Corporate Accounting 2: Retail Food Group Financial Analysis Report

This report analyzes the financial performance of Retail Food Group (RFG) based on the provided assignment brief and related documents. It examines the trends in share price and profit (loss) over a three-year period, providing explanations for the changes observed, including the impact of significant impairment charges. The report discusses the commentary surrounding the application of the going concern principle to RFG, considering the company's financial position and liabilities. It also defines and analyzes RFG's debt covenants, addressing the concerns raised and the strategies management is implementing to improve performance. Furthermore, the report explores the franchisor/franchisee relationship and its potential for agency problems, drawing parallels to the manager-shareholder dynamic in publicly listed companies. The analysis utilizes financial data and relevant articles to provide a comprehensive overview of RFG's financial situation and strategic responses.

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BAO 2203 Corporate Accounting

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Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................5
Question 4........................................................................................................................................6
Question 5........................................................................................................................................7
Question 6........................................................................................................................................8
References......................................................................................................................................10

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Question 1
Profits are the main aspect of the business and they shall be maintained in an effective manner.
There are various changes which take place in them with time. This is also the case with the
share price of the company which fluctuates on daily basis. There are the ups and downs which
are faced and that affect the value of the company. Due to this it is required that they shall be
evaluated in proper manner (RFG, 2017). All the changes which are taking place will have to be
determined and together with them the reasons which are responsible for it will also be needed to
be identified. This will be made possible when the information required for carrying out of the
analyzation will be obtained. By the help of that there will be evaluation of the performance
which will be made possible and the steps which are to be taken for the further improvement will
be identified. All of the changes that have occurred in relation to the profits and share price in the
retail food group have been identified and represented below.
Particular
s
Net profits Share price
2016 52963 5.3238
2017 61927 4.6932
2018 -306693 0.41
All of the values have been identified and in that the trend which is involved has been taken into
account. It can be seen that there is an increase in the number of profits which is made from
$52963 in 2016 to $61927 in 2017. The company has made an increase because of the rise which
has been made in the sales which have been done. The cost incurred in the business is also
increasing with sales (Ergun, 2012). It has been noted that increase in the sales is more than that
of the cost and due to that profits are also increasing. In the year 2018 the company has made
huge losses which amounted to $306693. This was a vast decline faced by the company and has
affected its position in an adverse manner. It has been noted that despite the increase in the sales
there is the loss which is made in this year. The company has made the increment in the revenues
but the expenses have also risen with the same. The control has not been established by the
company on the same and due to that there are high amount of the losses which have been made

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by the company. The main expenses which have increased faster include the operations related
cost and also the expenses of occupancy (Li et al., 2014). The company has also taken into
account the impairment losses which have been incurred and due to that the losses have further
increase. They have been charged from the profits and that led to decline in the amount to such
level that losses have been made in the company and that has affected its long term profitability.
In addition to this the share price related data is also collected and from that it can be noted that it
is declining on a continuous basis. There is the link which is available between the profits which
are made in the company and the share price which is prevailing. With the decline in the profits
of the company there is a reduction in the share price also. This is because the losses create a
negative impact on the investors and market. The trust is broken and that led to the adverse
impact on the share price. With the losses company is not able to pay the required amount to the
investors and they are demotivated by the same (Yahoo finance, 2019). They will not be willing
to deal with the company and will not be investing further in the company. As there will be
fewer investors and no one else will be interested in the company so the value of the business
will be reduced and that will be affecting the share price in negative manner to decline the same.
This decision is taken by the investors because they are not sure of the returns which will be
made by the company. If the losses will be continuing then the company will not be able to pay
any amount to the shareholders and so without any return on investment will be made.
Question 2
In the business, there are various assets which are used and there is the change which is required
to be made on them and that is identified to be the impairment. In the case of retail food group
also the same is done and there has been the identification of the losses which amounted to
$123.7 million. There are various new decisions which have been made in the company and
because of them the charge has been made. In the business there are various such franchises
which are operating without any profits. With the new system all of them will be identified and
discontinued which will be creating the impairment losses (Peetathawatchai and Acaranupong,
2012). The centralized functions will also be rationalized in the new process which is also an
important step. This has affected the shareholders’ value and the same has declined and reached
to $18.5 million. To consider this there will be consideration of the new laws which are
applicable under the AASB 9. In that all the systems and processes which are required to be

