For further query you can Contact Us :

msa@msahomeworkhelp.com
MSA Homework Help

Answer

Accounting Issues

$49.99


Research Topic: Issues in Revenue Recognition Slater and Gordon is a large law firm based in Melbourne, Australia. It is the first law firm being listed on Australian Securities Exchange. However, recently, the firm has frequently appeared in media headlines due to various controversial accounting issues. A serious problem with the firm is centered on the company’s accounting policy in revenue recognition of ‘work-in-progress’ cases. The following text is extracted from the article ‘The Undoing of Slater and Gordon’ by Melissa Fyfe published in the Age. A full version of the article is available at https://0­www­nexis­com.library.vu.edu.au “The… problemwenttotheheartofSlater&Gordon'sprofitability.Perhapsmoreaccurately,tohowmuchthe marketbelievedSlater&Gordonwasprofitable.Investorsarelookingforacompany's"growthnarrative"­theywantthe keyfigures,theheadlinenumbers,tobeasbigaspossibleandonanupwardtrajectory.Yearafteryear,inhisreassuring corporate­speak,AndrewGrech (CEO of the firm)presentedtothe marketlovelyfatfiguresfornetprofitaftertax,earningspershare,and price­to­earningsratios(thehigherthesewere,the morelawfirmsyoucouldbuy).Butunderpinningthesefigureswasa conceptcalledWorkinProgress. Slater&Gordonspecialisesin"nowin,nofee"personalinjurycases.Thismeansitdoesnotgetpaiduntilacase closes,somethingthattypicallytakes18 monthstotwoyears.Ifyousellcakes,youreportyourrevenuewhenyousell acake.Buthowdoesalawfirmreportrevenue?Slater&Gordondecidedtorecordrevenueascasesprogressed(WorkinProgress),estimatingthelikelihoodofsuccessandhowmuchworkhadbeendone.Itrecordedthisasrevenue,even thoughitwasyettogetany­and,insomecases,wouldnevergetpaid.In2014,Slater&Gordon­whichsaysitexplaineditsmethodstoinvestors­declared$467 millionofWorkinProgressand,in2015,$826 million... WorkinProgressisanaccountingrecipeusedbymanyprofessional servicesfirms­includingthebigaccountancy companies­largelywithoutincident.ButasVGI'sresearchpointedout,itis"trustme"accounting,andgives managementhugediscretionovertheprofittheyrecord.VGI'sresearchintoSlater&Gordonthrewup10redflags,includingitsWorkinProgressaccountinganditsaggressiveappetiteforsmallerlawfirms.VGIbelievedSlater&GordonwasbuyingtheundervaluedWorkinProgressinthesefirmsandpumpingupitsvalueonitsownbooks,inflating revenueandprofits.Eachyear,VGIconcluded,Slater&Gordonneededtobuylargerfirmstomeetthesharemarket'sappetiteforgrowth. TheVGIresearchsuggestedsomethingeven moretroubling.EighteenmonthstotwoyearsaftertheWorkinProgress wasdeclared,the matchingcashwasnotcomingthroughthedoor.Tynanandhiseight­personresearchteamdidarun­of­the­millcheck,pullingthebalancesheetsapartandtryingtoputthembacktogether.Buttheiranalysisfoundblack holesinSlater&Gordon'saccounts:about$80 millionin2013and$90 millionin2014.InNovember2014,two months beforeitbecameknownthatSlater&GordonwasinterestedinQuindell,VGItookamultimillion­dollar"short"positionin themarket,apuntonSlater&Gordon'ssharepricefalling.VGIwaspredictingtheAustralianfirm'sromancewiththe sharemarketwasabouttoend. SixdaysafterGrechtoldSlater&Gordon'sNovember2015annualgeneralmeetingthathesawnodamaginglegislative reformonthehorizon,furtherreformswereannounced.TheUKgovernment,aspartofitsongoingcrackdownon compensationculture,signalledchangesdesignedtoreducewhiplashfraudanddeallawyersoutofsmall claims. Sharesfellby50percent OnDecember17,Slater&Gordondumpeditsprofitpredictions,citingpoortradingresults.Butnooneexpectedthe scaleoftheannouncementwhichcameonFebruary29thisyear,withthefirmdeclaringa$958 millionnetlossforthe sixmonthstoDecember2015… Thingsweren'tsogoodathomeeither.Slater&GordonwrotedownitsAustralianbusinessesby$52 milliononlower­ than­expectedcashflows.Investorswonderedifthecompanywouldsurvive,andwhetherthebankswouldtakeitover."Clearlytoday'sresultsareverydisappointing,"GrechsaidinastatementtotheAustralianstockexchange. MarketwatchersweresogobsmackedbySlater&Gordon'sIcarus­likefallthattheymissedsomethingsignificantinthe Februaryannouncement.Formonths,attheinsistenceofASIC,Slater&GordonhadbeenlaboriouslygoingthroughfilesandrecalibratingitsWorkinProgressfigures.Thiswassoldinthestatementtothe marketassimplyanearly adoptionofanewaccountingstandardand,onthefaceofit,itwas.ButthenewaccountingstandardforcedSlater&Gordontorecordonlyrevenuethatitcouldclassas"highlyprobable",whichtriggeredahugewritedowninprevious WorkinProgress­from$467millionto$382millionin2014,and$826 millionto$694 millionin2015.Thecompany admittedthenewstandardledtoadiscountingofWorkinProgressby15to20percent. Slater&GordonhadbeenoverstatingitsWorkinProgress,whichfedintoitskeyrevenueandprofitfigures,byupto20 percent(althoughacompanyspokeswomansaysthe"underlyingvalue"ofitsserviceshasnotchanged).Withtwo classactionsagainstSlater&Gordonalreadyannounced,ASICmadeacarefullywordedstatementon February29 sayingthatitneither"approvedordisapproved"ofSlater&Gordon'spastWorkinProgressaccounting”. Source: TheAge(Melbourne,Australia)­Online June24,2016 Friday05:38 Required 1. How did Slater and Gordon meet the capital market’s expectation of the firm’s growth as reported in ‘the Undoing of Slater and Gordon’? 2. Why did the share price of Slater and Gordon fell so badly by 50% in late 2015? 3. Analyze how service revenue is recognized under IAS 18 Revenue and the new accounting standard IFRS 15 Revenue from contracts with customers 4. Did Slater and Gordon’s accounting treatment for revenue recognition of ‘work-in-progress’ as reported in the Age (2016) meet the revenue recognition under the new accounting standard IFRS 15? Discuss 5. Review the annual financial reports of Slater and Gordon for the reporting years 2013, 2014 and 2015. Analyze how revenue was recognized in each of the reporting years, and explain why the firm’s reported revenue dropped significantly in 2015? 6. Associate the above media report to relevant accounting research literature on factors influencing firms’ accounting policy choice (e.g. Positive Accounting Theory), and explain why Slater and Gordon chose to be an early adopter of the new revenue standard IFRS 15? 7. In your opinion, was the sharp drop in the firm’s revenue in 2015 resulted from the firm’s early adoption of the new revenue standard IFRS 15 or from other factors? Explain. 8. In your opinion, are there any breaches of the fundamental principles of accounting ethics (as prescribed in APES 110 Code of Ethics for Professional Accountants) in the firm’s accounting practices? Explain