Financial Reporting Analysis: Chapmans Limited and ASIC Review

This report analyzes the financial reporting of Chapmans Limited, an Australian Stock Exchange (ASX) listed company, focusing on the issues raised by the Australian Securities and Investment Commission (ASIC) regarding its 2016 financial report. The report details the background of Chapmans Limited, the specific accounting treatments questioned by ASIC, and examines the differences between Chapman's initial accounting methods and the treatments suggested by ASIC, particularly concerning investments in various ventures and the application of AASB standards (AASB 128, AASB 10, and AASB 3). It explores the possible approaches Chapmans could have taken to address ASIC's concerns, the market's reaction to the amended financial report, and provides recommendations for future practices to ensure compliance. The report highlights the importance of accurate financial reporting and the impact of regulatory oversight on company valuations and stakeholder perceptions. The report also mentions the company recorded the investment it made in these entities as per the guidelines of recording the same as in the case of an investing company.

Running head: COMPANY ACCOUNTING
Company Accounting
Name of the Student:
Name of the University:
Author’s Note:

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Executive summary
In this report an effort will made to ensure that relevant data pertaining to Chapmans
financial statements, in relation to the adjustments made by it in response to the scrutiny done
by ASIC, is reflected clearly and efficiently. The importance of revealing the same to the
stakeholders of the company is that they will be able to understand the basis on which the
company had to issue an amended financial report for the relevant period.

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Table of Contents
Introduction................................................................................................................................3
Background of Chapman Limited:.............................................................................................3
Identification of the questioned accounting treatments:............................................................4
Examination of the basis of accounting treatment previously adopted by Chapman and the
basis of accounting treatment as suggested by ASIC.................................................................5
Possible approaches available with Chapman to address the issue raised by Chapman............6
Market reaction to the announcement to the market on 18th August 2017.................................7
Recommendations in relation to the steps that can be taken for reducing the same in the
future.8
Conclusion................................................................................................................................10
Reference List..........................................................................................................................11

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Introduction
In the following report details pertaining to the issues raised by ASIC will be
discussed. It is a general practice for the body to ensure that periodic financial reporting
surveillance program is conducted by it for the purpose of ensuring that all the guidelines
relating to the preparation and presentation of the financial statements are adhered to by the
companies that are listed on the stock exchange. In the present case it has been found that
Chapman Limited which is a listed company has violated certain principles of reporting (Van
Linden and Mazza 2018). In respect of the same the ASIC directed the company to make the
necessary adjustments. For the purpose of confirming to the directions as given out by ASIC
the company ensured that an amended annual report is being published on its part. In its
pursuance the company issued an amended financial report for the year ended 2016. The
news in respect of the amended financial report was released in the market on 18th August
2017. In addition to this the company issued its half yearly annual report on 5th September
2017 and in it the company made special mention of the amendments that were being
affected by it on the direction of ASIC.
Background of Chapman Limited:
It is an Australian company which is listed on the Australian Stock Exchange as CHP.
The portfolio of the operations conducted by the company can be termed as a company
mainly concerned with investment and having investment in diversified fields. The industries
in which the company is currently having its investment are engaged in operations across
diverse fields. The company mainly focusses on the industries that are concerned with mobile
technology. One of the major objectives of the company is to ensure that it establishes itself
as an active investment player across the current economic market (Trotman 2014). In
pursuance of this the company regularly engages in investing in companies that are recording

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high profits over a significant period of time. The company ensures that the spirit of
investment of the company is characterised by high conviction along with special situation
features. The company makes sure to give due consideration to advisory and investments in
the nature of equity. The company also ensures that the investment made by it is structured
around specific events and the assets of both the public as well as large private companies. In
the present case the company being an investment company had recorded its investment in
various entities following the rules and regulations applicable on an investment firm (Singh
2014). But, ASIC is of the view that the same should have been made in accordance with that
of the guidelines issued by AASB 128 (Investment in Associates and Joint Ventures), AASB
10 (Consolidated Financial Statements) and AASB 3 (Business Combinations)
Identification of the questioned accounting treatments:
There were several factors on which the ASIC raised its concerns. The main reason
for the direction of the regulatory body was in relation to the treatment adopted by the
company in respect of the investment it made in the various ventures across the country
(Schaltegger and Burritt 2017). The company being an investment company had made
several investments across various entities which were operating in several different fields.
The company recorded the investment it made in these entities as per the guidelines of
recording the same as in the case of an investing company. The company recorded the value
of the investment made by it at fair value. In addition to this the company treated as separate
from that of the entities in which it had made the investments. Consequently the company did
not prepare the consolidated financial statements as it should have. Rather the company
prepared only its standalone financial statement and within it recorded the investments made
by it at fair value. But, the company should have been recording the investment made by it in
a way it would have recorded the same in case of it being a holding company (Public

