Sino Grandness

[portuser]

Boon

We are wondering what gave rise to large VAT receivables (RMB 121m as at end-2014).

An assumption has been made that plant and machinery make up 60% of project cost.

I am not sure whether this ratio is appropriate. In 2013 and 2014, of the RMB 296m construction-in-progress that was reclassified, RMB 203m (or 68%) was for plant and machinery.

Juice factory is highly automated and has high investment in plant and machinery.   

We have no information on the composition of RMB 55m advances for PPE.

Advances to suppliers was RMB 77m in 2014, up from RMB 26m in 2013, and less than RMB 1m before.

The spike was largely attributed to the new Hubei factory. But we have no information on VAT receivables attributable to the advances.

The factory in Shanxi produces canned vegetables for export. Offsetting [input] VAT against export tax refund takes time, as the custom department is involved. The subsidiary that operates the Shanxi factory likely has VAT receivables.

[Boon]

Boon

We are wondering what gave rise to large VAT receivables (RMB 121m as at end-2014).

An assumption has been made that plant and machinery make up 60% of project cost.

I am not sure whether this ratio is appropriate. In 2013 and 2014, of the RMB 296m construction-in-progress that was reclassified, RMB 203m (or 68%) was for plant and machinery.

Juice factory is highly automated and has high investment in plant and machinery.   

We have no information on the composition of RMB 55m advances for PPE.

Advances to suppliers was RMB 77m in 2014, up from RMB 26m in 2013, and less than RMB 1m before.

The spike was largely attributed to the new Hubei factory. But we have no information on VAT receivables attributable to the advances.

The factory in Shanxi produces canned vegetables for export. Offsetting [input] VAT against export tax refund takes time, as the custom department is involved. The subsidiary that operates the Shanxi factory likely has VAT receivables.

[Image: 33yn7mo.jpg]

Hi portuser,
 
The assumption that plant and machinery make up 60% of project cost looks conservative if compared to the 6 year average -  at only 49%.
 
Input VAT credit corresponds to RMB 260,345,188 of plant and machinery purchases amounted to RMB 260,345,188 x 17% = RMB 44 million only, as compared to “VAT receivables” of RMB 121 million as at FY2014.
 
Question remains : 

What have contributed to ballooning “VAT receivables” over the year from RMB 18 million in FY2009 to RMB 121 million in FY2014
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From page 81 of AR2014:
 
“The advances which are unsecured, interest-free and repayable on demand are mainly made to:
                  -  contractor relates to the construction of newly acquired land and existing factory and warehouse; 

                  -  suppliers of property, plant and equipment relate to the purchase of plant and machinery;
                  -  suppliers relate to the purchase of raw material, packing materials and finished goods; and 

-      employees pertaining to business purpose.”
 
Question:
 
The RMB 55 million and 77 million had been classified as “advances to suppliers of property, plant and equipment” and “advances to suppliers”.

Couldn’t this be interpreted as the 55 million was for the “purchase of plant and machinery” whereas the 77 million was for the “purchase of raw material, packing materials and finished goods” ?
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[portuser]

Boon

Ha ha, RMB 194m was spent on civil works at the Hubei factory (page 71 of annual report).

Therefore, if the project cost of the Hubei factory was RMB 500m, plant and machinery accounted for around 60%.

The RMB 77m advances to suppliers are likely prepayments for stuff used for production at the Hubei factory. The [input] VAT may qualify for deduction of future [output] VAT.

I have suggested that export, which is VAT-exempt, gives rise to VAT receivables.

We have no detailed information to identify the components of VAT receivables.

What is the likelihood of VAT receivables being inflated, given that tax authority is concerned about evasion.

[CY09]

Hi Portuser/Boon,

Good analysis from a single perspective.

The only way this issue can be resolved is through time. This is because one can argue this and the other argue that the accounts are not real. This is in light of many incidents such as Eratat (disappearance of cash), China Gaoxian (1 Billion RMB factory which disappeared overnight despite audits) etc. Let's leave it to time to provide us the answer.

[Boon]

Boon

Ha ha, RMB 194m was spent on civil works at the Hubei factory (page 71 of annual report).

Therefore, if the project cost of the Hubei factory was RMB 500m, plant and machinery accounted for around 60%.

The RMB 77m advances to suppliers are likely prepayments for stuff used for production at the Hubei factory. The [input] VAT may qualify for deduction of future [output] VAT.

I have suggested that export, which is VAT-exempt, gives rise to VAT receivables.

We have no detailed information to identify the components of VAT receivables.

What is the likelihood of VAT receivables being inflated, given that tax authority is concerned about evasion.

Hi portuser,
 
Interestingly, one component of VAT receivables had been identified on page 119 of AR2014:
 
b) Property Plant and Equipment
 
"In 2013, the additions of RMB 278.8 million in the cost of property, plant and equipment had included construction-in-progress of RMB 270.8 million. Included in the additions in construction-in-progress of RMB 270.8 million was VAT receivables of RMB 29.3 million. The VAT receivables of RMB 29.3 million was adjusted from construction-in-progress but was incorrectly disclosed as a disposal of construction-in-progress. The error has been corrected in the current year’s financial statements. The additions to construction-in-progress have been adjusted from RMB 270.8 million to RMB 241.4 million accordingly." 
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In FY2013, VAT receivables grew from 35 m in FY2012 to 69 m in FY2013 – an increase of 34 m, of which 29.3 m was attributable to construction in progress
 
 29.3 m = 241.4 x 17% x 71%.
 
