Solved by verified expert :Required:
Critically analyse and evaluate the arguments for, and against, for the
case study.
Which arguments do you consider to be more compelling? (In other words,
what is your
opinion?) (1000 words).
Note: Please use appropriate referencing
style. For this assignment, you may need to use Proquest.
Use recent academic journal
articles in referencing( in-text referencing is mandatory).
7.17. Read Accounting Headline
7.7 below, and, adopting a Positive Accounting theory perspective, consider the
following issues:
a) If a new accounting standard
impacts on profits, should this impact on the value of the firm, and if so,
why?
b) Will the imposition of a
particular accounting method have implications for the efficiency of the
organisation?
Accounting Headline 7.7 Implications of the release of new Accounting
Standards
Foster’s: les goodwill,
higher earnings
Anthony Hughes
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 the
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
recognised.
The other major contributor to
the reduction is the requirement to allow for deferred tax liabilities based on
the difference between the carrying value of assets and their cost base.
Despite scepticism 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 in cash flows or ability to pay dividends.
But reported profits will be
higher than they otherwise would be because of the removal of goodwill
amortisation charges.
Under the standards, goodwill is
instead subject to an annual ‘impairment test’, with the elimination of
amortisation expenses boosting reported profits. If the new standards were
applied to Foster’s half-year accounts to December 31, 2004, the 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 mean they will report more favourable
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 global wine and brewing peers such
as Diageo and Pernod Richard.
ABN Amro Asset Management’s Mark
Nathan said: ‘It differs by company and industry. There will be some concern
over whether the new standards result in a less realistic portrayal of what’s
happening than the current Australian standards, but by and large it’s 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 or three weeks of August.’ Foster’s closed 2?
higher at $5.46.