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undertaken are specified. There are various aspects which have been considered and then on that
basis the final amount of the impairment loss will be determined. All of the expected credit
losses which will be taking place will be taken into account and no consideration will be given to
the losses which are incurred. All of the losses will have to be calculated accurately and then
their reporting will have to be made in the proper manner. There are several policies and
procedures which are specified in this respect and they will be required to be followed for the
ascertainment of the best process. By the help of them it will be possible for the company to
record the correct amount in the reports (Linnenluecke et al., 2015). The impairment losses in the
current year have been recognized in respect of the property, inventory, trade receivables, and
intangible assets. For the determination of the final amount to be taken into records there is the
impairment testing which is to be followed.
In this process there is the use of the several assumptions and the recoverable amount is highly
affected by them. That amount is required to be identified so that the loss which is incurred on
the impairment is ascertained. The company is following policy in this respect and according to
that the recognition will be made with the amount that is gained after the reduction of the cost of
sale from the fair value of the asset.
Question 3
Going concern is an important aspect which is required to be taken into account in the business
while reporting all the values. Under this concept, it is assumed that business will be continuing
in the future also. The same has been considered in the retail food group and there is the use of
going concern in the making of the financial accounts. The company has made the losses and
they amounted to $111.1 in the year 2018 (RFG, 2018). In addition to the recovery of the same
there are current liabilities also which the company will be required to pay off in the coming year
and they are for the value of $182.3 million. The operations are carried in the company and cash
flows which have been derived from the same amounts to $7.6 million. There is the loan which
is taken from the syndicate bank and is due to be repaid in the coming one year and that is
amounting to $258.8 million. This is the obligation for the company and will have to be paid in
the coming year.
The comment has been made on the going concern of the company and that is because of the

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losses which are involved and with that the company has the huge amount of the liability which
is required to be repaid. This is not the end and in addition to them the company has the
impairment losses also which will be considered and they are for the amount of $123.7 million
(RFG, 2019). This has been incurred in the company as it has recently changed its system and
that has led to various other changes also. There were various new programs which have been
introduced by the company and their impact has been made on the profitability of the business. It
was necessary to make the repayment of the loan of syndicate bank and for that funds were
required. To meet this there was sales program which has been launched and it has been decided
that all of the income which will be made with the help of that will be used by the company for
the purpose of repayment of the loan.
The restructuring program was to be taken into the company but the lender of the company has
waiver the same and provided the time to the company. The postponing of the process provided
the company with the duration in which it can take various steps to improve its position. There
are various opportunities which are available and they all have been used by the company in an
effective manner. In spite of this the risk is involved in the business that the financial covenant
will be breached by it. This is the situation which needs to be avoided as by the occurrence of the
same the loan of syndicate could not be repaid.
All of this has led to the situation of the doubt ongoing concern and the comments have been
made on the same. This is based on the support which will be received from the syndicate
lenders and the uncertainty is present in relation to the same. If the situation will not be in favor
of the company then it’s going concern will be affected.
Question 4
Debt covenant is involved in all the businesses and is highly essential. It is an agreement which
is framed between the company and the lender in respect of the debt which has been taken. In the
business, there are various financial ratios which are calculated and in that there is the limit
which is specified and required to be followed. All of them will be made applicable to the
company so that finances can be managed (Demerjian, 2017). The contract will be required to be
followed and if there is any breach which is made in this respect then the actions will be taken in
this respect. The lender in such situation can ask for the refund of the amount and this will be

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difficult for the company.
There are debts in the company which has been taken from the syndicate bank and the waiver for
the same has been provided by the lender. The company will be required to utilize the time
which is available in the improvement of the position of business. There will be steps which will
be taken by the board so that position of the financial statements can be managed. There are
various other options and alternatives which are available with the company and all of them will
be identified and evaluated in an effective manner. By the help of them the leverage which is
involved in the business will be reduced. The cash balance of the company will be required to be
increased and that will be done with the help of the sale of assets that are made. This will be
beneficial for the company as it will be using the collected amount to the pay the debt to the
syndicate bank (Christensen and Nikolaev, 2012). The process will be required to be followed in
fast manner as there is the right which is still available with the lender to review the process and
the accounts. They can come at any time and due to that it is necessary that the appropriate steps
are taken. By that the position will be maintained and there will be gaining the support from the
bank in a continuous manner. The company will be achieving the growth with the help of this
and will also be taking into account the funding options which are available with the company.
This will be done so that company has some scope in the situation of emergency.
Question 5
In the business, there is always the need for the growth and the same hall be maintained. This
will be required so that the position can be kept at the point which will satisfy the lenders and
they will be providing the company with the required funds. In this process there are several
strategies which are available and will be taken into use. There is a large amount which is
required to be repaid and in that there is the evaluation of the results which have been made.
There are several arrangements which are made by the company so that it can deal with the
situation in the best manner. There will be no dividend which will be paid in the current year and
same has been decided in the strategies (RFG, 2018). This will be the position will be maintained
for the coming year as the amount which will be retained with the help of this will be used for
the repayment of the loan. There is the turnaround strategy and the level at which the same will
be providing the required results will be the pint till which the dividends will not be provided.

