CA207 Accounting Theory: Analyzing Myer's Financial Crisis

This case study analyzes the financial crisis experienced by Myer Corporation in 2018, focusing on the role of financial statements and related accounting issues. The report examines the $476.2 million loss reported by Myer, attributing it to impairment losses, restructuring costs, and store closures. It investigates whether the company fairly applied AASB 136 in recognizing these impairment losses, particularly concerning goodwill and brand name valuations. The analysis considers other contributing factors, such as leadership changes and competitive pressures. The report concludes that the crisis was largely entity-specific, stemming from inadequate financial management, and suggests potential changes to accounting standards for better estimation of intangible asset values. Desklib offers similar case studies and resources for students.

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Accounting Theory

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Executive Summary
The present report is developed for developing an understanding of examining the
financial statement of an enterprise for identification of any issue related with financial crisis. In
this context, the report has discussed the issue of accounting loess recognized by Myer in its
interim financial results of the year 2018. It has been identified from the analysis of the financial
statement of the company that the losses identified are unfair as per the AASB 136 accounting
standard.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Clear and comprehensive overview of the enterprise’s financial crisis and outcome & Impact on
other Industries................................................................................................................................4
Role of Entity’s Financial statements in the Outcome....................................................................5
Avoidance of the Crisis...................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
The present report is developed for carrying out an analysis of the financial statements of
a public limited company within Australia. This is carried out for identifying the financial
accounting issues that were responsible for the occurrence of financial crisis within the
enterprise. The possible measures that could have been taken for avoiding the occurrence of such
issues are also discussed within the report. Lastly, it provides an analysis of whether the financial
accounting issues are entity specific or have wider implications. The changes that have been
occurred within the accounting standards or regulation in relation to the crisis have also been
discussed within the report. The company selected for the purpose is Myer Corporation, an ASX
limited up market Australian department store chain involved in retailing of wide range of
clothing products in the men’s, women’s and babies section.
Clear and comprehensive overview of the enterprise’s financial crisis and outcome &
Impact on other Industries
Myer is recognized as a retail giant within the Australian market but the company’s
goodwill has been recently negatively impacted to a large extent due to huge financial losses of
about $476.2 million in the first half of the year 2018 (Chau, 2018). The huge occurrence of
financial losses has negatively impacted the goodwill of the company across its shareholders as it
has suspended its interim dividend to meet the financial losses. The financial losses have resulted
mainly due to impairments, restructuring and store closure costs. The company has realized
financial loss mainly due to impairment losses with the pre-impairment profit declined to 36.1
per cent in the first-half of the year 2018 and also sales declined to 3.6 per cent. The financial
losses realized by the company can be attributed largely to failure of the company to respond
adequately to the increasing competition within the retail sector of the country. The restructuring
undergone by the company has resulted in realizing it huge financial loss after it has been split
from Coles in the year 2010 (Mitchell, 2018). The share prices of Myer have declined after its
split from Coles that can be depicted as follows:

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(Source: https://www.news.com.au/news/the-slow-painful-death-of-myer-and-djs/news-story/
7319b35c5c04c07975bd404a018feb0d)
The financial loss realized by the company has also resulted din the downfall in the
financial performance of the other departments stores as well such as Myer, David Jones, Target
and Big W. The sales and earnings of these department stores have also experienced a significant
downfall mainly due to impairment losses and restructuring changes. The lack of adequate
management skills for successfully undertaking the restructuring changes are providing to be
major reason for the downfall of such big corporations (Murphy, 2018).
Role of Entity’s Financial statements in the Outcome
Financial Accounting Issues in Relation to the Crisis
It has been seen that Myer Australia has suffered a loss of $476.2 million in first half
financial year of 2018. The half year annual report published by the Myer has shown significant
accounting issues that have led to loss of $476.2 million. As reported in the annual report the loss
includes non cash impairment charges of $ 500.2 million. The impairment loss was generated
due to write-off intangibles that include goodwill and brand name. The impairment of intangibles
was completed with an ongoing cost of $9.7 million, which is very big looking at the size of
company. The cost total implementation cost and other significant items amount to $516.3
million dollars that was the main cause of such a big loss reported by Myer in first half year
2018. In the report it was mentioned that impairment was carried out due to decrease in
recoverable amount of intangible assets (Interim Annual Report, 2018).

