Financial Analysis and Continuous Disclosure of Surfswitch Group

This report presents a detailed financial analysis of Surfswitch Group, a major online sports retailer facing a class action lawsuit due to falling share prices and alleged financial misstatements. The analysis covers key financial areas, including goodwill impairment, cash flow, and profit and loss accounts, highlighting potential accounting irregularities and violations of financial reporting standards. The report also explores the concept of continuous disclosure in the Australian company framework, as per the Corporations Act and ASX Listing Rules, and its importance in reducing information asymmetry and maintaining market transparency. It reviews the advantages of continuous disclosure, potential penalties for non-compliance, and the role of the ASIC in enforcing these regulations. The report concludes with recommendations for improved financial practices and regulatory enforcement to protect investors and ensure market integrity, emphasizing the need for transparency and adherence to disclosure requirements.

By student name
Professor
University
Date: 10 September , 2017.

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Contents
Question no 1…………………………………………………………………...2
Question no 2…………………………………………………………………...6
Refrences.....……………………………………………………………….......9
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Question No. 1
Surfswitch group is one the major online sports action pack centre and has evolved has as an
online action sports retailer in the past. Today it has a customer base of 6 Million customers. The online
fashion retailer giant is is facing a class action on behalf of the shareholders amidst the falling share
prices of the company and in the process the total investments have been wiped out (Chiapello 2017).
One of the law firm filed an open suit against anyone who held or bought shares between Aug’15 to
Jun’16. It shares have fallen drastically by around 90% in Jun 2016 on 3 profit warnings in 2016 and is
accused of misleading the markets and breaching the disclosure requirements and claiming falsely that
it is the market leader. The market also claims that the company failed tio dsclose that the EBITDA
would be less than the forecast and continued to make false claims without reasonable grounds (Abbott
& Kantor 2017).
The goodwill of the company has gone major changes in 2015 on account of the wide changes in
acquisition of the different entities. Moreover, the opening balance was $ 36 Mn, new acquisition of $
25 Mn and then the impairment amounted to $ 54.6 Mn which resulted in $ 6 Mn at the year end. It
majorly included impairment on account of goodwill recognised within books for acquisition of 100% in
subsidiaries like Surfdome Shop Limited ($ 10.9 Mn in goodwill), Megicseaweed Limited ($ 3.07 Mn
impairment in goodwill), acquisition of Rollingyouth private limited ($ 0.9 Mn impairment in goodwill),
100% acquisition of Garage entertainment Aus Pty Limited amounting to adjustment of $ 1.2 Mn in
goodwill and final acquisition of SHI Holdings Pvt Ltd. amounting to adjustment of $ 11.1 Mn in the value
of the goodwill (Chariri 2017). Th cash position of the company has declined from $ 39.7 Mn in 2015 to $
21.3 Mn in 2016. The major change whih was shown in the financials is the reclassification of amount
from payment providers from cash and cash equivalents to the other receivables as on 30the June 2015
towards the year end reporting (Crosby & Henneberry 2016).
There has been a major changes in the profit and loss account in 2016 as when compared to the
2015 financials. The selling and distribution expenses have increased from $ 44 Mn to $ 101Mn without
substantive changes in the business opeartions, the impairment cost has moved from 0 to $ 89 Mn in
2016 which shows that there is something which was being misstated in the books in 2015 and now the
same has been impaired all of a sudden. The administrative expenses have risen more than 7 times in a
span of 1 year from $ 7 Mn to $ 49 Mn without substantial increase in the business base. This also points
to the material misstatement being there in the financial statements (Minnis & Sutherland 2017).
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Based on the analysis mentioned above without taking into consideration the post facto impact and the
trade halt, etc., I would have never asked my clients to buy or hold the shares of this company as it
appears prima facie from the financials of the company that there is something fishy and the accounts
are materially misstated, the company is window dressing its financials with no supporting for the
calculations made, false claims being made in the market and variance analysis showing some adhoc
figures. The consistency and the matching concept has been violated and it points to material
misstatements and chances of fraud (Maynard 2017).
