ACCT20074 Case Study: JB Hi-Fi's Profit Downgrade and ASX Response

This assignment presents a case study analysis of JB Hi-Fi's decision to release its profit downgrade in a specific manner, viewed through the lenses of Classical Political Economy Theory and the Managerial branch of Stakeholder Theory. The analysis using Classical Political Economy Theory explains JB Hi-Fi’s decision, considering factors such as limited government interference and self-regulation. The assignment highlights that JB Hi-Fi believed a 3% downgrade was immaterial according to ASX guidelines. Furthermore, the analysis employs the Managerial Branch of Stakeholder Theory to explore JB Hi-Fi's reporting decisions, emphasizing the company's prioritization of stakeholders and the belief that the profit downgrade wouldn't materially affect share prices, leading to its disclosure in a presentation rather than a standalone statement. This assignment provides a comprehensive understanding of JB Hi-Fi's actions within the context of established economic and managerial theories.

ACCT20074 Final Assignment
Case study
The following is the case study to be used when answering your questions in the final assessment item.
JB Hi-Fi unapologetic on profit downgrade
By Eli Breenblat 8 May 2018
Consumer electronics giant JB Hi-Fi is sticking by its reasoning for releasing a profit downgrade buried deep within a presentation to analysts last week, rather than make a
stand-alone statement to the stock exchange. This follows being hit with a “please explain” by the ASX (Australian Stock Exchange) in the wake of the earnings warning that
sent its shares plummeting.
JB Hi-Fi yesterday issued its response to detailed questioning from the ASX and the presentation by chief executive Richard Murray at the Macquarie Australia Conference,
where during a lengthy talk on the retailer he handed out a 3 per cent revision to its full-year net profit guidance.
The profit warning was contained on page 4 of a 14-page presentation to the conference, and when it was lodged with the ASX on the day it was titled Macquarie Australia
Conference Presentation, with no reference to the profit warning.
Shares in JB Hi-Fi sank 10 per cent after the consumer electronics giant cut its profit forecast for fiscal 2018 at the conference, marking the stock’s biggest single-day fall since
2011. The ASX issued JB Hi-Fi with a series of questions over its communication of the downgrade to the market, pushing the retailer to explain why it wasn’t released as a
stand-alone statement.
“The company’s revised net profit after tax guidance was a decrease of 3 per cent from the midpoint of the company’s previous NPAT guidance,’’ JB Hi-Fi said in its response
to the ASX.
“JBH notes guidance in section 7.3 of Guidance Note 8 issued by the ASX which suggests that companies should treat an expected variation in earnings compared to its
published guidance equal to or less than 5 per cent as not being material and presume that its guidance therefore does not need updating.
“JB Hi-Fi did not consider that the information contained in the fiscal year 2018 outlook slide would have a material effect on the price or value of the entity’s securities,” the
statement said.
Bruce Smith, principal at Alphinity Investment Management, said he was “surprised” by the ASX’s query of JB Hi-Fi. “I’m surprised by it considering the announcement on
earnings fell short of the ASX’s own definition of materiality,” he said. “While the share price move was a little greater than the downgrade that was something that could not be
known by the company in advance.”
Reference:
Greenblat, E. (2018, May 8). JB Hi-Fi unapologetic on profit downgrade. The Australian. Retrieved from https://www.theaustralian.com.au/business/companies/jb-hifi-
unapologetic-on-profit-downgrade/news-story/ba2f4f54b195a85bb201e28f4a9baf0e

