RE: Review of Shadowfall Report4 Feb 2018 13:56
In this instance, the fair value of the equipment based on its commercial use has been assessed at �12m (it is perhaps worth stressing that the equipment was independently valued), so it seems reasonable to me for that value to be used when the equipment was transferred to the joint venture, resulting in an accounting gain for IQE.
If they had transferred the equipment at the lower net book value figure, IQE would have been effectively contributing more to the JV than their 50% equity share merited, which would have been a breach of their fiduciary duty to IQE shareholders, if nothing else.
So Shadowfall may find that transaction �unorthodox�, but in my view it's simply a mundane application of accounting rules and commercial common sense.
3. IQE�s investment in the CSC JV appears to be swiftly and largely written off
IQE received �8 million in preference shares in CSC and �12 million in cash inlieu of this IP transfer. However, subsequent to this receipt it appears that the value of the preference shares and its other equity interest was almost immediately impaired.
As far as I can tell, Shadowfall are conflating preference shares and ordinary shares here.
They are correct that IQE sold �20m of IP to the JV in exchange for �8m preference shares and �12m cash, but contrary to what Shadowfall claim, the �8m preference shares have not been written off by IQE. Look at the FY16 group accounts and they are shown as �Financial Assets� within �non-current assets�:
5a76f6ee595f8IQE3.png
Further details are provided in note 15:
5a76f72f86a5cIQE4.png
Note in particular that last comment about the carrying value (i.e. the �8m figure) representing the estimated fair value.
So when Shadowfall refer to write offs, they appear to be referring to the ordinary shares held by the IQE subsidiaries in the JV. These have nothing to do with the payment for the �20m of IP, but are instead a simple application of the �equity method� of accounting for joint ventures, as required by the accounting standards.
This is mentioned in the accounts of the IQE subsidiaries, from which Shadowfall have quoted extracts in relation to the impairments, but they seem to have missed these additional disclosures, e.g. in the accounts of IQE (Europe) Ltd:
5a76f7acca794IQE5.png
The reference there to �the group accounting treatment� simply means the �equity method� of accounting for joint ventures, as explained in more detail in the IQE group accounting policies note:
5a76f80e3de4eIQE6.png
So the combination of the losses incurred by the JVs and the unrealised gains on transactions between IQE and the JVs gives rise to the write off, as required by the accounting standards. This is quantified in note 27 of the group accounts:
5a76f8bba40efIQE7.png
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