BAO2203 Corporate Accounting Assignment: Retail Food Group Analysis

This assignment provides a comprehensive analysis of Retail Food Group (RFG), focusing on its financial performance and accounting practices. The analysis begins with an examination of RFG's share price and profit/loss trends over three years, identifying key drivers for changes in financial results. It delves into the company's impairment charges, explaining the application of impairment principles and their impact on financial statements. The assignment further explores the going concern principle in relation to RFG, evaluating the factors that raise concerns about the company's ability to continue as a going concern. It then examines RFG's debt covenants, the consequences of breaching them, and the company's responses to these financial obligations. The assignment also identifies and assesses the effectiveness of the strategies implemented by RFG's management to improve its performance, including restructuring initiatives and cost-saving measures. Finally, it explores the franchisor/franchisee relationship within RFG, considering whether this relationship can lead to agency problems, as seen in the context of publicly listed companies. The assignment draws on RFG's financial reports, announcements, and academic research to support its analysis.

1
BAO 2203 Corporate Accounting

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

3
Question 1
In all the companies there are various changes which are noted in terms of the profitability and
the share price. It is required that the changes shall be evaluated so that the reasons for them can
be identified. In this process, all the data in this respect will be collected and then the
performance evaluation will be made possible. The changes which took place in the retail food
group are as follows:
Particular
s
2016 2017 2018
Net profits 52963 61927 -306693
Share price 5.3238 4.6932 0.41
It can be noted that the profits of the company have increased in 2017 from $52963 to $61927.
This was due to the increase in the revenue which is made by the company and it was more than
the cost which was incurred in respect of the same. After this there was a great fall which took
place and company had the loss amounting to $306693 in 20181. The revenue in 2018 has
increased but then also the losses have been made. There was high rise which was faced in
various expenses such as the occupancy expense and operating expenses. There were high
impairment losses which were made and due to that the decline in profits of the company has
been faced. The amount of the losses is high and that made the company bear high amount of
losses2. Due to the same the impact has been noted on the profitability of the company. The share
1 RFG. (2018) Annual report 2018. [Online] Available at:
https://www.rfg.com.au/wp-content/uploads/2018/RFGAnnualReport2018.pdf [Accessed 5
September 2019]
2 RFG. (2017) Annual report 2017. [Online] Available at:
https://www.rfg.com.au/wp-content/uploads/2018/02/RFGLAnnualReport2017.pdf [Accessed 5

4
price is also affected and there is continuous decline in the same. The share price is related to the
profitability and with the decline in one the other will automatically reduce. When the company
will be having negative outcomes then it will not be able to pay any amount to the investors and
this will restrain the investors to make more investment3. The declined demand in the market will
lead to reducing share prices in a drastic manner. This will be affecting the market as the value of
the company will be declining with the decrease in the market price of the shares. The losses are
high and so investors will not be willing to buy the shares of the company as no return will be
available to them on the made investment.
Question 2
Impairment is made applicable in the company in which charge is created on various assets.
There is the assessment which is carried and in that it is identified that a charge of $123.7 million
is created for the period. This is because of the discontinuance of the unprofitable franchise
stores and rationalization of the centralized functions4. Due to this, there is a reduction of the
shareholder value to $18.5 million. There is the new impairment model methodology which is to
be applied under the AASB 9. According to it the impairment losses will be recognized on the
basis of the expected credit losses and in that incurred credit losses will not be taken into
account. The company will be following the required policy in relation to the impairment so that
September 2019]
3 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 5 September 2019]
4 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 5 September 2019]

5
it is recorded in the accounts in the best and effective manner. In the last year the policy for the
impairment of accounting receivable was to make the assessment on basis of incurred losses
which has changed to the new model in current year. In the current year impairment has been
identified on various assets and the entry of the same is made in the financial statements in
relation to the trade receivables, inventory, assets held for sale, property, intangible assets and
many others. For the identification of the impairment there is the impairment testing which is
performed on all and by that the final results are determined. The recoverable amounts of all the
units, for which there is the identification of impairment loss is considered to be highly sensitive
to the various assumptions which are used.
According to the policy of the company the recognition of the impairment loss is made in
relation to the subsequent or initial writing down of the asset in comparison to the amount
derived after deducting the cost of sale from the fair value5. If there is increase in place of
downfall then the gain will be taken into account. If there is any asset for which the recognition
has been made earlier then the loss for the same will not be recognized.
Question 3
In all the businesses there is the need to cover the aspects in relation to going concern in the
reporting process. In the retail food group also there is the preparation of the financial statements
as per the going concern. There were losses which have been incurred in 2018 and they
amounted to $112 million before tax and $111.1 million after-tax. On the balance sheet date the
net current liabilities of the company were $182.3 million which will be required to be paid in
the present year only6. It has been identified that company has made the operating cash flows of
$7.6 million.
5 Andrews, R., 2012. Fair Value, earnings management and asset impairment: The impact of a
change in the regulatory environment. Procedia Economics and Finance, 2, pp.16-25.
6 Amanzholova, B.A. and Ovchinnikova, N.N., 2015. Going concern in financial statements and
accounting policy: Forecasting the economic and social impact. Ekonomicheskii analiz: teoriya i
praktika= Economic Analysis: Theory and Practice, 14(46), pp.44-55.