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Company Accounting Oversight Board (PCAOB) 2015. The company incidentally held more
than 50% of the shares of some company and became a holding company. Hence, the
company was directed by ASIC to ensure that it prepared a consolidated financial statement
and recorded the investments made by it as per the guidelines issued by AASB 128
(Investment in Associates and Joint Ventures). In addition to that in respect of the
acquisitions made by it in the financial year 2016 it should ensure that it follows the
guidelines as issued by AASB 3(Business Combinations).
Examination of the basis of accounting treatment previously adopted by Chapman and
the basis of accounting treatment as suggested by ASIC.
The basis on which the company formed its former accounting policy and the basis of
the accounting policy suggested by ASIC are completely different in substance. The company
previously was engaged in recording the investment made by it in various companies as per
the guidelines issued by it in case of the investment firm. According to the same the company
was supposed to record the investment at fair value (Ni and Van Wart 2015).
On the other hand, as per the directions as prescribed by ASIC in respect of the
change in the accounting policy of the entity the firm ensures that the investment made by it
are made in compliance with the regulations as given out in AASB 128(Investment in
Associates and Joint Ventures), AASB 110 Consolidated Financial Statements. In addition to
that the directions given out by ASIC ensured that the acquisitions made by the company in
the year 2016 should have been made in accordance with the guidelines as issued in AASB 3
Business combinations. Pursuant to the directions issued by ASIC the company was required
to prepare consolidated financial statement in which it must incorporate the financials of the
subsidiary in which it had more than 50% of shareholding. The company ensured that the

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guidelines issued by ASIC were followed immediately and the amended financial statement
is being released to the public (Li et al. 2015).
Possible approaches available with Chapman to address the issue raised by Chapman.
It is established that in case of interference on the part of the regulatory bodies in the
operations of any entity in relation to the stature rules and regulations there are some select
approaches that can be adopted by the entity. In the given case the accounting policy adopted
by the company in respect of the investment made by it in the relevant period of time led to
the intervention on the part of the government regulatory bodies (Krahel and Titera 2015).
The company could have taken the following approaches:
a) Contesting the claims made by the regulatory body in the court-
Under this method if the party which is affected by the intervention of regulatory
bodies within the country shall approach the court with their contention regarding the
same. The company could have contended its original accounting policy as valid in
the court. The reason being that it adopted the former accounting policy based on
certain grounds. The same could have been brought forward by it to the court for
contention (Hope, Thomas and Vyas 2017).
b) It can take the help of legal experts for the purpose of discussing the implication of
the adoption of the new accounting policy as suggested by the regulatory body. It can
gain detailed information regarding the basis on which the regulatory body has
deemed fit to change the accounting policy of the entity for the relevant period. If the
company was content that the accounting policy adopted by it were in accordance
with the guidelines issued by the laws and regulations of the country it would have
challenged the decision of the regulatory body (Chiu, Chien and Lin 2017).