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The improvement in the financial position will be made with the help of this.
The company has adopted various new techniques and strategies and in that which are related to
the transformation have been intensified. There will be a barrier which will be made on the
commercial operations and also the franchises which are working with the losses will be
identified and discontinued. As they are not adding to the value of the business so their
discontinuance is acceptable. The overall activities which are taken will be made better with the
help of the rationalization that will be carried in respect to the centralized functions. There will
be sale of the assets and for that a program will be launched which is highly required as this will
be providing the company with the required amounts.
The company is required to earn higher returns and that will be made possible with the help of
this approach. This is because the performance will be improved by the rise in the effectiveness
and efficiency of the performance. There will be long term profitability which will be maintained
and once the improvement in the situation will be made there will be payment of the dividends
which will be made. The debts of the company will be declined with the help of the proceeds that
are received from the sale of the assets. As this will be saving the cost there will be amount to be
paid as the dividends in the future. In addition to this the expenses which are incurred on various
franchises will be saved as they will be closed. No earning was made from them instead
additional expenses were made which will be eliminated now. The company will be gaining the
benefits because of the same and that will help in long term sustainability.
Question 6
The agency problems are the issues which are made between the shareholders and the managers
of the company. They arise in public limited companies and needs to be taken into consideration.
They arise in the company because of the conflicts of the interest which arise. There are several
personal interests that are involved and due to them the problems are faced. The agency
problems will be faced by all those who have a similar type of relationship. This applies to the
franchisor as well as the franchise and they will be involving the interest in the business and that
will lead to the occurrence of the agency problems (Bebchuk, Cohen and Hirst, 2017). In case of
retail food group also there are various issues which have been included in this respect and the
problems are arising due to the same. This has been identified for a franchise store in which the

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personal products have been sold by the directors and for the same there is the issue which has
been raised. This is not a correct action and so there is the opposition which is made by the
manager in this respect. The sale of goods is made by the director as with the help of the same
there will be additional personal income which will be made possible. the brand name of the
company is used and with that the personal products are sold.
Due to such actions, the interest conflict has taken place among all of the parties involved. The
business interest and the personal interest are conflicting with each other and this will be
negative for the company. There were losses which have been made by the company in 2017 and
the same is due to the conflicts of the interest which have been identified (Attila, 2012). This is
the duty of the company to identify them and then take the appropriate steps by which the same
can be eliminated. The regular monitoring will be made and by that all the circumstances in this
respect will come to notice. All of the losses which are faced due to this fact will, therefore, be
reduced further.

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References
Attila, G. (2012) Agency problems in public sector. Annals of the University of Oradea, 21(1).
Bebchuk, L.A., Cohen, A. and Hirst, S. (2017) The agency problems of institutional
investors. Journal of Economic Perspectives, 31(3), pp.89-102.
Christensen, H.B. and Nikolaev, V.V. (2012) Capital versus performance covenants in debt
contracts. Journal of Accounting Research, 50(1), pp.75-116.
Demerjian, P.R. (2017) Uncertainty and debt covenants. Review of Accounting Studies, 22(3),
pp.1156-1197.
Ergun, U. (2012) Internal determinants of the stock price movements on sector
basis. International Research Journal of Finance and Economics, 92.
Li, Q., Wang, T., Li, P., Liu, L., Gong, Q. and Chen, Y. (2014) The effect of news and public
mood on stock movements. Information Sciences, 278, pp.826-840.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K. (2015) Planetary boundaries: implications
for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Peetathawatchai, P. and Acaranupong, K. (2012) Are impairment indicators and losses
associated in Thailand?. Journal of Financial Reporting and Accounting, 10(1), pp.95-114.
RFG. (2017) Annual report 2017. [Online] Available at:
https://www.rfg.com.au/wp-content/uploads/2018/02/RFGLAnnualReport2017.pdf [Accessed 12
September 2019]
RFG. (2018) Appendix 4D Interim Financial Report Half-Year Ended 31 December 2018.
[Online] Available at:
https://www.rfg.com.au/wp-content/uploads/2019/02/RFG1H19FinancialStatements.pdf
[Accessed 12 September 2019]
RFG. (2018) UPDATE ON DEBT FACILITIES. [Online] Available at:

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https://www.rfg.com.au/wp-content/uploads/2018/12/ASX-
Announcement_UpdateonDebtFacilities21_12_18.pdf [Accessed 12 September 2019]
RFG. (2019) 1H19 Results & Update. [Online] Available at:
rfg.com.au/wp-content/uploads/2019/02/1H19ResultsAnnouncement.pdf [Accessed 12
September 2019]
Yahoo finance. (2019) Retail Food Group Limited (RFG.AX). [Online] Available at:
https://finance.yahoo.com/quote/RFG.AX/history?
period1=1441305000&period2=1567535400&interval=1mo&filter=history&frequency=1mo
[Accessed 12 September 2019]