Material Background of Champans Limited
Champans was founded in 1992 by Charles Champans who is the chief executive officer. Its headquarters is located in the New South Wales, Australia. Champans Limited is an investment firm which specializes in investment, and it cuts across a variety of industries. It is an Australian finance and investment company. It typically offers advisory and growth capital services to different companies that is either private or public. There are various categories through which the company invests in and such include, direct investment and incorporation or acquisition of other public listed companies (Chapman, Miller and White, 2018 p.100). The primary focus of the company is advanced industrial technology sector and mobile industry sector. Champans Limited is seeking to become one of the leading strategic investors in the high growth market regions. It is also willing to work with certain high growth organizations which are emerging.
The investment philosophy of Champans Limited including its technique depends on the special situation features and a high conviction mixture. The philosophy contains certain characteristics such as the equity and advisory investments which are structured on certain assets and events. Such assets and events are typically for the large private and public companies. In 2017, the company made its first investment, and that was in the blockchain (Bartov, Marra, Dossi and Pettinicchio, 2017 p.100). Such an investment led to the development of a blockchain industry advisory board of the company whose task was to acknowledge and evaluate the compelling blockchain opportunities in investments. The investment in blockchain by the company has been aligned with the commitment and growth plans of investing and thus us specifically in the early stages of technologies with the aim of reaching the international markets all over the world. The company also has certain subsidiaries such as Gladstone Development Pty Limited, Champans Corporate Advisory Pty Limited, and CAN 600838873 Pty Limited.
The review by ASIC showed that there were certain questionable accounting treatments of various items in Champans Limited. The accounting treatments related to the impairments, revenue recognition and accounting for tax. According to ASIC, there were certain errors identified in the overstatement of various cash generations by the company and that there were incorrect values which had been assigned to different units. Additionally, the company failed to include all asset generating cash flows (Chapman et al.2018 p.100). Apart from the above-mentioned issues, ASIC also pointed out that the company had also deducted the liabilities incorrectly. The following illustrates the accounting treatment of various items in the company which was found to be questionable by the Australian Securities and Investment Commission.
Accounting Treatment for Revenue Recognition
According to the company, revenue is recognized based on the extent to which it is probable that there will economic benefits flowing back into the entity and that it can be estimated reliably.
When there is a net gain on the sales made in the company, it is recognized as revenue, and this is usually at the date when the control has been transferred to the buyer of the services of the company (Raymond, 2017 p.195). Such a situation only occurs when there is a sign indicating that there was an unconditional contract of sale.
The interest revenue is recognized when it is accrued, however when it is disclosed already it is not recognized in the annual report.
The dividend revenue is often recognized in the company at the time when it has been established that the right time to receive the dividend has finally reached. Further, the other revenues are recognized when it has been established that it is right to receive a particular payment from the company (Peterson, 2017 p.530).
IBÁÑEZ (2015 p.169), argues that based on the accounting treatment of the impairments in the company, all the assets which have no definite useful life are not typically subjected to armotisation.However such assets are tested every year for impairments, and that happens when it has been identified that the carrying amount of the assets will not be recoverable. Further, when there is a change of events which exhibit that the carrying amounts will not be recoverable, the various assets which are to be amortised will be tested for impairment Chapman et al.2018 p.100). When there is a loss due to the impairment, that loss will be recognized in the statement of comprehensive income, and this will be for the amount resulting from the excess of carrying amount over the recoverable amount of the asset.
According to the accounting policies of Champans Ltd, all the non-financial assets such as the goodwill which does not have a definite useful life are not amortized, but instead, they are subject to testing on a yearly basis (Bottomley, Hall, Spender and Nosworthy, 2017 p.120). Such assets are usually recognized to be impaired whenever there is a prolonged decrease in value which is just below the initial cost. However, for the subsequent increase in the value of the assets, they are recognized in the other comprehensive income, and this is through the available for sale reserve.