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c) The company can readily accept the contention made by the regulatory body
recognising the fact that the same would have been made by the bodies based on some
solid ground and there is no need for contention. It is considered most prudent in
cases where the company is already aware about the fact that it is violating certain
principles or guidelines laid down by the laws and regulations of the country.
In the given case the company went ahead with the third option. The reason being that the
grounds on which the change in the accounting policy of the company was suggested by
ASIC were very valid and the same should have been followed by the company on its own.
There was no reason for the company to content the remarks made by the regulatory body
because of the fact that it was aware of the fact that it would be violating the rules and
regulations laid down by several regulatory bodies of the country in case it fails to comply
with the directions of ASIC (Brown 2016).
Market reaction to the announcement to the market on 18th August 2017.
The reaction of the market forces in respect of the adjustments made by the company
were very varied. This resulted in some significant volatility in the share prices of the
company. The reason for the mixed reaction was that the company owing to its new
accounting policy had to book losses for the relevant period. The company had to record the
same in its financial statement due to the fact that according to the new policy adopted by the
company on the direction given by ASIC, it was recognised as the holder of the company in
which it had more than 50% shareholding. As a result the sentiment of the shareholder and
other stakeholder of the company were affected to a moderate level (Agrawal and Cooper
2017). On the other hand, some stakeholders of the company including a sect of the
shareholders believed that merely a change in the status quo of the investment made by the
company will have no impact on the long run operations and financial performance of the

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company. the reason being that even thought the company did not record the losses of the
company it had control over in the previous period the effect of the losses incurred by the
investee would have reflected in the near future as loss from investment in the financial
statement of the company. Hence, due to the meeting of shareholders of the two mentalities it
was found that the change incorporated by the company in its financial statement did not
result in a catastrophic effect on the price of the shares of the company.
In addition to this, it was found that as the regulatory bodies from a part of the market
in which the company is conducting its operations, it was able to ensure that future
interference of the state in a much stricter way was avoided. As the guidelines issue by the
regulatory bodies of the country was duly followed by the company, it is very much possible
that the company will be able to ensure future operational freedom and effectiveness and
efficiency in its operations.
Recommendations in relation to the steps that can be taken for reducing the same in the
future.
There are many risks relating to the compliances that are faced by modern day
companies. the reason for the same can be attributed to the fact that the operating structure of
the companies have become very complex and several factors are to be considered by any
company in order to ascertain the financial statements of the company for the relevant period
are made in accordance with the relevant rules and regulations. Some of the factors that the
company being a complex and big entity should avoid getting into in the future are as
follows:
a) Profit sharing:
At present due to the advent of latest technology it has been made possible that the big
and complex companies can make available their services to their customers near their

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location or can have entirely centralised location for conducting their entire
operations. Some of the regions in which the companies start their operations owing
to this advancement of technology may offer them tax and other reporting
concessions. These opportunities can lure the company to take undue advantage of the
arbitrage opportunities presented before it by these areas. Hence the company must
ensure that it prohibits itself from global profit sharing.
b) Intangible assets and non-arm’s length transaction:
All the intangible assets that are acquired by the company over the period of time
including the intellectual property right are highly mobile assets. The company will
face situations where it will find that it is very lucrative to ensure the location of
intangible assets in the areas with favourable tax regimes. The compliance risk that
the company will face in this respect is related to artificial allocation and dynamic
migration of these intangible assets. The company must refrain from these practices in
the future. The risk related to non-arm’s length transactions are as follows:
a) Migration and allocation of the intangible assets that are generated within
Australia in an artificial manner to the parties situated offshore.
b) Making sure that the intangible assets gets involved especially in the case wherein
the same have been generated by the entities that are operating within Australia.
c) Disposing or allocating the intangible assets that are generated in Australia to the
parties that are located outside of Australia and subsequent granting of rights back
to the entities operating within Australia.
d) Group structuring and business events:
The authorities or the regulatory bodies that are operating within Australia are
cautioned by significant business transactions. These business transactions can be

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in the nature of mergers, acquisitions, disinvestments of major assets and
demergers, rising of capital and the returns that are generated on capital.
If the company ensures that all the above mentioned precaution are considered by it
before barging into the task of preparation and presentation of financial reporting then it can
be said that the company will be able to mitigate the risk arising out of non-compliance.
Conclusion
From the above discussion it can be concluded that it is very important on the part of
every entity to ensure that all the compliances relating to the process of preparation and
presentation of the financial statement are being adhered to. The reason being that if the same
is not followed by the company there will be increased amount of interferences from the
regulatory bodies of the country which will hamper the image of the company and at the
same time can also meddle with the future plans of the company in relation to its mode of
operations and the way it will raise capital. The reason being that the same will affect the
price of the shares of the company listed on the stock exchange.

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concepts and practice. Routledge.
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