Step 7
EXPLORING THE
INVENTORY PRACTICES OF YOUR FIRM
PTB inventory includes aircraft, engines and spare parts as
finished goods which are assets held for sale. As well as engines and aircraft
undergoing reconditioning or preparation for sale as work in progress and
incomplete repair jobs. We can understand that their business isn’t just about
selling turbine engines but also complete aircrafts, repairs and maintenance
and spare parts. They also list their inventories as current which indicates
they expect their value to be realised within 12 months.
The notes state inventories are stated at the lower of cost and
net realisable value. Costs are assigned to individual items of stock by
specific identification. Net realisable value is the estimated selling price in
the ordinary course of business less the estimated costs of completion and the
estimated costs necessary to make the sale. In line with the accounting
standards, the cost includes all direct and indirect costs in relation to
prepare the item for sale.
Costs are assigned to individual items of stock by specific
identification. Suggesting they use the specific identification method or it is
possible. The annual stocktake no doubt involves data matching technology,
although a physical identification of aircraft would be obvious. Somewhat
different to the stocktakes I did while working at a service station using a
pad and a pen and physically observing and recording every drink bottle, chip,
lolly and chocolate plus everything else, which would then be matched to sales
and stock in storage. Although it is not
exactly identified, the mention of using perpetual growth rates as key
assumptions used for value-in-use calculations signifies the perpetual system
for inventory recording.
PTB 2014 $19.789 mill write down in the value of group assets with
a provision $3.284 mill a strategy driven by issues created by the GFC. From
the report: “On 4 November 2013, PTB Group Ltd announced to the market that it
would be carrying out a rationalisation of its operations. This significant
change in direction for the business drove a change in the valuation
assumptions for a range of Group assets, leading to significant write-downs.”
So even though the GFC ended in 2008 the company was still
feeling the effects. I guess this kind of accounting helps to protect the
business by not only predicting possible future expectations but also making
provisions for the actual expectation after it has occurred.
“In the 2015 year, this business will continue to be focused on
selling down the current inventory while continuing to support IAP and
Emerald’s leased aircraft.” Strategies forecasted to allow for past events and
future obligations???
Significant portion of PTB inventory includes spare parts over
completed engines.
Their main strategy is “continuing the focus on turning
inventory into cash”, which makes sense to generate cash, which is essential
for business to continue and to pay debts, wages etc to focus on turning
inventory into cash, which is its original intention anyway! This is continuing
theme over 2015 and 2016 which sees inventory steadily grow from $18817mil,
$21113mil and $21440 respectively.
“In September 2006, it acquired IAP Group for $13.8 million. IAP
Group is a Sydney based niche aviation asset management company providing
aircraft inventory support”; This looks like a smart move to account for the
effects of the GFC but also a complementary acquisition to support their
current operations and allow for global expansion. (Hogget etal, 2015) “gross
sales margin — the difference between the cost of goods bought from wholesalers
and the price the goods are sold to consumers”. So PTB show $18 512mil as cost
of goods sold as a credited expense in the profit/loss consolidated income
statement, which I know is related to inventory.
Along with a total of $7216mil for impairment of inventory. I
didn’t understand what “impairment’ meant, commenting “Impairment of inventory?
Is that depreciation, spoilage, wastage???” so I went looking for further
information. I found this in the accompanying notes to the financial
statements:
1. Summary of Significant Accounting Policies
(j) Impairment of assets Goodwill and intangible
assets that have an indefinite useful life are not subject to amortisation and
are tested annually for impairment or more frequently if events or changes in
circumstances indicate that they might be impaired. Other assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognised for
the amount by which the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to
sell and value in use. For the purposes of assessing impairment, assets are
grouped at the lowest levels for which there are separately identifiable cash
inflows (cash generating units).
(n) Other financial assets
When an event occurring after the impairment was recognised
causes the amount of the impairment loss to decrease the decrease in impairment
loss is reversed through the statement of profit or loss and other
comprehensive income.
Further reading of the textbook explained impairment to be the
recoverable amount of writedowns and since this was their cash generating
strategy, I began to understand the difference between impairments and
depreciation.
The company’s accounting policies seem to align with accounting
standards and as yet I have not noticed any significant changes. Their cash
generating from writedowns of idle inventory seems to be effective as cash
balances rise from $1142mil in 2014 to $3800 in 2015. Although cash dips to
$1982 in 2016, this reflects the change in borrowings from $3535mil in 2015 to
$1798 in 2016. Equity remains steady over the years with little to no change.
I get the feeling the company discloses everything on the up and
up and find nothing too suspicious.
