Challenger Limited: A Comprehensive Analysis of Financial Reporting Practices

This report provides a detailed analysis of Challenger Limited's financial reporting practices, focusing on contingencies, provisions, leased items, and asset valuation. It examines the criteria and measurements used for provisions and contingencies, presents an argument for and against the inclusion of Parent Entity Guarantees and Undertakings, and discusses the classification and presentation requirements for leased items. The report also explores a hypothetical situation for reclassifying leased assets and analyzes the valuation method used for non-current assets, proposing an alternative approach. This comprehensive analysis aims to provide insights into Challenger Limited's financial reporting practices and their impact on the company's overall financial performance.

TASK2: CHALLENGER LIMITED
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Table of Contents
Introduction......................................................................................................................................2
1. Providing details of the contingencies and provisions disclosed.................................................3
2. Discussing the criteria and Measurements for the Provisions and Contingencies......................3
3. Providing an debatary argument on Contingency.......................................................................3
4. Details of Leased Items of the Company.....................................................................................4
5. Discussion on the classification and presentation Requirement Relevant to The Leased Items. 4
6. Explanation and identification of the hypothetical Situation for further reclassification of the
leased asset.......................................................................................................................................5
7. Selection of the nation Current Asset Of the Company and Valuation Method used for it........5
8. Alternative Valuation Method.....................................................................................................6
Conclusion.......................................................................................................................................6
References:......................................................................................................................................7
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Introduction
In the era of globalization, the accuracy and transparency form the twin factors that augment the
process of attaining higher competitive edge in long run. Challenger Limited is a listed company
on the Australian Securities Exchange (ASE) that follows the rules of the Australian Prudential
Regulation Authority (APRA). Analyzing the provisions along with the contingencies of the
company and renewing its criteria while checking its measures, will build up the first part of the
report. An argument will be provided for and against demonstrating one of the contingencies of
the company has been mentioned in the report. Details on the leased items of the company will
be given and its classification will also be discussed. Choosing a hypothetical situation of
reclassified leased item and discussion on it will be provided. The valuation method used by the
company for its non-current asset and an alternative to it will be provided at the end of the report.
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1. Providing details of the contingencies and provisions disclosed
The contingencies and the provisions provided by the Challenger group have been always
employee and company friendly. The Retirement Income Plan was one of the contingencies of
the company which would help to increase the standard of the Australian Retirees. A broader and
wider aspect of retirement income solutions was planned in FY2017 of the company, which was
for the oldies of the country. This contingency disclosure has increased the efficiency along with
market leading cost to income ratio. A retirement illustrator was launched in order to deliver
quality services, known as the retirement tool. The Parent Entity Guarantees and Undertakings
included a guarantee which supports the corporate banking facilities. Some of the Financial
commitments say, hedging arrangements were also supported. A Third Party Guarantees, say
bank guarantee could be issued by the third party financial institutions representing the group
along with its subsidiaries (Challenger.com, 2018). This comes under the contingency of the
company, named as Contingent Future Commitments. The guarantee of its subsidiaries has been
taken by the CLC and the third parties has assured of their extraordinary performance. Assets
pledged as collateral, the company planned to provide collateral in order to secure liabilities.
This has been done in favor of the counterparties.
2. Discussing the criteria and Measurements for the Provisions and Contingencies
The contingencies should always be separated from the critical contingencies to the non critical
ones. Under the critical contingency, there shouldn’t exist any false alarm, on the basis of the
magnitude of the contingency measure. An occurrence of any misclassification in the critical
contingency and has no thermal or voltage limit violations carries a small measure and then the
contingency is not considered to be critical (Challenger.com, 2018). The contingencies of a
company should be framed in such a manner that anyone connected to the company receives a
benefit out of it. Therefore, this has been done by the Challenger Limited group.
3. Providing an debatary argument on Contingency
The inclusion of Parent Entity Guarantees and Undertakings in the financial report of the
company can be quite argumentative. As the mentioned the contingency provides letters of
support to its subsidiaries, in the day to day business (Hussey, et al. 2018, p.67). The intention of
supporting the subsidiaries is clearly stated in the letter and this would help them to continue in
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meeting their obligations. This shows the supporting nature of Challenger Limited and the belief
the company has on its subsidiaries. This may give the company a better and fruitful result at the
end. As everything has other side to it, the contingency carries some drawbacks along with its
positivity (Chen, et al. 2015, p.566). If for any reason the subsidiary company fails to deliver the
desired results, the parent company’s image and goodwill will deteriorate as it has acted as a
guarantor of the subsidiary company. The loss would be huge and the parent company would
have to spend years on rebuilding the trust of its customers and employees on failure of the
subsidiary company.
4. Details of Leased Items of the Company
The Leased items of the Challenger Limited included items as follows:
DIAC Building, located in Belconnen, 97.8 percent leased and the tenant was
government, lease expiry in 2020.
Discovery House, located in Woden, 100 percent leased and the major tenant
government, lease expiry in 2023
The Forum, located in Sydney, 72 percent leased and the tenants Cisco Systems(36.6%),
Flexi Rent (23.6%), HCN (7.2%) and NAB (6.5%), with expiry in 2018.
