Slater & Gordon (S&G) became the worlds first listed law firm in 2007. The company is headquartered in Melbourne, where it was founded in 1935, by William Slater and Hugh Gordon. Progressively, S&G has become one of the most recognised brands in the industry and developed a reputation for defending the underdog and was considered anti-globalist, anti-capitalist, pro-worker, pro-environment and
Slater & Gordon (S&G) became the world’s first listed law firm in 2007. The company is headquartered in Melbourne, where it was founded in 1935, by William Slater and Hugh Gordon. Progressively, S&G has become one of the most recognised brands in the industry and developed a reputation for defending the underdog and was considered “anti-globalist, anti-capitalist, pro-worker, pro-environment and pro-indigenous peoples” 1 . After enjoying double digit growth since it became listed, its share price went from a $1 listing price up to as high as $8.07 per share, prior to its crash in 2015. This collapse started from the acquisition of a UK law firm, Quindell PLC, in 2014. The acquisition cost £637 million (about AUD$1.3 billion), initiated by an AUD$890 million share issue and a AUD$375 million bank loan. Some AUD$1billion of the acquisition price was counted as goodwill. By the time the company released its 2016 annual report, it had recorded about $787 million of ‘badwill’, i.e. impairment losses on goodwill. Your task is to research the Quindell acquisition and answer the following five questions.
1: Identify the incentives that S&G had to go public? Read the company’s annual report immediately after the company’s IPO and analyse if going public had served the company’s stated IPO objectives.For each incentive, you must provide sufficient evidence to justify your analysis. Evidence may include legislative changes, figures and proof from documents or media resources released by the company or other reliable sources (of course references must be provided).
2: Explain the company’s “No Win- No Fee” business policy. What are the implications to the company’s accounting numbers on revenue recognition?
3: Select an annual report of S&G where the company disclosed contingent assets and contingent liabilities. Consider the following three alternatives and the three possible ways to account for it. i. Ignore the contingent assets and liabilities on the financial statements, and provide no information of these accounts. Would this option distort the credibility of the financial statements? Provide your analysis to justify your answer. ii. Ignore the contingent assets and liabilities on the financial statements, but disclose these details in the notes to the financial statements. Why would S&G prefer not to disclose contingent assets and liabilities on the financial statements? You need to provide a minimum of two reasons. iii. Recognise the amount of gain or losses on the income statement and balance sheet, and disclose the issues in the notes to the financial statements. Provide the journal entries (hypothetical, in this case) for the recognition of the contingent assets and contingent liabilities. What will the income statement and balance sheet look like after these adjustments (consider contingent assets and contingent liabilities separately?, (i.e. provide two scenarios, one taking account of just contingent assets and one taking account of just contingent liabilities. Do not offset contingent assets with contingent liabilities.) Would this option be more credible in the presentation of the company’s financial performance and financial position? In what situation would these contingent assets and contingent liabilities would be considered as provisions?Finally, did the company follow up with these contingent assets and contingent liabilities in the following year or years (this will require you to review annual reports in the following two years)? If yes, what changes did the company make?
4: In 2016, the company made an $879.5 million non-cash impairment charge. What would be the journal entry to account for this impairment loss? What caused the impairment losses and why it is a non-cash impairment charge?
5: Analyse the income and expense accounts from S&G’s 2015, 2016 and 2017 annual reports and determine what management did differently in response to the Quindell-crisis. To answer this question, you should compare accounts from the three years, line by line, and analyze the accounts that have changed significantly.