Financial Accounting Australia - Case Study Example

Running Head: G8 EDUCATION LIMITED REPORT NAME: COURSE: TUTOR: DATE: Table of contents Executive Summary………………………………………………………………………………………………………………………………………..3 Introduction…………………………………………………………………………………………………………………………………………………….3 Business Combinations………………………………………………………………………………………………………….3 Intangible Assets……………………………………………………………………………………………………………….…..4 Impairment of Assets…………………..………………………………………………………………………………….…….4 Borrowing Costs……………………………………………………………………………………………………………….…….4 Provisions, Contingent Liabilities and Contingent Assets………………………………………………….……5 Events after the Reporting Period…………………………………………………………………………………..……..6 Conclusion………………………………………………………………………………………………………………………………..…………………….7 Executive Summary This report is written based on the AASB policies. These policies have been constantly applied to all the years existing, except if not stated. The financial report includes details for G8 Education Limited as an individual entity and the consolidated entity consisting of G8 Education Limited and its subsidiaries. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group and the Corporations Act 2001. The Company acquired 5 of its centres between 1 February 2008 and 14 March 2008; as such the comparatives shown in the financial report are not directly comparable. Notwithstanding the fact that the Group has net current liabilities of $3,034,610, the directors are of the view that the Company will be able to pay its debts as and when they become due and payable, for the following reasons: • Cash flows as per the 2010 budget are adequate to cover operational and loan repayment requirements: • The Group has an unused overdraft facility of $1,500,000 which can be drawn upon if needed; and • Current liabilities include fees received in advance and enrolment deposits of approximately $988,000 and annual leave entitlements of approximately $679,000. It is Company policy for fees to be in advance and in the normal course of business these balances fluctuate only to the extent of seasonal changes in business activity. Compliance with IFRS Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report of G8 Education Limited and the Group complies with International Financial Reporting Standards (IFRS) Introduction G8 Education Limited (ASX code: GEM) formally Early Learning Services (ASX code: ELY) was listed on the Australian Securities Exchange in on 5 December 2007.The company had only 17 centres owned at that time, the group has however extended to now consist of 65 owned centres and 33 managed centres situated across Australia, with discussions continuing to expand the group. Its zeal is nurturing and developing children, while transforming centres into a community hub with the aim of making families feel valued in a happy and caring environment. The group’s mission is easy. It aims to be Australia’s leading provider of high quality, developmental and educational child care services. It seeks to achieve this through our four pillars for growth and sustainability. On quality education & Care, the company aims to nurture and develop children’s minds, social skills and confidence in a safe and stimulating environment. On its employees’ target, the company is committed to employee development and a rewarding culture which will ensure an engaged and driven workforce. It also strives to be responsive to local families and deliver upon community expectations while staying on business objective to grow and derive value for shareholders through innovative services, systems and management. Business Combinations The purchase method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. Cost is calculated as the fair value of the possessions given, equity instruments issued or liabilities incurred or unspecified at the date of replacement plus costs openly attributable to the acquirement. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Operation costs due to the issue of equity instruments are acknowledged directly in equity. Exclusive assets acquired and liabilities and conditional liabilities unspecified in a business arrangement are calculated firstly at their fair values at the acquirement date, irrespective of the scope of any minority concern. If the cost of acquisition is less than the Group’s share of the fair value of the identifiable net assets of the subsidiary acquired, the difference is recognized directly in the income statement, but only after a reassessment of the identification and measurement. Intangible Assets (i) Goodwill Goodwill on acquirement of subsidiaries is incorporated in intangible assets. Goodwill on acquisitions of child care centres that are not controlled entities is also included in intangible assets. Goodwill is not repaid. As an alternative, goodwill is checked for impairment yearly or more recurrently if proceedings or changes in situation point out that it may be impaired, and is passed at charge less collected impairment losses. Goodwill is owed to cash-generating units for the rationale of impairment test. (ii) Customer contracts Customer contracts acquired as part of a business combination are recognized separately from goodwill. The customer contracts are carried at their fair value at the date of acquisition less accumulated amortization and impairment losses. Amortization is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives, which currently vary