BAO2203 Corporate Accounting : Financial Records

Part I:

1. Identifying the recent financial predicament facing Surfstitch Ltd:

Surfstitch Ltd overall financial predicament mainly started with the exit of Justin Cameron in 2015, who was one of the founders of the organisation. This forced the management of Surfstitch Ltd to write down the assets, which directly increased its financial losses. This increment in the overall financial losses was also conducted due to the high-end cost of sales, and selling & distribution expenses conducted by the organisation. These irrelevant expenses did not allow Surfstitch Ltd to generate the required revenue to support its revenue growth. Therefore, in both 2015 and 2016 financial year the company faced major losses (Market Index 2017).

2. Identifying the 2015 goodwill, investment in subsidiary and cash position

Surfstitch Ltd during 2015 mainly portrayed goodwill of $73,832,000 in its books, while the investment in subsidiary stood at $70,197,000. In addition, during 2015 Surfstitch Ltd cash and cash equivalent position mainly portrayed $40,837,000 in its annual report (Market Index 2017).

3. Identifying the 2016 impairment costs, selling & distribution and administrative expenses in the profit and loss statement:

There were no impairments expenses during 2015 fiscal year, while in 2016 the overall impairment costs mainly rose to $88,999,000. In addition, the selling and distribution cost during 2016 mainly rose to $101,268,000 levels from $44,683,000 in 2015. Moreover, the administrative expenses of the organisation increased exponentially in 2016 to the levels of $49,237,000 from $7,424,000 in 2015 (Market Index 2017). Therefore, it could be understood that the organizations overall profit and loss statement depicted the loss in revenues, as the overall expenses increased in fiscal year. However, the revenue of the organization also increased, which was not adequate to support its rising expenses.

4. Recommending whether to buy, hold or sell Surfstitch Ltd shares and why:

The evaluation of the financial records of Surfstitch Ltd mainly helps in identifying the overall loopholes in the organisations financial condition. The overall Goodwill of the organisation in 2015 was recorded to be $73,832,000, which in 2016 amounted to $6,609,000. This mainly indicates that irrelevant valuation method was used by the organisation to inflate its financial condition by increasing the Goodwill value. The second weakness in the financial strength was found from the overall inclining administrative expenses, selling & distribution expenses and impairment cost, which directly rose to new levels in 2016. The mainly states that the organisations overall financial condition declined when one of its co-founders exited the organisation and took the relevant capital with him. The exit of the co-founder made the organisation financially vulnerable and reduced its ability to comprehend with the rising expenses (Hatch 2017).

Moreover, in the current scenario the organisation’s share value is priced at 6.6 per cent. This mainly indicates that any kind of investment conducted in the organisation will directly result in loss for the investors, as the management is not able to cope up with the rising expenses incurred from its operations. Therefore, selling shares of the organisation is much advisable for an investor who is currently holding the stocks of Surfstitch Ltd. However, for any new investor investment in Surfstitch Ltd is restricted, as the organisation will not be able to provide the relevant return from investments (Market Index 2017).

Part II:

Discussing about: Why is it necessary to have a continuous reporting regime for disclosure entities and is it effective?

The overall report indicates the significant information for disclosure, where ASX could aim the disclosure exemptions. This could help in reducing any kind of unethical measures that would be taken by organisations to inflate their shares. The overall new article indicates the measures taken by Donald Jones for demonstrating loopholes in ASX disclosure system. The relevant evaluation of research paper and ASX disclosure measure is also conducted in the report for identifying the relevant significance of continuous disclosure measure.

Introduction:

Both the newspaper article and the research paper directly state the necessity for continuous disclosure of entities, where relevant information that could have a material impact on the security value is reported by the organization. This depiction of the overall disclosure mainly helps in reducing any kind of risk that might reduce irrelevant returns of an investor. However, many organizations manipulate the advantages of disclosure measures and use false news to boost their overall share price. In case of Surfstitch Ltd, the management boosted that are relevant profits would be incurred in 2015 instead the organization had a huge loss in its overall operations. This mainly indicated that the use of continuous disclosure could be amended by the appropriate authority for reducing any kind of mismanagement that could be conducted by organizations (Abernathy et al. 2015).

