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Eclipx Group Limited Takes A Hit Due To Impairment

  • October 31, 2019 07:06 PM AEDT
  • Team Kalkine
Eclipx Group Limited Takes A Hit Due To Impairment

What does Impairment mean in accounting?

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Impairment refers to the permanent decrease in the value of the company’s asset specifically for a fixed or an intangible asset. Impairment arises as a result of the change in legal as well as economic conditions, physical damage (wear and tear) of the asset, change in the demand conditions from the end-user, etc.

If an organisation has depreciable fixed assets and its financial statement is as per generally accepted accounting principles, then at some point of time, the impairment of asset can have an impact on its income statement and balance sheet. This is by the way of a non-cash expense which will have to charged to the income statement and simultaneously the asset vale has to be depreciated on the balance sheet.

An asset impairment means that the asset is no longer of that much worth as estimated earlier. Thus, it is important that the value of asset should be assessed on a periodic basis in order to avoid any overstatement on the balance sheet. While the results of the company are being prepared, any impairment loss must be recorded as an expense on the income statement.

While evaluating the company’s assets, it is the duty of an accountant to write off the difference between the fair value and the carrying value, in case the carrying value is more than that of the fair value.

Just like asset impairment, the company’s goodwill could also become impaired. Goodwill impairment refers to the deduction from the earnings recorded on the company’s income statement after recognising that the acquired asset is not performing as well as expected at the time of acquisition.

Goodwill Impairment is calculated by subtracting the record value of the asset (the value of the asset at the time of acquisition) minus its current fair market value.

If the company incurs losses for a prolonged period of time, then the reserves gradually get depleted. In the absence of reserves, the paid-up capital of the company gets gradually depleted in case of prolonged period of losses.

Impact of Impairment on the Financial Statement:

  • Income Statement: Impairment has a negative impact on the income statement as it impacts the net income for the particular period in which the loss has been recognised.
  • Balance Sheet: In case any impairment, the asset is written down to an amount that is equivalent to the impairment loss as recorded in the profit & loss statement.
  • Cash Flow Statement: Impairment does not affect the company’s cash flow statement as it is a non-cash expense.

Impact of Impairment on Ratios:

As impairment has a direct impact on the income statement and the balance sheet, it also impacts the operating and profitability ratios as well. Let’s look at the ratios impacted by the impairment:

  • Profitability ratios like operating and net profit margins
  • Activity Ratios like, total asset turnover ratio, fixed asset turnover ratio, etc.

Impairment in Technology companies:

Technology companies particularly related to computer sciences, technology and software, have assets like copyrights, patents, goodwill and assets under research and development which may be tangible as well as intangible. Impairment in such assets are calculated as already mentioned above.

Through this article, we will see an update on Eclipx Group’s non-cash impairment charges.

Eclipx Group Limited (ASX: ECX)

Eclipx Group Limited (ASX: ECX), in Australia and Zealand, is a recognised leader in vehicle fleet management, fleet leasing as well as diversified financial services. It provides access to funds for consumers and businesses of various sizes. These funds are needed to operate leasing activities via novated leasing and fleet leasing, commercial equipment finance, vehicle sales along with solutions for customer motor vehicle financing.

On 24 September 2019, Eclipx Group confirmed that it would conduct a review of carrying values associated with its software, non-core businesses and intangibles while finalising its FY2019 accounts.

As per the unaudited impairment testing till 28 October 2019, the company expects that it will recognise a non-cash impairment charge in the range of $95 million and $100 million after-tax.

These impairment charges would be related to the remaining non-core business of the Group, Right2Drive and CarLoans plus the carrying value of software.

Non-cash impairments:

Below is the list of approximate non-cash impairments which the company expects to recognise in FY2019 accounts based on the final audit confirmation:

  • $41 million would be written off of the remaining goodwill in Right2Drive and CarLoans business segments.
  • Non-cash impairments in between $12 - $14 million with respect to brands and other acquired intangibles.
  • $20 - $23 million pertaining to software impairments related to its consumer portals, business intelligence platform along with NZ leasing platform investment.
  • Another $22 million write-down in relation to Right2Drive, showing the decision of the board to classify that business considered for sale.

Corporate debt refinancing

As per the market announcement on 19 September 2019, ECX received credit approved term sheets along with signed commitment letters from its present lenders. The investment committee also agreed the commercial terms and conditions from its current US Noteholder to amend and extend its Corporate Debt facilities which are subject to final customary and procedural long-form documentation.

On 28 October 2019, the company confirmed the completion of refinancing of its Corporate Debt facility.

The Background:

The company in its 1H FY2019 result reported a fall in its net operating income by 15% to $132 million, EBITDA by 46% to $31.3 million and NPATA by 62% to $13.8 million as compared to the previous corresponding period. The company also reported a statutory loss after tax of $120.3 million which includes $118.4 million after-tax non-cash impairment of goodwill related to Right2Drive and Grays.

The company’s performance got impacted during the period as its non-core operations underperformed during the period. The non-core businesses were Right2Drive, GraysOnline as well as Commercial Equipment. The board based on the result decided for a simplification plan which comprises of renewal of the company’s senior leadership team, divestment of non-core business and to right size the Group cost base.

The company also highlighted its intention to modify its long-term capital structure and started the process of reorganizing its corporate debt facilities to reflect the future business model.

Progress towards Simplification Plan:

  • On 5 July 2019, the company announced the divestment of GraysOnline and AreYouSelling to Quadrant Private Equity (Quadrant) for A$60 million. On the same date, the company appointed Jason Muhs as Acting CFO. On 31 July 2019, the company confirmed the completion of the sale of GraysOnline to Quadrant.
  • On 13 September 2019, the company announced the sale of Commercial Equipment Finance Australia, its non-core business, for a consideration of $14.6 million to Grow Asset Finance.

Stock Performance:

In the last six months, the shares of ECX have given a return of 60.10%. By the end of the trading session on 31 October 2019, the closing price of the share was $1.570, down by 3.385% as compared to its previous closing price. ECX has a market cap of 519.41 million and approximately 319.64 million outstanding shares.


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