H3 -
A little uncomfortable answering because I am aquainted
with the *reserve mentality* first hand.
Lets define *reserve mentality* - whats follows is a
metaphor and ALL REAL AND CLEARED REAL AUDITIORS.
The company that did this had 8 billion in sales the
year what follows follows:
Metaphor:
Sell a consumer product with a promotion. Promotion is:
(a) Buy product - get redemption coupon - required
that consumer send back --yellow ballon-- to company.
Expected sales of the *promotional product* $25 million.
Expected promotion redemption 2% - 3%.
====================================
Lets book a reserve.
------------------------------------
P&L
Debit Expense (25,000,000) * 2.5% = $625,000
Balance Sheet
Credit Promo Reserve = $625,000
====================================
When promo's eventually come in the door
------------------------------------
Balance Sheet entries ONLY
Credit Cash - Promo amount per coupon returned
Debit - Promo Reserve
====================================
If all works *perfectly*
------------------------------------
Cash out the door = $625,000
The Promo Reserve on the Balance Sheet goes down to -0-
Repeat the process above 500 times and we are talking
about $325,000,000 in reserves.
====================================
John - why *waste* my time with this?
I asked you a simple question
------------------------------------
(a) You need to understand the PROCESS above
in order to understand the follow - GET IT
Scenario One --
Ring - Ring -
John - we have too much profit - find a way to
REDUCE PROFIT. Hurry up.
The PURPLE BALLOON promo is about to come out.
Expected sales for this promo is $25 million.
Expected promo redemption rate is 2% to 3%.
(same facts as above)
Need an angle - angle is - PURPLE BALLONS ARE DIFFERENT.
Their redemption rate is 5% - not 2% to 3%.
(there really NOT any different but prove it)
Accounting entries:
====================================
Lets book a reserve.
------------------------------------
P&L
Debit Expense (25,000,000) * 5.0% = $1,250,000
Balance Sheet
Credit Promo Reserve = $1,250,000
Do you see it?
I just INCREASED EXPENSE from what should have been
P&L
Debit Expense (25,000,000) * 2.5% = $625,000
To:
P&L
Debit Expense (25,000,000) * 5.0% = $1,250,000
By doing so I have HIDDEN profit.
But you will say the auditors will argue. They can't.
Purple ballons ARE DIFFERENT and they don't have
a HISTORY to challenge MY ASSUMPTIONS. Eventually
only $625,000 in redemptions will come in the door
meaning - IN THE FUTURE - I will have to REVERSE the
UNUSED (remaining) reserve as follows:
Balance Sheet -
DEBIT - Reserve
P&L
CREDIT - Expense (i.e. this is a NEGATVIE expense
which is effectively equivalent to booking PROFIT)
==========================
CMM ???
They are in a REVERSE situation.
They want to create TWO balance sheet entries.
And they are.
Balance Sheet
CREDIT - CASH OUT THE DOOR
Balance Sheet
DEBIT - Some Deferred Asset Account called HOKEY ...
or in our case deferred stripping ....
IOW - no entries to P&L
Is this legal. You bet it is.
They have argued (successfully) that they ARE MATCHING
REVENUES and EXPENSES and that these EXPENSES should
sit on the balance sheets (and therefore be called
ASSETS and not EXPENSES) because the REVENUES they
*** MATCH TO *** are way out there in the future.
Do I believe any of this?
You bet I don't.
Whats her motive?
Show profit on the P&L to keep stock price up.
Why?
Sell more shares.
Why?
We are CASH POOR. We can't FUND San Juan or anything
else. i.e. they reuse the toilet paper at corporate.
Does any of this bother me?
No. Why?
She is doing what she has to do.
Will those deferred costs bit us in the ASS in the
future.
I doubt it -- because -- they will CAUSE US TO SHOW
a LOSS ON THE P&L - sooner or later ....
but those COSTS will have -- 000 --- effect with respect
to CASH OUT THE DOOR.
IOW - when those costs hit - to see CASH FLOW for the
quarter - even thought EAT (earnings after taxes IS A LOOS)
you will have to ADD
(1) EAT LOSS
(2) Deffered costs from stripping booked to P&L EXPENSE
---------------------------------------
= Postive Cash Flow
I talk too much - and sorry if I really didn't answer
your question.
The heart breaker in all of this is San Jaun.
I'll be dead before we see 80,000 oz a year.
regards,
John |