Literature Review:

There have been relevant cases during 2007 crisis where continuous disclosure was not implemented by the Australian government, which directly increased the unethical measures conducted by organisations for inflating their shares. Consequently, the use of continuous disclosure organisations is able to reduce any kind of unethical practices, which could be used in inflating the share price. There are certain rules in Australia away if an organisation has conducted false reporting of its financial projections, investors could directly take the matter in court. In the case of Surfstitch Ltd, The organisation provided false report of the projected annual earnings in future, which directly resulted in loss (Cascino et al. 2015). Therefore, the investors filed a court case against the company and demanded $100 million as compensation.

In the article “Australia’s continuous disclosure system: clear or confused?”, relevant loopholes in the Australian continuous disclosure system is been identified. This mainly indicates that relevant organization is able to manipulate the information and boost its share price. This is directly inflating the stock prices, which could have negative impact on the overall capital market. The author of the article directly indicates about the takeover offers was used by David Jones earlier this year, which directly indicates the complexity and confusion of the disclosure test under the listing rules. However, the takeover approach that was used by David Jones had received relevant media approach, which stated that any kind of announcement that is conducted by companies without any problem is disclosed in the Australian market. The author also pointed out that under the listing rule of 3.1.A.3, any kind of exclusive agreements weather creditable bitter is considered price sensitive but it is not included in the exemption list. This mainly allowed David Jones to interpret the old measures that needs to be taken by the market by evaluating any kind of information portrayed by an organisation. Blindly following any kind of information provided by an organisation would eventually lead up to false promises and might increase risk of investment (Clor?Proell, Proell and Warfield 2014).

The research paper also helps in identifying the relevant significance of using continuous disclosure environment, as companies were not providing relevant future forecast for investors. The research paper directly states that organisations disclosing before 2000 was relatively not providing adequate information to the investors regarding future growth. However, the overall research data is old, does not comply with the changing regulations and rules of Australian exchange. Nevertheless, the relevant implications of the research data indicated that use of continuous disclosure environment allows investors to goes into the future growth of an organisation. This helps in reducing any kind of miscommunication or unethical measures that is used by organisation to boost the share price (Dechow, Sloan and Zha 2014).

Therefore, it could be understood that there is significant need of continuous disclosure method with adequate implementation of relevant rules that could help in reducing false presentation of information to the investor. This continuous disclosure measure mainly helps in declining the unethical conduct that could be used by the organisation to boost their share price. There has been relevant disclosure that is conducted by ASX, which needs to be maintained by organisations. However, there are certain criteria’s, which needs to be evaluated to identify the significance of the information (Goh et al. 2015). The criteria’s are depicted as follows.

• The overall breach of any law for disclosing the information
• Incomplete information on the overall proposals and negotiations
• If the information is generated for internal management
• The information is trade secret.

The identified information could mainly be used in detecting and segregating relative information with significant information. Harford and Powell (2015) mentioned that with the use of adequate disclosure method Australian authorities are mainly able to reduce relevant problems, which could reduce false information projections. Therefore, with the help of relevant measures Australian authorities are mainly able to reduce the overall wrong projection of news, which might be conducted by companies. However, the evaluation of cases identified during the financial crisis of 2008 mainly forced the Australian authority to mandate continues disclosure measures for providing relevant news, which could have impact on the share price. The relevant measures mainly help in reducing any kind of problems, which might by portrayed by the declaration of wrongful information. Therefore, the listing of Rules 3.1 mainly helps in identifying the relevant news, which could be used in boosting the share price of an organization.

Furthermore, ATO with the help of relevant measures and articles are mainly able to identifying the unethical conduct that is used by organization in disclosing the annual report. The Australian divisions for portraying the adequate information of the organization could use the measures. The “Management earnings forecasts in a continuous disclosure environment” research paper mainly evaluates different types of Australian management, where its earnings forecast is been evaluated. This evaluation of the earnings forecast mainly help in identifying the reliability of the company projection that is been conducted in their financial report. The articles directly evaluate the relevant significance of the continuous disclosure that needs to be conducted by organization in their annual report. This relevant measure could directly help in generating the overall profitability of the organization, where it might help in reducing disclosure problems (Lee 2017).