Question 1: Use Classical Political Economy Theory to explain JB Hi-Fi’s decision to release its profit downgrade
in the way it did. Make sure you explain what Institutional Theory is, and support your observations with evidence
from the case study.
Classical Political Theory was developed by Adam Smith in 18th century. The classical economics states that change in demand of any
goods and services have direct impact on supply to establish the economic equilibrium. The classical economy can also be defined as
market economy that deals with price mechanism to maximise the profit of customers and business firms. It emphasizes on limited
government interference in trade practices (Lexicon, 2018).
Adam Smith argued that free trade without government interference is best for the economic growth of nation. People are
motivated by self-interest. He explained the economic corporation between buying and selling activities.
The essential criteria of economic policy are national advantage. The economists focused on individual initiatives in freely
competitive market results in development of society as a whole. The theory suggests that the social productive investment and
accumulation of activities is the main force acting for the economic growth. Self-regulating of economy is the main principle of
classical political theory. The extensive government intervention in business practices leads to hamper the operational activities of
the organization. The profit classical theory states that profit is calculated from the marginal productivity. The major focus was on
effects of economic thought on free trade (Robbins, 1965).

The government or other regulatory bodies of the industry has some specific guidelines for controlling the firms operating in
industry. The control should be to the extent of these specific rules only. JB Hi –Fi was unapologetic for profit downgrade as it was
not aware about the material effect of it on its share prices (Elmas, 2018).
The ASX has clear guidelines that companies earning variations less than or equal to five percent in any organization are not
considered as material. It does not make impact on share prices. The downgrade in profit was the result of unfavourable weather
conditions and heightened price completion in the market.
The company stated that there was only three percent downgrade in profit from their presentation. And it is clear in ASX guidelines
that revision up to five percent is immaterial.
The company also argued that it was not aware about the impact of downgrade on its share prices estimated revenue and long term
performance of the organization. The company on the question of ASX about making a standalone statement about profit downgrade
argued that it does not require updating the presentation because of the ASX guidelines that earning variation up to five percent is
not material (Foye, 2018).
References:
Elmas, M. (2018, May 7). JB Hi-Fi cops query on profit downgrade. Retrieved May 27, 2018, from Insideretail.com.au:

https://www.insideretail.com.au/blog/2018/05/07/jb-hi-fi-cops-query-on-profit-downgrade/
Foye, B. (2018, May 7). JB Hi-Fi grilled by ASX over profit downgrade. Retrieved May 27, 2018, from Crn.com.au:
https://www.crn.com.au/news/jb-hi-fi-grilled-by-asx-over-profit-downgrade-490446
Lexicon. (2018). Definition of classical economics. Retrieved May 27, 2018, from Lexicon.com: http://lexicon.ft.com/Term?
term=classical-economics
Robbins, L. (1965). The Theory of Economic Policy in English Classical Political Economy. London: MacMillan & Co. Ltd.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
Demonstrates a balanced and high
level of knowledge of core
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
Demonstrates a good level of
knowledge of some of the core
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
Demonstrates limited knowledge of
core concepts by providing a
limited level of analysis. Utilises
few current, appropriate and
credible sources.
Demonstrates little, if any,
knowledge of the core concepts
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
the ideas presented; drawing clear
and well thought-out conclusions.
The assessment presents a fairly
detailed and focused summary of
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
The assessment presents a
somewhat detailed and focused
summary of the ideas presented;
providing some evidence of
conclusions.
The assessment provides limited
detail with no clear summary of the
ideas presented; drawing limited
conclusions.
The assessment fails to provide
any clear evidence of the ideas
presented; drawing no clear
conclusions.

Question 2: Use the Managerial branch of Stakeholder Theory to explain JB Hi-Fi’s reporting decisions. Make sure
you support your observations with evidence from the case study.
The Managerial Branch of Stakeholder Theory is a theory of business ethics that deals with morals and ethics of an organization. It
defines the nature of interaction between the company and its stakeholders. It involves the motivation factors to management that
influence their decision to interact with the stakeholders. The interaction includes the detail of the organizational activities impacting
the profitability of the organization. The stakeholder theory describes the financial reports as economic, political and social
documents. They work as the theme for the organization’s private interest. Stakeholder theory explains the standard managerial
behaviour for any organization. The stakeholder theory also distinguish among the group of stakeholders that which group of
stakeholder require more managerial attention.
It defines the dynamic relationship between stakeholders and the company. The theory also defines the extent of responsibility and
accountability among the relationship. It acknowledges the societal groups that are eligible for an adequate amount of information
about business activities. It firstly identifies the group of stakeholders that have the right to information.
The theory considers both resource based view and market based view in defining the specific stakeholders and the conditions for
managers to treat them as stakeholders (Wilmshurst, 2004).
The stakeholder theory can be broadly categorised into ethical (normative) and positive (managerial) branch. The normative

