p38). If we take the FY2023 building depreciation charge ($0.933m) and multiply that by 50 (I am assuming straight line depreciation over 50 years here) then I get: 50 x $0.933m = $46.65m. This number is greater than the un-depreciated book value of the assets - $37.376m - because IFRS16 tends to 'front load' depreciation into the early years. An alternative, pre IFRS16, straight line linear depreciation charge would have been $37.376m/50= $0.748m (based on declared asset values.)



The issue here is that the withdrawal of the ability to claim depreciation on buildings is an IRD directive, not an accounting standard reporting directive. So when you say that the $4m one off charge which
"arises from the creation of a deferred tax liability (which hits the P&L in the form of tax expense)."

how can there be a deferred tax liability because of this? The reporting period for IFRS standard accounting and IRD tax accounting are still exactly the same as they were before the depreciation law change. There is no time shifting of tax here is there? It is only the amount of income tax taken that will increase in subsequent years.



What deferred tax liability (I am still doubting where it has come from)?

How can you say that 'disallowing depreciation'/'increasing IRD profits'/'increasing tax due to the IRD' has no effect on the profit and loss in the future? If there was no P&L effect from changing the tax law, then why did the National lead government even bother to change the tax law? The purpose of changing the tax law was to rake in more tax from these property owning entities, was it not?

SNOOPY

Some further comments:

1. The depreciated cost of the buildings in the financial statements will presumably include amounts for building fit-out which are still depreciable for tax purposes (e.g. air conditioning, plumbing, electrical, internal partitioning, floor coverings, bathrooms, security systems, etc.). No deferred tax liability needs to be recognised on these assets except to the extent that the depreciation rates applied to date are different for financial reporting and tax purposes.

2. The economic life of buildings is identified as 50 years at new, so as at 2024 the remaining economic life is a few years less than 50.

3. The accounting standards also allow certain amounts of deferred tax to be derecoignised (i.e. not included as a liability on the balance sheet) where the asset qualifies for an initial recognition exception. This could apply in part to buildings 'acquired' between 2010 and 2020 when at the time of acquisition there was no tax depreciation allowed - tax depreciation was reinstated in 2020 as a COVID relief measure but has now been turned off again. This Initial Recognition Exception area is somewhat convoluted and difficult to calculate unless you have the detail.

4. The accounting standards require that deferred tax be recognised unless the entity holds the property as investment property and chooses to revalue to market each year for financial reporting purposes and they intend to realise the carrying value through sale rather than holding for all of the economic life. Recognising deferred tax is not optional and follows the passing of income tax legislation in March 2024. You will see a whole host of NZ companies making disclosure on the impact at the moment, if nothing else to keep the market informed.