Therefore, it is necessary for organization to have continuous reporting regime for disclosing entities and their effect to improve the relevant problems. Relevant agreement for the statement is been proposed, where it is necessary for organization to have continuous disclosure in their system. This could mainly help in portraying the relevant actions that is been taken by the management to increase revenue of the organization in near future. Furthermore, the continuous disclosure measures could mainly help in improving reliability of the information that is portrayed by organization to their shareholders (Malone, Tarca and Wee 2016). Furthermore, the need for continuous disclosure method mainly started after commencement of the economic crisis, which portrayed weakness in financial report and reporting of the organisations. Therefore, it is essential for the Australian government to have certain criteria met before allowing any kind of news that could be published by the organisation.  Moreover, ASX has Specified rules for the disclosure of information, as it might affect the overall share price.  the main aim of ASX us to allow the shareholders to discount all the relevant news and portray the adequate stock price, which cannot be included by the organisation (Müller M.A., Riedl. and Sellhorn 2015).

Hence, it is Essential for ASX to have a continuous disclosure system for all the organisations listed in the stock exchange. However, the organisation needs to have significant information for disclosure, where ASX could amend the disclosure exemptions. This could help in reducing any kind of unethical measures that would be taken by organisations to inflate their shares. Donald Jones mainly demonstrated this measure in the news article, where he used the loopholes in ASX disclosure system for manipulating the valuation. Therefore continuous disclosure measure is needed for the Australian organisations, as it helps in reducing any kind of manipulations that could be conducted on the management level.

Conclusion:

However, this continuous disclosure measure could also be restricted, where non-reliable Information should not be disclosed by the organisation, as it has a negative impact on the share price and shareholders. Hence, the use of a continuous measure could eventually support the efficient market hypothesis system, where shares of the organisation will be valued according to its current situation. Therefore, the use of adequate continuous disclosure system could eventually allow the organisations to portray all the relevant information that could affect its future growth and profitability. This could eventually allow the investors to gauge into the future prospects of an organisation and determine whether the share price is adequate to support its value. Thus, it could be stated that use of continuous disclosure measured in a very good method that allows investors to evaluate all the relevant decisions conducted by the management.

References:

Abernathy, J., Hackenbrack, K.E., Joe, J.R., Pevzner, M. and Wu, Y.J., 2015. Comments of the Auditing Standards Committee of the Auditing Section of the American Accounting Association on PCAOB Staff Consultation Paper, Auditing Accounting Estimates and Fair Value Measurements: Participating Committee Members. Current Issues in Auditing, 9(1), pp.C1-C11.

Cascino, S., Gassen, J. and Ramanan, R.N., 2015. This paper examines whether and how fair value measurement and disclosure by US bank holding companies influences financial analysts’ ability to forecast earnings. Fair value measurement relates to more dispersed forecasts. Measurement basis disclosure (levels 1, 2 and 3) enacted by SFAS 157 translates into more accurate forecasts but has neutral effects for banks with a sizable proportion of assets... Review of Accounting Studies, 20(1), pp.559-591.

Clor?Proell, S.M., Proell, C.A. and Warfield, T.D., 2014. The effects of presentation salience and measurement subjectivity on nonprofessional investors' fair value judgments. Contemporary Accounting Research, 31(1), pp.45-66.

Dechow, P.M., Sloan, R.G. and Zha, J., 2014. Stock prices and earnings: A history of research. Annu. Rev. Financ. Econ., 6(1), pp.343-363.

Goh, B.W., Li, D., Ng, J. and Yong, K.O., 2015. Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and Public Policy, 34(2), pp.129-145.

Harford, J. and Powell, R., 2015. Measuring the Effectiveness of Australia's Statutory-Backed Continuous Disclosure Policy on ‘Innovative’Investment Disclosures

Hatch, P. (2017). SurfStitch faces $100m class action over share wipeout . [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/retail/surfstitch-faces-100m-class-action-over-share-wipe-out-20170522-gwatsh.html [Accessed 8 Sep. 2017].

Lee, K.H., 2017. Does size matter? Evaluating corporate environmental disclosure in the Australian mining and metal industry: A combined approach of quantity and quality measurement. Business Strategy and the Environment, 26(2), pp.209-223.

Malone, L., Tarca, A. and Wee, M., 2016. IFRS non?GAAP earnings disclosures and fair value measurement. Accounting & Finance, 56(1), pp.59-97.

Market Index. (2017). Surfstitch Group Limited. [online] Available at: https://www.marketindex.com.au/asx/srf [Accessed 8 Sep. 2017].

Müller, M.A., Riedl, E.J. and Sellhorn, T., 2015. Recognition versus disclosure of fair values. The Accounting Review, 90(6), pp.2411-2447.