Available for Sale Financial Asset
The deferred income tax, for example, is recognized in the company based on the extent to which it has been estimated that the future taxable profit will be made available. Such a future taxable profit will be against the temporary differences, and therefore it will be easy to utilize the losses and unused tax assets (Barbosa, Rubino, Caspari and Holliger, 2017 p.8190). All the income taxes are recognized in the equity and not in the statement of comprehensive income, and this is unlike accounting standards set in the treatment of the accounting taxes.
Based on the above accounting treatments, the ASIC ordered the directors of the company to lift their game specifically during the valuation of the assets and selection of accounting policies relating to the treatment of various items such as revenue, taxes, and impairments (Holstenkamp and Kahla, 2016 p.115).
Just like the Australian Securities and Investment Exchange had initially pointed out there was a case of overstatement of value in the asset cash generating items, one of the key accounting treatments of Champans Limited which raised certain doubts were on the non-consolidation of the subsidiaries. It also failed to account for the equity associates. The company typically treated itself as one of the investment business enterprises and therefore in its accounting treatment of the subsidiaries and equity. It failed to recognize them in the financial report for the year ended on 31st December 2016 (Chapman et al.2018 p.100).
According to the accounting treatment items such as equity and subsidiaries, the company does not include them in its financial report at their fair value. The basis of concern of the Australian Securities and Investment Commission was on the accounting treatment of the equity and various subsidiaries in the company (Tan and Chapman, 2017 p.10). Champans Limited, therefore, was forced to restate its financial report for the year ended 31st December 2016 and this was done to typically enable the company to consolidate and account for equity in the investments they had made. The net assets were therefore reduced by $3.2 million.
According to Chapman et al. (2018 p.100), there are a variety of approaches which could be used by the company with the aim of addressing some of the concerns of the Australian Securities and Investment Commission. For example, Champans Limited can focus on material disclosures of certain information which are considered to be useful to various investors and this will, involve the disclosure of the subsidiaries and equity for investment in the financial reports. However, the information must be communicated clearly and accurately to avoid any material misstatement in the financial reports (Halliday, 2016 p90). Another approach would entail the restatement and reissue of its financial report for the year which had ended on 31st December 2016 to include some of the missing information on financial reports. Further, the company can adopt proper accounting policies as stipulated by the ASIC to avoid certain issues of non-statement of certain items in their financial reports.
Interest
Also, it should aim at communicating effectively with the different accounting information which is vital to a variety of information users such as the investors and other business enterprises. The other approach which could be adopted by Champans Limited would be the use of realistic valuations of asset values. In its financial report which ended on 31st December 2016, the company had failed to provide an estimated value of equity and consolidated subsidiaries in the report, and hence it was difficult to calculate the real value of the company (Collier, 2015 p.100). Apart from the approaches mentioned above, Champans Limited can also hire skilled directors who would be in a position to challenge any of the accounting treatments and estimates which have been used in the financial reports because they do not approve of the choice of accounting policy applied in such circumstances by the company.
Champans Limited should issue an amended financial report of the year ended 31st December 2016 to correct the concerns which had been raised by the Australian Securities and Investment Commission, and this will entail the inclusion of the equity and subsidiaries in the financial report. Also, the company should issue the amended financial report to change the perception which had already been formed by various stakeholders in the market such as the investors (Van den Brink et al.2018 p.2290). The other approach which can be used by the company is making corrections on the financial statements by keenly following the rules, laws, and standards of the Australian Standard of financial reporting and this will typically enhance the level of credibility which had been lost by the various users of the company’s information such as the investors (McLean, McGovern and Davie, 2015 p.190). The primary aim of the company should be to build its reputation which had already been ruined in the market.
According to Weaver (2014 p.780), generally, there is often a negative reaction by the financial markets towards any restatement of earnings by a particular company. Such a reaction has been attributed to the fact that all the restatements of earnings by a particular will typically indicate a negative impact on the prices of stock. It is considered that all the announcements based on the restatements are fundamental for the prediction intervals. However, there are usually more impacts in the long term compared to the short-term reactions (BenYoussef and Khan, 2018 p.350). Further, it is expected that all the negative reactions are higher on a variety of reasons which concerns the earnings management. Such a negative market reaction is usually based on various factors depending on the features of the financial statements corrections. The features may entail the credibility of the disclosure and restatement announcement characteristics.