from 1 to 2 years. Impairment of Assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Goodwill must be assessed for impairment at the lowest level at which management monitors goodwill, however the level cannot be higher than the operating segment level. The group operates only one operating segment and management monitors goodwill at that level. Therefore goodwill is tested for impairment at the operating segment level. This represents a change from the 2008 practice of testing for impairment at an individual centre level because in its first full year of operation management monitored centres at that level. Borrowing Costs Borrowings are initially recognized at fair value, net of transaction cost incurred. Borrowings are subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in the income statement over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not an incremental cost relating to the actual draw-down of the facility, are recognized as intangibles and amortized on a straight-line basis over the term of the facility. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in impairment of intangible assets. Provisions, Contingent Liabilities and Contingent Assets Provisions are not recognized for future operating losses. Provisions are measures at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The increase in the provision due to the passage of time is recognized as interest expense. The parent entity and Group had contingent liabilities at 31 December 2009 in respect of: G8 Education Limited is a defendant in proceedings before the ACT Supreme Court. The proceedings relate to the decision by the company not to proceed with the purchase of two child care centres in the A.C.T. in 2008. The plaintiff is seeking an order that the Company perform the contracts of $3.9M, being the price of the two leasehold childcare centres which ELS had contracted to purchase. The case has been heard and judgment has been reserved. It is not known when the decision will be handed down. Events after the Reporting Period (a) Planned Merger On 18 December 2010 the Company announced a suggestion to merge with Payce Childcare Pty Limited (“PCC”). The deal will create a diversified group with more than 5000 child care positions across 97 centres. The merger will be carried out by way of an offer for all of the shares on issue in PCC. PCC at present operates 60 Childcare Centres, including 29 managed on behalf of other owners, in a range of locations with a strong existence in South-East Queensland. The company is well established having operated valuably for over 4 years. PCC is presently debt free. The Company offer to Payce Childcare Pty Limited shareholders was $6 million in cash and issue 40 million ordinary shares in G8 Education Limited at an implied price of $0.49 per share. This values Payce Childcare Pty Limited at $16 million. The offer provided an alternative for the question of additional shares if the Company did not raise the $6 million cash component of the consideration. The offer is subject to the approval of G8 Education Limited shareholders to the terms of the merger plan and to the approval of G8 Education Limited’s current financier. The publication stated that G8 Education Limited’s board intended to recommend the offer to its shareholders subject to it enjoying the support of the Independent Expert. Subsequent to the end of the year: • The Company announced on 22 January that, if the merger proposal is approved by shareholders, the entire consideration will be in the form of shares in the Company. In lieu of the $6 million cash component, the Company will issue an additional 24 million shares calculated at $0.49 each. This means the shareholders of PCC will receive a total of 64 million shares as consideration under the transaction. That will represent 59% of the total 108 million shares on issue if the transaction is approved and completed. • An Independent Expert’s Report has been completed and concluded that the transaction if fair and reasonable to shareholders of G8 Education Limited. • A general meeting of shareholders has been called for 24 March 2010 to vote on the proposed transaction. (b) Sale of Land and Buildings The sale of the Land and Buildings classified as Held for Sale in the Balance Sheet was completed in January 2010 and $1,000,000 (One Million) of the proceeds was used to reduce bank debt. Conclusion The financial report has been written in accordance with the Corporations Act2001, including: abiding by Accounting Standards, the Corporations Regulations 2001 and other obligatory professional reporting necessities; and giving an accurate and just view of the Company’s and consolidated entity's financial situation as at 31 December 2010 and of their performance for the fiscal year ended on that date; and there are sensible justification to believe that the group will be able to pay its debts as and when they become due and payable; and At the date of this declaration, there are reasonable grounds to accept as true that the members of the extensive closed group identified in will be able to meet up any responsibilities or liabilities to which they are, or may turn out to be, subject by virtue of the action of cross guarantee described. References: Beechey, V. &Perkins, Accounting Guidelines Minneapolis: University of Minnesota Press. (2007). Tybout, A. & Calder, J. B. 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