6
The secured syndicate loans are for $258.8 million and will be repaid in one year. There are
various transactions which are leading to the comment on the going concern of the company.
There are impairment losses which have been included and amounts to $123.7 million due to the
change in the strategies of business in relation to franchises and other functions. There is a sale
program which is launched and all the income which will be made from them will be used for the
repayment to the syndicate bank. There was a waver which was received from the lenders and in
that restructuring program has been postponed to 28 February 2019. Although company has used
all the opportunities there is the risk which is involved with the group to breach its financial
covenant. If this will happen then the debt of syndicate will be overdue.
Due to all this, it has been said that the going concern of the company will be dependent on
covenants management, support from syndicate lenders and facilities which are available in
immediate terms. There is high level of uncertainty which is involved in the group because of all
these events7. They all are considered to be undertaken in the coming period but high level of
risk is involved in this. If the company fails to attain any of them then it will be affecting the
going concern in an adverse manner. There was belief that going concern will continue for at
least one year and that resulted in preparation of the financial statement via going concern
concept and there is no adjustment which is included in the reports.
Question 4
In the company, there are various debts which are present and an agreement is made in relation
to them among the creditor and company which are identified as debt covenant. In them there is
a limit which is set in respect of the financial ratios and company is required to adhere to the
same. In case the breach is made then the lender will have right to take various actions. They can
demand full payback or can convert their loans into equity.
RFG also includes debt from the syndicate and they were due to be tested in December 2018 but
the same has been waived by the lenders and will now be tested on 31 March 2019. The time has
7 Kuruppu, N., Laswad, F. and Oyelere, P., 2012. Assessing going concern: The practical value
of corporate failure models and auditors' perceptions. Pacific Accounting Review, 24(1), pp.33-
50.

7
been provided by the lender but then also the company is required to make the focus on the
position of the business8. The board will be maintaining the balance sheet position of the
company and will be evaluating all the available alternatives by which the reduction in the
leverage on balance sheet will be attained. The potential sale of asset which is available will also
be taken into account as there will be increase in the cash balance with the help of this which will
be used for further repayments which are due.
RFG is required to take them into account as the lender company has all the rights and they can
review the system even before the provided date. Due to this company will be required to
manage all the operations in such manner that it continues to receive the support from the
syndicate and this will be adding to the growth of the company9. The alternate opportunities
which are available for the funding will be evaluated by RFG which can be used in case of
emergency and will be providing the company with more flexible capital structure.
Question 5
The performance of the company is required to be improved so that it can maintain the position
and for that, there are various strategies which are being taken into consideration. After the
evaluation of trading results and the arrangements which are made with the banks, it has been
decided by the company to apply the strategy of no dividend for the current year. It is also
decided that the dividend will not be made applicable in the coming period of 12 months10. This
8 Demerjian, P.R., 2017. Uncertainty and debt covenants. Review of Accounting Studies, 22(3),
pp.1156-1197.
9 RFG. (2018) UPDATE ON DEBT FACILITIES. [Online] Available at:
https://www.rfg.com.au/wp-content/uploads/2018/12/ASX-
Announcement_UpdateonDebtFacilities21_12_18.pdf [Accessed 5 September 2019]
10 RFG. (2019) 1H19 Results & Update. [Online] Available at:
rfg.com.au/wp-content/uploads/2019/02/1H19ResultsAnnouncement.pdf [Accessed 5 September
2019]

8
will be continued until the turnaround strategy of the company provides the business with an
acceptable financial position.
The strategy in relation to the transformation of the business activities has been intensified. In the
new system, all the franchise stores which are not making the profits will be closed down and
also the commercial operations will be stopped. The centralized functions which are involved in
the business will be rationalized and this will improve the overall functioning of the company.
The staff redundancies will be considered and with that asset sale program will be launched.
All of these will be efficient for the company as by that the performance, in the long run, will be
improved and the group will be able to have higher returns. The dividends will be paid once the
company will be gaining financial advantages. The cash will be collected with the help of sale of
asset and that will help the company in reducing its debts which will save the cost in coming
period.
The cost which is incurred on the stores which are working on losses will be saved. This is the
additional cost which is not providing the group with the required benefits and so the
discontinuance of the same will be advantageous for the company.
Question 6
In the public listed companies, there are agency problems which are faced by them between the
managers and shareholders. This is due to the conflict of the interest which arises among them as
all have their some personal interest involved in the company. The franchisor and franchisee
relation is also same and in that also the agency problem is faced. There is the conflict of interest
which arises in this relation also and the same has been identified for the RFG. The issues have
been raised by a director of the franchise store who has started selling off her personal products
in the store. The objection has been raised by the managers on the action taken11. This was done
by the director to gain additional benefit at the personal level by using the brand of RFG.
11 Hatch, P. (2019) RFG director's plan to sell her products to group's cafes raised concerns.
[Online] Available at: https://www.smh.com.au/business/companies/rfg-director-s-plan-to-sell-
her-products-to-group-s-cafes-raised-concerns-20190717-p5283j.html [Accessed 5 September
2019]

9
This led to a conflict of interest where the personal and business interests were conflicting. The
condition has been identified in 2017 and it was determined that company has made the losses
due to the same. Due to the identified case it can be said that the same agency problems are
included in the relation of franchisor and franchisee also. In order to avoid them there will be
regular testing which will be performed. This will help in eliminating the losses which are borne
by the business due to arising of such situations.