I don't know about % of completion method being phased out. personally I think the method is not perfect but is the closest we have for now to reflect the underlying economic reality. recognising everything at completion doesn't reflect the work done over the years for long term contract and create unnecessary earnings volatility
Very informative. I think can be enhanced if consider depreciation of hardware and licensing for software as life circle for both roughly also 3 years. Another consideration is the support cost for the next 12 years. My 2 sen worth as I am not an IT expert.
@BLee as the payment amount is guaranteed and not contingent upon usage, the SKIN software would be recognised as a financial asset instead of intangible asset, so there won't be any amortisation. the support cost would be recognised in the 12 year maintenance stage which is not explicitly covered here.
One assumption made here is also that the RM1.5b cost covers all the necessary costs for SKIN development during the first 3 years. A gross margin of 17% assumed here is not overly aggressive, in my opinion
Thanks for answering. I do not view SKIN as financial asset as B.O.T. concept carries risk of changing technology and software/hardware update unlike physical assets which can consider 'new' after completion in 3 years time. Just my view..Thanks again.
@BLee no problem. here in this article my view is that Prestariang should follow IFRIC 12 for accounting recognition. For BOT contracts with guaranteed payment it is specified that they should be recognised as financial assets under the standard. Essentially I think the rationale of the standard is under BOT, eventual ownership belongs to government, not the company so it's essentially a FA/receivables, not PPE. that's why there is no amortisation. hope this clarifies.
Worldwide % of completion method is the exception not the norm and in Malaysia it is being phased out even for normal housing construction due to the build and sell concept.
Moreover for concession agreement where do you see provisions for progress payment during the initial construction and deployment period like in a normal SPA for buying a house?
@PurplePain IAS 11 is still using % of completion method for construction. Personally I like % of completion rather than one-off recognition for reasons explained above, but it's up to the standards setter.
For SKIN contract, it is very clear cash payment will only start in the 4th year, no progress payment. What is in this article is on earnings recognition based on IFRIC 12. essentially you are doing work in the first 3 years to be entitled to receive the cash from 4th year onwards. that's why the standards is asking company to recognise revenue and profit in the development stage
@Jay You are positive with Ekovest, Triplc and now Prestariang. It seems like you like to invest in companies where the future is secured but details are not so straightforward and very complicated to work out. Am I correct ? Any comment on WCE ?
@PurplePain long term contract is not really equal to direct sales of goods and services. imagine a contract staff, do you pay him at the end of his contract? that would be the most conservative way but doesn't really reflect his services throughout the year
the concession agreement already specify the terms and payment so I don't see why they can't recognise the revenue. if government eventually default or the company fails to fulfill their obligation then that will be a separate event whereby they should recognise a writedown of the financial assets
@chonghai I like Ekovest and Triplc because I see them as deep value with short to mid term catalyst. Roughly I can estimate their value, it only depends on timing when the values are realised. Prestariang comparably I'm not so positive yet because all the above are still essentially my assumptions and the PE is still high (although it may be normal for software company).
The details are not so complicated actually, once you know the components inside. Haven't had time to look at WCE, anything interesting? may look at it if I have time
more like you are speculating on how the future standards will be while I'm talking on current standards which are effective for now. from conception to effective implementation of a new standards will easily take years, good luck waiting for that
In fact, "progress payments" will start only after completion and commission.
Since there is no provisions for progress billings in the concession agreement for the construction and deployment stage, say, if the construction got stuck by the 2nd year due to unforeseen do you think the goverment your progress billed "receivable" will pay you?
If not how can you recognise revenue during the construction and deployment stage based on progress?
Jay. I don't think revenue and costs can be recognized for the first 3 years. Service is not considered rendered while a project falls under development stage. All the costs incurred during the development stages would be capitalized and amortization starting to apply when service is provided for receiving payment from the government.
Accounting 101: accruals concept means that revenue and costs are recognised as and when they are incurred, not when cash payment is received or paid. So my interpretation is revenue and costs should be recognised in the first 3 years when work is done, not when payment is received in the next 12 years while maintenance revenue will be recognised in the 12 years maintenance period. In other words, my take is that the development revenue for the build and deployment phase should be recognised by progress for the first 3 years while maintenance revenue will be recognised when maintenance works are carried out.
I get where you are coming from. That's what I thought as well before I understood concession contracts accounting. the concept where no revenue and profits are recognised during development stage is the essence of intangible assets where development cost, like what you said, are capitalised and amortised when products/services started to be sold
but if you read IFRIC 12, then you can understand where the accountants are coming from as well. concession contract in essence, is different from usual products/services development.
normal product/services you don't recognise R&D costs because there's no sales transaction happening, so it would be wrong to recognise revenue and profit. there's no customer, you don't know how much revenue can you get from the R&D costss incurred
concession contract on the other hand is a bit like construction contract. just imagine MRT Corp (government) awards a contract to Gamuda (Prestariang) to undertake the construction. in this case, there's already a customer (MRT Corp/government). When Gamuda (Prestariang) starts work, they are not trying to invest and develop something and hopefully make a sale in the future, they are fulfilling a sales already made. They know the contract value (revenue) and minus the costs incurred, they will get their profit.
that' why Gamuda don't wait until full construction is completed only they recognise revenue and profit. the rationale behind IFRIC 12 is almost identical with IAS 11. other examples would be highway concessions or university concessions. revenue and profits are recognised even though the highway/university is still being built
but what if they fail? similarly, if Gamuda has built the MRT line but it collapsed in the 3rd year before full completion, MRT Corp can choose not to pay them or ask for damages, but that's a separate event. Gamuda still did their job in the first 2 years and they didn't reasonably think that it is probable for it to fail, that's why it won't be wrong to recognise revenue and profit in the first 2 years and recognise a rectification cost or an impairment in the 3rd year.
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Posted by Flintstones > 2016-11-21 20:37 | Report Abuse
Good article