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Question no 2
Abstract
It is been quite a time since the rule of continuous disclosure have been introduced in Australia,
and is followed by the companies as per the in Chapter 6CA (ss674-678) Corporations Act and through
the ASX Listing Rules (Chapter 3). Continuous disclosure is one of the important disclosure provisions of
the Australian company framework.The same has been explained in the report given below.
Introduction
As per section 674, it is important for the companies to provide notification to the investors
through the ASX of any information that may not be generally available but all that may have a material
impact on the company and its investors (Sweeting 2017). As per the Listing Rule 3.1 it requires that all
the material that is sensitive for the investors must be informed to them. Once the company becomes
aware of any such information than the investor must be made aware of the same. There has been a lot
of conflict whether such information must be made public or not and whether this policy of continuous
disclosure is viable or not. The same has been presented hereunder with all the necessary disclosures
and results (Kew & Stredwick 2017).
Literature Review
There is a lot of advantages that are associated with continuous disclosure of information to the
investors. With the help of continuous disclosure it will help in reducing the symmetry between the
mangers and the investors but also within different other categories also. It is one of the best methods
of governance as it helps in maintaining the required level of transparency between the companies and
their investors (Crosby & Henneberry 2016). It also helps in improving the confidence of the investors
and helps them in taking decisions that might affect their companies materially. In cases where the
companies do not comply with the same than those companies will be penalized. There are provisions
as per the ASIC, in which the companies who do not comply will have to pay penalty and that may be as
much as 1 million, along with several criminal penalties and enforceable undertakings. Many companies
may find it easy to deal with the infringement case notices but in the long run if the default continuous
than criminal proceedings may be undertaken (Guragai et al. 2017).
The main point of question is why it is important to follow this provision. The fact that it
provides help to the investors in proving them correct information that may affect their materiality
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position, helps them in taking important decisions. It also helps in trust building as the investor’s gets
information about the company and hence the transparent position improves the market position of the
company in several ways. It helps in improving the position of the investors and their confidence in the
secondary markets. There are several information that the investors may not get in general through the
internet and that might be affecting their material position in that cases these policies makes the
investors aware and helps them in taking important decisions. The main features of continuous
disclosure are that the market is properly disclosed. All the information that affects the market
materially must be disclosed to the investors (Dichev 2017). The information must be disclosed timely,
because if not delivered at the right time than the information might become irrelevant. It is also a
policy that all the information that is price sensitive must be made available to all the investors and
there should not be any kind of biasness in the same. Selective disclosure of information gives the
investors an upper hand to trade on the basis of information that is not generally available. Insider
trading has a lot of negative impact on the market and can affect the overall position of the competitors
and the investors (Birt, Muthusamy & Bir 2017). There should be a proper balance between what one is
disclosing and when the information is being disclosed. Premature disclosure of information must be
avoided as it may lead to emergence of a false market that may affect the overall trading. The parties
who are disclosing this information are often at a risk. Hence it is important that commercial viability of
such traders must be safeguarded (Prasad & Chand 2017). Information might be withheld from getting
disclosed if any case they are affecting the position of the investors. It is also important that balance
must be there between information being disclosed and the parties who have the details before it is
disclosed should not be allowed to indulge in the trading of those particular shares. These steps must be
followed to make sure that the entire process is authentic and proper information should be disclosed
to the proper party keeping in mind all the important steps (Dichev 2017).
It is important that such process must be properly enforced to make sure that it is effective
enough. Proper guidelines must be given to the companies for following these specific provisions.
Specific rules must be stated in order to disclose price sensitive information to the investors. There is a
regime of penalties that have been included for specific defaults in this matter (Given 2016). But on the
basis of the research that has been taken it can be seen that the companies found can easily escape
from these because the civil penalties or the letters that are issued are not that effective (Fay &
Negangard 2017). In case of penalty provisions it can be said that balance must be there between the
need for a credible treatment to prevent controversies and also the need to maintain proper safeguards.
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It will help the companies and motivate them to follow the provisions that have been laid down by the
law. There should be perfect mechanism to deal with defaulters that will make the entire process
effective enough (Chariri 2017).
