Step 7

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.