FINANCIAL ACCOUNTING IN THE NEWS Assets understated by fruit


Question Description:

25

FINANCIAL ACCOUNTING IN THE NEWS Assets understated by fruit company Leonie Wood The Australian Financial Review, 21 February 1992 Audited accounts for the Shepparton-based fruit-packaging and trading company Geoffrey Thompson Holdings Ltd indicate the company’s balance sheet significantly understates the current value of the group’s plant and property holdings. The consolidated balance sheet for the year to October 31 indicates the unlisted public company has property, plant and equipment valued at $2.37 million based on a historical-cost accounting method. But notes to the accounts show that independent reviews conducted in October and November last year show an existing use or replacement value for property of $4.73 million, compared with a net consolidated book value of just $1.47 million. Plant and equipment was valued independently at $4.98 million, compared with a net book value of $788 487. The total market valuation of $9.7 million for property, plant and equipment is not brought to book, and the accounts show the properties were last revalued by directors in 1973. Directors said the valuation surpluses were not brought to account as, in their opinion, the sale of the assets under different market conditions, or for a different usage, ‘may result in a considerably lower realisation than indicated’. The valuations are becoming a sticky issue with the company’s smaller shareholders who believe their shares have been grossly undervalued in recent years. Shares in Geoffrey Thompson Holdings have changed hands in recent years for $2 and $3 each, with almost half the turnover picked up by 41 per cent major shareholder, Geoffrey Thompson Investments Pty Ltd, a company associated with the managing director and chairman, Mr Geoffrey Thompson. A recent valuation of the shares, by accountant R.D. Larsson and Co., concluded that minority shareholders who could not influence board decisions would be expected to pay about $4.58 a share, while a majority shareholder could be expected to pay about $4.635 a share. The latter price includes a significant premium for control of the group. The Larsson valuation said that, on a going-concern basis, the shares carry a net tangible assets backing of $75.40. This assessment used the same sources of valuations for the company’s property, plant and equipment, but deems that the assets have a realisable market value of $6.64 million—or about $3 million less than replacement value. Geoffrey Thompson Holdings’ audited accounts show reported pre-tax profits fell slightly to $755 436 in the year to 31 October after a $77 904 cut in depreciation charges to $184 039. Dividends increased from 30¢ a share to 50¢. The accounts, released earlier this week, accompany documents detailing a tender for 33 000 Geoffrey Thompson Holdings shares, or about 28 per cent of the issued capital. The share parcel, previously owned by a former director, Mr Cyril Jameson, now deceased, was more recently held by Geoffrey Thompson Investments. But following court action by the Australian Securities Commission, which alleged breaches of takeover thresholds under the Corporations Law, the shares were transferred to the ASC and are now being offered to the highest bidder. The tender process is due to close on February 24. Required: Read the above article by Leonie Wood called ‘Assets understated by fruit company’ in Financial Accounting in the News 6.1, which details a case where directors elected not to revalue the company’s assets. Then answer the following questions: a.What might have motivated the directors not to revalue the plant and equipment? b.What effects will the decision not to revalue have on the firm’s financial statements? c. Would the decision not to revalue adversely affect the wealth of the shareholders? AssignmentQue…

Answer

25