Advanced financial accounting

HA3011 AFA T1 2015

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HOLMES INSTITUTE

FACULTY OF

HIGHER EDUCATION

HOLMES INSTITUTE

FACULTY OF HIGHER EDUCATION

UNDERGRADUATE PROGRAM

Case Study- Individual HA3011: Advanced Financial Accounting

Sydney /Melbourne Campus

TRIMESTER 1 / 2015

This assignment is to be conducted individually.

The assessment carries 20% of the total assessment for this subject.

The assignment is due week 6. You are required to submit a soft-copy to Safeassign and a

hard-copy.

Word limit: Whilst there is not a maximum limit, the minimum is 1500 words.

HA3011 AFA T1 2015

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Assignment requirements.

Read the following article and adopting a Positive Accounting Theory perspective,

consider the following issues:

1. If a new accounting standard impacts on profits, should this impact on the value of the firm, and if so, why?

2. Will the imposition of a particular accounting method have implications for the efficiency of the organization?

Foster’s: less goodwill, higher earnings

The challenges facing investors seeking a true picture of a company’s earnings

during the impending profit reporting season were underlined again on Friday when

Foster’s flagged it would report a $1.2 billion reduction in net assets under new

accounting standards.

The transition to international financial reporting standards (IFRS) means Foster’s net

assets will fall from $4.6 billion to $3.37 billion based on its last reported balance

sheet, mainly as a result of the internally generated goodwill on brand names not

being recognized.

The other major contributor to the reduction is the requirement to allow for deferred

tax liabilities based on the difference between the carrying values of assets and their

cost base.

Despite skepticism about the likely success of Foster’s recent $3 billion acquisition of

winemaker Southcorp and Foster’s ability to extract sufficient merger synergies, the

changes to the reported accounts do not relate to any issues with that acquisition.

The brewing and winemaking group told analysts the balance sheet adjustments

wouldn’t affect its cash flow or ability to pay dividends.

But reported profits will be higher than they otherwise would be because of the

removal of goodwill amortization charges.

Under the standards, goodwill is instead subject to an annual “impairment test”, with

the elimination of amortization expenses boosting reported profits. If the new

standards were applied to Foster’s half-year accounts to December 31, 2004, the

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company would have made a net profit of $783.2 million versus the $757 million

reported.

The reduced asset base reported by companies such as Foster’s will also means

they will report more favorable returns on these written-down asset values.

The transition to new standards has raised concerns that companies will announce

potentially misleading profit numbers and will be reluctant to predict future profits

because of the uncertainty around some aspects of the standards. There is also

concern about how credit ratings agencies will react to such wild swings in balance

sheet values.

But the adoption of the standards will make it easier for investment analysts to

compare companies to their global peers. In Foster’s case, this means investment

analysts will be able to better discern whether it is outperforming or underperforming

global wine and brewing peers such as Diageo and Pernod Ricard.

ABN Amro Asset Management’s Mark Nathan said: “It differs by company and

industry. There will be some concern over whether the new standard result in a less

realistic portrayal of what’s happening than the current Australian standards, by and

large its an improvement.”

However, Goldman Sachs JBWere said in a note to clients that given the shortened

period in which companies must now report their results, the new standards “would

only add to the data overload during the last two to three week of August.” Foster’s

closed 2 cents higher at $5.46.

Due Date: Week 6.