stakeholder theory defines the organizations obligation for stakeholders. The managerial branch of stakeholder theory defines that
the organization and its stakeholders are independent of each other. The managers are obliged to maintain exchange relationship for
the sustainable growth of the organization. The theory states that the organization may not respond to all the stakeholders but will
respond to those who seem to be powerful. The theory helps in prioritizing the stakeholders.
The theory establishes the relation among the business and the stakeholders as the actions of stakeholders can impact the
organizational performance. The management is motivated through a number of factors in making decision to provide environmental
information to its stakeholders. It defines the stakeholders’ right to be informed. The theory states that the managers are more likely
to meet the expectations of the stakeholders (Hossain, 2013).
The theory explains the reasons for making particular voluntary actions. The primary objective of mangers is to maximize the interest
of stakeholders. It states that management is obliged to activate business activities in a way to increase the business profitability and
the benefit of stakeholders (Van der Laan, 2009).
The warning about profit was contained on page 4 of a 14 page presentation according to priority basis of the stakeholders. The
management is considered about creating value for the stakeholders. The managerial approach of stakeholder theory defines the
disclosure of information to a group of stakeholders only. The downgrade in profit was also of three percent that was not expected to
make any material effect on the organization’s performance.

The Company disclosed the information about the profit downgrade in presentation slides presented before the investment
conference rather than making a standalone statement of announcement in the market.
The company states that it considered that the downgrade of three percent is immaterial and does not need to be disclosed in public
but only to stakeholders having right to be informed. They also assumed that profit downgrade would have no impact on the share
prices of the company (AFR, 2018).
References:
AFR. (2018, May 7). JB Hi-Fi rapped by ASX for burying earnings downgrade in Macquarie presentation. Retrieved May 27, 2018, from
Australian Financial Review: http://www.afr.com/business/retail/jb-hifi-rapped-by-asx-for-burying-earnings-downgrade-in-
macquarie-presentation-20180507-h0zq08
Hossain, M. M. (2013). A managerial perspective of corporate social and environmental responsibility (CSER) reporting. The 7th Asia
Pacific Interdisciplinary Research in Accounting (APIRA) Conference . Japan: The Kobe University.
Van der Laan, S. (2009). The role of theory in explaining motivation for Corporate social disclosures: Voluntary Disclosures vs
‘Solicited’ Disclosures. Australasian Accounting, Business and Finance, 3(4), 15-29.
Wilmshurst, D. T. (2004). Stakeholder theory: modelling stakeholder theories as a research tradition: SME Australian evidence.
Retrieved May 27, 2018, from Unisa.edu.au:

https://www.unisa.edu.au/Global/business/centres/cags/docs/apcea/APCEA_2004_10(3)_Wilmshurst.pdf
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
Demonstrates a balanced and high
level of knowledge of core
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
Demonstrates a good level of
knowledge of some of the core
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
Demonstrates limited knowledge of
core concepts by providing a
limited level of analysis. Utilises
few current, appropriate and
credible sources.
Demonstrates little, if any,
knowledge of the core concepts
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
the ideas presented; drawing clear
and well thought-out conclusions.
The assessment presents a fairly
detailed and focused summary of
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
The assessment presents a
somewhat detailed and focused
summary of the ideas presented;
providing some evidence of
conclusions.
The assessment provides limited
detail with no clear summary of the
ideas presented; drawing limited
conclusions.
The assessment fails to provide
any clear evidence of the ideas
presented; drawing no clear
conclusions.