The present state of the disclosure policies of the AISC can be judged form the records of the authorities
that have details about the number of companies that have defaulted and have been given the
infringement notice. But the nig companies find easy to deal with these infringement notices than
making price sensitive information available to the investors. As per records, there are currently 25
active insider trading investigations and around 11 infringement notices have been issued to nine
companies that have defaulted in this case for effective disclosure of effective information (Burke &
Clark 2016). Thus on the basis of the same it can be said that the ASIC has been successful in making the
effective application of the provisions , however there are certain matters and areas still exist that are
to be taken care of. It is important that the entities must follow the guidelines as it will be helpful for the
company and the investors (Minnis & Sutherland 2017). Selective disclosures have a lot of issues and
that might affect the overall functioning of the market and lead to large amount of speculation. Hence
the need of the hour is that the companies follow these policies to safeguard the market and promote
safe functioning of the same (Burke & Clark 2016).
Conclusion
After considering all the facts and details we can say that the provisions related to continuous
disclosure of information is very effective and will be very helpful for the all the players in the stock
market. It will also help in safeguarding the price sensitive information, and making it available to the
right person as and when required at the right time. All these will be helpful in managing the market and
also benefit the investors (Laursen & Thorlund 2016). On the basis of the current situation it can be said
that the steps that have been taken by the ASIC is helpful and effective. However there are many
changes that the ASIC needs to done, changing the various methods of penalties and other framework
that can motivate the companies and compel them in following these provisions and rules. Changes are
required in the overall penalty structure, more strict rules are required to be followed and applied. All
these will eventually help the ASIC in better implementation of the policies that will b enefit both the
investors and the entities at large (Han, Subrahmanyam & Zhou 2017). Thus this policy of continuous
accounting disclosures must be followed both by the entities and the investors who invest in these
companies at large (Alexander 2016).
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Refrences
Abbott, M & Kantor, AT 2017, 'Fair Value Measurement and Mandated Accounting Changes: The Case of
the Victorian Rail Track Corporation', Australian accounting Review.
Alexander, FK 2016, 'The Changing Face of Accountability', The Journal of Higher Education, vol 71, no. 4,
pp. 411-431.
Birt, JL, Muthusamy, K & Bir, P 2017, '"XBRL and the qualitative characteristics of useful financial
information"', Accounting Research Journal, vol 30, no. 1, pp. 107-126.
Burke, JJ & Clark, CE 2016, 'The business case for integrated reporting: Insights from leading
practitioners, regulators, and academics', Business Horizons, vol 59, no. 3, pp. 273-283.
Chariri, A 2017, 'FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING WITHIN
INSTITUTIONAL FRAMEWORK', Journal of Economics, Business and Accountancy, vol 14, no. 1.
Chiapello, E 2017, 'Critical accounting research and neoliberalism', Critical Perspectives on Accounting,
vol 43, pp. 47-64.
Crosby, N & Henneberry, J 2016, 'Financialisation, the valuation of investment property and the urban
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Dichev, ID 2017, 'On the conceptual foundations of financial reporting', Accounting and Business
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Given, L 2016, 100 questions (and answers) about qualitative research, Sage.
Guragai, B, Hunt, NC, Neri, MP & Taylor, EZ 2017, 'Accounting Information Systems and Ethics Research:
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81.
Han, B, Subrahmanyam, A & Zhou, Y 2017, 'The term structure of credit spreads, firm fundamentals, and
expected stock returns', Journal of Financial Economics, vol 24, no. 1, pp. 147-171.
Kew, J & Stredwick, J 2017, Business Environment: Managing in a Strategic Context, 2nd edn, Chartered
Institute of Personnel and Development, London.
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Laursen, G & Thorlund, J 2016, Business Analytics for Managers: Taking Business Intelligence Beyond
Reporting, 2nd edn, Wiley Publisher, CANADA.
Maynard, J 2017, Financial accounting reporting and analysis, 2nd edn, Oxford University Press, United
Kingdom.
Minnis, M & Sutherland, A 2017, 'Financial Statements as Monitoring Mechanism: Evidence from small
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Sweeting, P 2017, Financial Enterprise Risk Management, 2nd edn, Cambridge University Press, UK.
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