The order of magnitude of increase in VAT receivables for FY2013 was more or less in line with what we have been talking about - but this was not the case in FY2014.
 
In FY2014, VAT receivables grew from 69 m in FY2013 to 121 m – an increase of 52 m.
 
Addition to construction in progress was only 98 m - meaning possible maximum VAT receivables was 98 x 0.17 = 17 m.
 
52 m = about 3 times of 17 m => too huge a gap !

This could possibly be explained by export, which is VAT- exempt. However, “export tax refund” had been separately accounted for. 
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[portuser]

Boon

We have no idea whether [input] VAT paid in connection with export had been fully covered by export tax refund.

There is also the possibility that an operating subsidiary paid substantial [input] VAT just before end-2014, and the amount was captured as VAT receivables as at end-2014 before VAT return was filed.

Anyway these are all guesses.


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Did advances (for PPE as well as supplies) not contribute to the RMB 52m rise in VAT receivables? 

[Input] VAT would have been paid to a potion of advances (RMB 55m) for PPE, which had yet to turn into construction-in-progress..

Advances for supplies would have attracted [input] VAT too. The RMB 51 m increase in such advances (RMB 77m in 2014 - RMB 26m 2013), likely for the new Hubei factory, would also have given rise to increase in VAT receivables.

[Oldman9]

Very interesting discussion on VAT.

By the way what is the impact of Vat on credit sales?

Hi Leeeta

I think the answer is simple. VAT creates cash flow problems.

cheers
Oldman9.

[Boon]

Boon

We have no idea whether [input] VAT paid in connection with export had been fully covered by export tax refund.

There is also the possibility that an operating subsidiary paid substantial [input] VAT just before end-2014, and the amount was captured as VAT receivables as at end-2014 before VAT return was filed.

Anyway these are all guesses.


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Did advances (for PPE as well as supplies) not contribute to the RMB 52m rise in VAT receivables? 

[Input] VAT would have been paid to a potion of advances (RMB 55m) for PPE, which had yet to turn into construction-in-progress..

Advances for supplies would have attracted [input] VAT too. The RMB 51 m increase in such advances (RMB 77m in 2014 - RMB 26m 2013), likely for the new Hubei factory, would also have given rise to increase in VAT receivables.

“The VAT receivables of RMB 29.3 million was adjusted from construction-in-progress but was incorrectly disclosed as a disposal of construction-in-progress.”
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Hi portuser,

Ha-ha! They had already made a mistake on the above - if they do make another mistake again by mixing up “export tax refund” with “VAT receivables” – that would put their credibility at even greater risk.
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Trade and Other Receivables are parked under Current Assets on the Balance Sheet.

“Advances” and “VAT receivables” are parked under Other Receivables.

55 (117%) = 47 (100%) + 8 (17%)

The entire RMB 55 m of prepayment had been parked under “Advances”. If the 8 m VAT component of it had also been concurrently parked under “VAT receivables”, before being expensed, it would have been “double counted”.

Upon being expensed or converted into construction in progress, “addition to construction in progress" would increase by 47 m, and “VAT receivables” increase by 8 m.

The other possibility that “Advances” could have “contributed” towards increase in “VAT receivables”, before being expensed, would be if Sino had made 55m PLUS 9 m (= 55 x 17%) of VAT to the suppliers of PPE – with 55 m parked under “Advances” and 9 m under “VAT receivables”. But would this be in line with the accounting principles ? Besides, we are talking about prepayment of 64 m and not 55 m.
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[portuser]

Boon wrote

"The other possibility that “Advances” could have “contributed” towards increase in “VAT receivables”, before being expensed, would be if Sino had made 55m PLUS 9 m (= 55 x 17%) of VAT to the suppliers of PPE – with 55 m parked under “Advances” and 9 m under “VAT receivables”. But would this be in line with the accounting principles ? Besides, we are talking about prepayment of 64 m and not 55 m."



The underlined statement is correct only if the asset to be constructed was building structure, in which event the RMB 9m VAT could not be deducted from output VAT and hence did not qualify as "VAT receivable". 

There is no information that this was the case. 

On the other hand, if RMB 55m was for plant and machinery and RMB 9m the associated VAT, is it incorrect to account for them separately?

[Boon]

Boon wrote

"The other possibility that “Advances” could have “contributed” towards increase in “VAT receivables”, before being expensed, would be if Sino had made 55m PLUS 9 m (= 55 x 17%) of VAT to the suppliers of PPE – with 55 m parked under “Advances” and 9 m under “VAT receivables”. But would this be in line with the accounting principles ? Besides, we are talking about prepayment of 64 m and not 55 m."



The underlined statement is correct only if the asset to be constructed was building structure, in which event the RMB 9m VAT could not be deducted from output VAT and hence did not qualify as "VAT receivable". 

There is no information that this was the case. 

On the other hand, if RMB 55m was for plant and machinery and RMB 9m the associated VAT, is it incorrect to account for them separately?

Hi portuser,
 
Agreed, if the 64 m was for building structure, the associated VAT of 9 m would not qualify as “VAT receivables” – my implicit underlying assumption is: it was for the purchase of plant and machinery.
 
“If RMB 55m was for plant and machinery and RMB 9m the associated VAT, is it incorrect to account for them separately?”  
 
From the perspective of accounting treatment and practice, can the 9 m be parked under “VAT receivables”, bear in mind that we are talking about prepayment BEFORE it is being expensed.
 
If no VAT has been paid or incurred, could a “VAT refund status” be accorded to the 9 m?
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