Question 3: To what extent do current share prices anticipate future earnings announcements? Use the case
study to support your answer.
Current share prices helps in estimation of future earnings. The earnings announcements and other financial information play a vital
role in the functioning of investors. The earnings announcements are based on company’s past performance, recent good or bad
activities and news about the company. The positive signal in share prices leads towards positive earnings announcements.
The negative earnings announcements lead the investors to perceive a negative look towards the organization. In a strong market the
share prices reflects all information about the company earnings. The stock prices reflect both public and private information. The
private information reflects the corporate information related to management of the organization like incorporation of new
accounting methods etc. The investors respond to the new information about the organization in a rational manner (Nber, 2018).
Capital market responds to corporate information like earning announcement. In capital market it is assumed that if information
plays an important role the information is reflected by the movement in share prices.
Share price movements are considered as interesting occurrence to observe as they transmit information about the firm’s future
earnings announcements. The earnings announcements are used for testing market efficiency. The earnings announcements can be
utilised to assess the profitability of the organization. The earnings announcements are announced publicly as the share price
immediately reflects the announcements (Patrick, 2014).

The earnings announcement can be defined as an official statement of company’s profitability for an accounting period. The earnings
statement is announced on a specific date and includes the earnings estimates issued by equity analysts. If the share prices rises
slightly the company is supposed to have a profitable leading up to the announcement.
The share price fluctuations are used by the analysts in estimating future profit or earnings per share. The bond prices incorporate
earnings information. The bond price reflection of earnings announcement can lead to predict future stock returns. There is a direct
relation between trading activity and share prices. The earnings reports affect the positions of analysts, traders and investors on or in
a company.
The earnings reports work as the important financial data to provide the details that how the stocks are likely to be valued of the
company in future prospects. In case of market expectations there is a great correlation between stock price and earnings growth
results. The stock prices fall as a result of downgrading earning announcements. All the stakeholders also earnings announcement
and the firm’s share price movements in the earnings announcement season. The share prices of company can be used to estimate
overall health and strength of the organization.
The stock prices and dividends affect the earnings announcements. The investors may suffer negative excess returns on the day after
the earnings announcements (Ong, 2017).
The company JB Hi Fi faced downgrade in its share price by eight percent after revising tax guidance to be lower by three percent.

The share price JB Hi Fi decreased following the earnings announcement. The downgrade was not believed to be price sensitive by
the organization. It showed a positive relation between the share prices and the future earnings announcements. The downgrade in
share prices leads to estimation of drop in profit earnings by 6.4 %. The JB Hi Fi retail stock dropped by 5.3 percent. The share price
fluctuations showed a direct relationship in the estimation of downgrade in profitability in earnings announcement (Q Continuum,
2011).
References:
Nber. (2018, May 28). Stocks Rise Around Earnings Announcements. Retrieved May 28, 2018, from Nber.org:
http://www.nber.org/digest/mar08/w13090.html
Ong, H. (2017, May 17). How do quarterly earnings reports affect stock prices? Retrieved May 28, 2018, from Business.inquirer.net:
http://business.inquirer.net/229677/quarterly-earnings-reports-affect-stock-prices
Patrick, K. (2014, November). Stock Price Response to Earnings Announcements: Evidence from the Nigerian Stock Exchange.
Retrieved may 28, 2018, from Chss.uonbi.ac.ke: http://chss.uonbi.ac.ke/sites/default/files/chss/Kipronoh%20Patrick.pdf
Q Continuum. (2011, July 15). Time to buy JB Hi-Fi. Retrieved May 28, 2018, from Macrobusiness.com.au:
https://www.macrobusiness.com.au/2011/07/time-to-buy-jb-hi-fi/
Marker’s Comments: The marker will provide feedback here. Mark (10):
0