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It is important to understand how impairment of intangible assets is being carried out as it
was major cause for reported loss by Myer Australia. AASB 136 provides the accounting
procedure to make the impairment testing of intangibles and how to make the impairment. As per
AASB 136, goodwill and other intangible must be regularly tested for the impairment (AASB
136, 2009). It can be done either on annual basis or at the any time of any significant changes
various accounting items. Goodwill and brand name has indefinite useful life and it is not subject
to amortisation and only impairment loss is recognised when the recoverable amount of such
assets is lower than the carrying value of such assets. Carrying value is the amount that is
reported in previous balance sheet date and recoverable amount is the higher of asset fair value
less cost to sell and value in use. Myer Holdings has two main intangible assets that has suffered
major downfall in its recoverable amount. These intangible assets are goodwill and brand name.
Goodwill has been recognised at the time of business combinations and brand names have been
self created on the basis of cash flow generated through use of particular brand name (AASB
136, 2009).
As reported on famous online news reporting website News.com.au that Myer was
struggling with financial losses and the main cause of this loss is write-down of value of assets.
The CEO of Myer has accepted that brands are not performing as it was performing before and
its impact is that Myer has faced decrease in sales revenue (Murphy, 2018). On looking at the
financial statement of Myer it was discovered that Myer is still making money through selling of
its products and earned profits before the recognition of loss of impairment despite of decrease in
sales and increase in cost of goods sold. So it can be said that there is big accounting issues in
relation to impairment of goodwill and brand image has been reported by the Myer in its last
interim financial report (Interim Annual Report, 2018).
Contribution of Other Factors
There are some other factors that have contributed to such financial crises in Myer
Company. One reason can be non presence of permanent CEO in Myer and it has impacted the
decision making power of the company in situation of financial crises (Myer Annual Report,
2017). The former accountant Mr. Hounsell has acted as the acting CEO of company and are
involved in making the financial decisions and Chairman Garry Hounsell has taken the place of
CEO in the company on temporary basis. So all the decision related to reporting of financial loss

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involves the role of Mr. Hounsell and it seems that he has no knowledge to lead to the company
in situation of lower sales revenue as budgeted. Reporting of impairment losses is not the
solution to avoid the dividend payment despite the company is making some profits (Murphy,
2018).
Avoidance of the Crisis
Crisis being entity specific or having wider financial accounting issues
The financial crisis occurred within the Myer can be regarded as mainly entity-specific as
it has resulted mainly due to inadequate financial management by the business managers of the
company. The business managers were not able to take accurate strategic decision for promoting
the financial growth of the company after it divested from Coles. The major reason identified for
the realization of huge financial losses in the year 2018 has attributed mainly to failure of the
business executives to develop strong strategies for delivering an improved financial
performance. The significant leadership changes that have been made by the company in its
Board have not adequately helped in improving its sales. The company has appointed new
merchandise and financial officer while these have been regarded to be ineffective in improving
the company’s sales and strengthening its profitability position. The failure of the management
team to adequately identify and meet the customer needs in a highly competitive retail
environment resulted in the significant financial losses realized by the company’s reported in the
first-half year financial statement developed by Myer. Thus, the financial crisis that has been
realized by the company can be attributed mainly entity-specific rather than having wider
financial implications (News Corp Australia Network, 2018).
Changes in the accounting standards in context of the crisis
As such there was no change in accounting standard in relation to crisis reported by
Myer. As the financial crises is related only with the impairment loss recognised by Myer and
other companies in retail market of Australia, there is need to make certain changes in
accounting standard AASB 136 to avoid the reporting of such big losses. There is need to
introduce proper estimation procedure for calculating the recoverable amount of goodwill and
other intangibles.

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Conclusion
It can be stated from the overall analysis of the interim financial results of the company
of June 2018 that it has reported a huge financial loss on account of impairment and decline in its
goodwill. However, the losses realized by the company can be attributed to be unfair as per the
AASB 136 standard developed for recognition of impairment losses. As per standards, the
company is still in profitable position and thus declaration of such a huge amount of financial
loses can be regarded as an unethical accounting practice by the company for restoring profits.

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References
AASB 136. 2009. Impairment of Assets. [Online]. Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
[Accessed on: 19 October, 2018].
Chau, D. 2018. Myer posts 'disappointing' $486 million loss, as CEO admits 'shareholders
deserve better'. [Online]. Available at: https://www.abc.net.au/news/2018-09-12/myer-full-year-
results-2018/10236074 [Accessed on: 19 September 2018].
Interim Annual Report. 2018. Myer Holding. [Online]. Available at:
http://investor.myer.com.au/Investor-Centre/?page=ASX-Announcements [Accessed on: 19
October, 2018].
Mitchell, V. 2018. Myer announces half-billion dollar loss. [Online]. Available at:
https://www.cmo.com.au/article/646600/myer-announces-half-billion-dollar-loss/ [Accessed on:
19 September 2018].
Murphy, J. 2018. Myer’s darkest hour isn’t what it seems. [Online]. Available at:
https://www.news.com.au/finance/business/retail/myers-darkest-hour-isnt-what-it-seems/news-
story/aabf983139b6724277840d9cc0e55bc2 [Accessed on: 19 October, 2018].
Murphy, J. 2018. Why our big department stores are struggling. [Online]. Available at:
https://www.news.com.au/finance/business/retail/why-our-big-department-stores-are-
struggling/news-story/460eed4ce498e3d811e9982a94638b00 [Accessed on: 19 September
2018].
Myer Annual Report. 2017. [Online]. Available at: http://investor.myer.com.au/Reports/?
page=Annual-Reports [Accessed on: 19 October, 2018].
News Corp Australia Network. 2018. Shedding cash: Myer hit by $476.2 million half-year loss.
[Online]. Available at: https://www.news.com.au/finance/business/retail/shedding-cash-myer-
hit-by-4762-million-halfyear-loss/news-story/eaba17db870e1e2bda3a38e1895cb9f4 [Accessed
on: 19 September 2018].

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