Dividend Revenue
The negative reaction in the market, however, will not be enormous like it used to happen before. Such a slight reaction can be attributed to various factors such as changes in the specific characteristics of the restatement of the financial reports by various organizations in the recent past. The other reason could be as a result of different changes in the response of the markets compared to the features (BenYoussef and Khan, 2018 p.350). Additionally, the negative reaction can be based on whether the restatement can be upwards or downwards and since the restatement which had been announced by the company was a downward one, the reactions of the market are expected to be more negative since it will typically result in a decline in the price of shares (Qaiser and Abdullah, 2016 p.1).
According to Kattan, Tello, Giraldo and Cadena (2016 p.400), the investors in the market will generally remove their shares from the company, and this is because of the fraudulent acts which had been displayed by the company. Champions Limited had earlier failed to include some of the key items in the financial report such as the subsidiaries and equity. Based on that it was difficult to know the value of the company. This, therefore, confirms the reactions of various financial users in the market due to the restatement of the amended financial report. The restatement of the financial report typically impacted the prices of stock negatively resulting in low returns of the investment which had been made by a variety of stakeholders of the company (BenYoussef and Khan, 2018 p.350). The reduction in the stock prices and hence low returns generally displays the company in a negative manner, and this, therefore, means that the reputation of the company will be destroyed leaving a bad public image. A lot of investors and other stakeholders will typically run away with shares to invest in some other firms which complies with different accounting policies and treatments.
Most of the investors of the company will possibly consider the management as lacking candidness, and this will typically result in a negative market reaction. Even though the company will be penalized for the restatement, the benefits which had already been obtained during the last disclosure will not be negated (John Wiley & Sons. Botes, Low and Chapman, 2014 p.120). The company’s management trust and credibility will be at a questionable level by the various investors in the market, and this will typically result in the loss of different clients.
Accounting Treatment of Impairments
Based on the concerns which had been raised by the Australian Securities and Investment Commission, Champans Limited should adopt the right accounting policies such that the auditors and directors should take into account the choice of accounting policy which would negatively impact the financial reports. Such policies should revolve around the tax accounting, asset value, revenue recognition, and rebates. Another recommendation is that the company should put a lot of emphasis on the disclosure of material information which is useful to a variety of users such as the investors. Such material disclosures should be based on the fundamental accounting policy choices, support of accounting estimates and influence on the new reporting requirements. The company should also focus on improving their audit reports for future financial years, and this will include certain vital audit issues relating to the performance of audit work.
The auditors should take into consideration that the accounting treatments and estimates often need specific material disclosures and therefore without such disclosures, the whole financial report becomes useless to various users such as the investors and customers of the company (Adhikary and Mitra, 2016 p.50). Additionally, the company should hire certain qualified and skilled auditors both internal and external who can identify various errors made in the financial reports. Such auditors must aim at providing support to the selected accounting treatment and estimates used in the company during the financial reporting. In certain circumstances, the auditors should even challenge the accounting treatments used in the financial reports. Further, the auditors should look for pieces of advice on events in which there is no proper reflection of their comprehension of the arrangement of substance based on the accounting treatment used in the company during the financial reporting.
The company should also take into account the different assumptions which they use while valuing various assets which are to be reported in the financial reports. The auditors, therefore, should take into account the necessity for impairing the inventories and assets and this is because it is expected of them by the Australian Securities and Investment Commission to estimate the fair value of various assets on the basis of inputs, assumptions, and models which are appropriate (Hales, Koka and Venkataraman, 2018 p.80). The other recommendation is that has ASIC had instructed it, Champans Limited should restate and reissue its financial report and therefore such a report should be corrected appropriately by including all the items which had not been stated previously.
Financial Assets
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