Jam Factory, located in Chapel Street, 59% lease with tenants Village Cinemas (31.6%),
Village Office (20.6%) and Topshop (7.2%), expiry in 2022.
Innaloo Cinema Centre, located in Woodlands, 83 percent leased with tenants Greater
Union (75.1%) and Sizzlers (8.8%), expiry in 2020.
Table 1: Lease records
(Source: Amhalhal, et al. 2015, p.56)
5. Discussion on the classification and presentation Requirement Relevant to the Leased
Items
The Lease is classified into two categories and named as the operating lease and capital or
financial lease. The lessee (one who is purchasing the right to use the asset) receives the right to
use the asset but by no means, he can make a record of the asset on his balance sheet. The lessee
is not even allowed to make a record of the lease payment liability on its balance sheet. It is also
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known as "off-balance sheet financing" (Lin, et al. 2017, p.127). Only in the Income statement,
the lessee is allowed to make a record of the lease payment as a rental expense. It can either be
placed under a cost of goods sold or under SG&A. The other classification is capital or finance
lease where the lessee enjoys all the rights to use the asset and explore its risks along with its
benefits of owning the asset. In this case, the lessee records the leased asset on the company
balance sheet. Challenger Limited uses the capital or finance lease and thus enjoys all the
benefits of the system. The company gets benefits of earning goodwill in the market through the
use of capital or finance lease.
6. Explanation and identification of the hypothetical Situation for further reclassification of
the leased asset
A situation may arise up in a company that a need for the reclassification of the lease occurs . It
may so happen that for some of the properties which have been previously classified as finance
leases, the land may be reclassified as the operating lease and the building elements may be
reclassified as finance lease (Hussey, et al. 20167, p.23). This is done when the land has an
indefinite economic life then it is classified as an operating lease. It has been observed that the
land is on a normal basis classified as an operating lease on a condition that the title is expected
to pass to the lessee on the termination of the lease.
7. Selection of the nation Current Asset Of the Company and Valuation Method used for it
Property, Plants and Equipment have been identified as the non-current assets of the company.
The valuation method used for this asset valuation is the Discounted Cash Flow Method. Under
this method, an assumption about the cash flow is done which the company is expected to
generate in the future. The origination of these cash flows in the operational results, even from
the mutations in working capital, fixed assets and provisions are seen. The projection of the cash
flows is done on the basis of "weighted average cost of capital" (Joubert, et al. 2017, p.1). The
weakness or drawback of the discounted cash flow method is that it includes the “cost of
capital”.
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8. Alternative Valuation Method
Appraisal Method is known for calculating the fair market price of the asset. Generally, an
appraiser gets hired to determine the value of each item worth company's balance sheet. The in-
house assets are assessed through its current condition and a consideration of the wear and tear of
the asset is done and the degree of obsolescence is also considered. Then a comparison is made
with the other assets and its current value in the market is determined. This method is more
reliable than the discounted cash flow method, which the Challenger Limited has used because
the former method provides the actual current value of the assets. In the discounted cash flow the
inclusion of the “cost of capital”, makes the picture or the value of the asset a bit clumsy and
difficult to understand (He, et al. 2016, p.330). The clarity of the financial statements helps the
investors to understand the company laws and current market status well, which builds up trust
and goodwill of the company.
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Conclusion
The Australian Accounting Standard Board (AASB), functions as per the regulations provided
by the Australian Securities and Investments Commission Act, 2001. Challenger Limited has
overall worked in favor of its investors and customers. The mere analysis of its accounting part
and the descriptions given in the annual report creates a clear picture and standard of the
company. Providing an alternative method for valuation and an argument for the contingencies
has actually made the assignment quite interesting and effective.
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References:
Amalia, A.M.A., Anchor, J.R. and Dastgir, S., (2015). The effectiveness of the use of multiple
performance measures: the influence of organisational contingencies.
Challenger.com (2018) Annual report Available at:
https://www.challenger.com.au/group/CompanyAnnouncements/Challenger_welcomes_new_fra
mework_for_retirement_income.pdf [Accessed on May 20th, 2018]
Challenger.com (2018) News Available at:
https://www.challenger.com.au/group/Interim_Financial_Report_2018.pdf [Accessed on May
20th, 2018]
Chen, S.C. and Teng, J.T., (2015). Inventory and credit decisions for time-varying deteriorating
items with up-stream and down-stream trade credit financing by discounted cash flow analysis.
European Journal of Operational Research, 243(2), pp.566-575.
He, L., Evans, E. and He, R., (2016). The Impact of AASB 8 Operating Segments on Analysts’
Earnings Forecasts: Australian Evidence. Australian Accounting Review, 26(4), pp.330-340.
Hussey, R., (2017), May. Leasing of Assets: A Content Analysis of Comment. In GAI
International Academic Conferences Proceedings (p. 23).
Hussey, R., (2018). Accounting for Leases and the Failure of Convergence, pp.23.
Joubert, M., Garvie, L. and Parle, G., (2017). Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. The
Journal of New Business Ideas & Trends, 15(2), pp.1-11.
Lin, K.C. and Graham, R.C., (2017). How Will the New Lease Accounting Standard Affect the
Relevance of Lease Asset Accounting?,pp.127.
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