Assignment -

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?

FINANCIAL ACCOUNTING IN THE NEWS11.2

Lion Nathan rethinks bricks and porter strategy

Leon Gettler

The Age, 29 January 2004, p. 3

Lion Nathan has put its pubs operation under review, four years after embarking on an aggressive plan in which it spent $65 million on hotel assets to ratchet up its low share of the Victorian beer market.

The brewer said yesterday that it was reviewing its ownership of 41 pubs in Melbourne and Geelong after receiving expressions of interest. This is expected to involve various sale and leaseback options.

Contracts for long-term supply arrangements are expected to be part of any deal.

Lion Nathan is revisiting the pubs business after its rival, Foster's, spun off its own hotels and gaming business, Australian Leisure and Hospitality.

Lion Nathan's pub-buying spree was at odds with its strategy of not owning or operating hotels, but the brewer wanted to make an exception in Victoria, the backyard of Foster's.

In June 2000, it had a 13 per cent share of the Victorian beer market but by November 2003, Lion Nathan's share had crept up to only 13.2 per cent.

Lion Nathan had shrewdly targeted the 18-to 25-year-old segment in Victoria, but the strategy has been criticised because of the difficulties of coming in as an outsider and using an exclusive retail network to drive market share from such a low base.

In that time, Lion Nathan had also written down the value of its Victorian hotels.

Yesterday, the group said the change did not indicate a reduction in its plans for Victoria but rather a switch in focus by increasing its investment across brands including Tooheys, Becks, Hahn, James Squire and XXXX.

Analysts said yesterday that the news was in line with Lion Nathan overhauling its Victorian strategy, something which had been under way for 12-18 months.

Lion Nathan is believed to have raised $20 million from the sale and leaseback of about a third of its Victorian portfolio about 12 months ago.

In a statement to the market, Lion Nathan said it was not looking to sell individual venues and was committed to retaining ownership and control of the portfolio 'if that will deliver the best outcome for Lion Nathan and maximise shareholder value'.

Hotels in the brewer's portfolio include Pugg Mahone's and The Imperial in the central business district, the Albert Park Hotel, Limerick Arms and Golden Gate in South Melbourne and the Builders Arms in Fitzroy. Lion Nathan Australia managing director, Andrew Reeves, said yesterday: 'Hotel ownership and management was only one part of our Victorian growth strategy, the objectives of which have been largely achieved. We have never viewed hotel ownership as a core business and, given the recent focus on investment in the sector, we considered that now was an opportune time to review the future of these venues in our Victorian growth strategy'.

Required:

Read the newspaper article by Leon Gettler called 'Lion Nathan rethinks bricks and porter strategy' in Financial Accounting in the News 11.2 (above) and answer the following questions:

(a) Identify some benefits that might accrue to Lion Nathan as a result of the sale and leaseback transactions.

(b) Would you expect the related leases to be finance leases or operating leases? Explain your answer.

(c) How should Lion Nathan account for any profit or loss on the sale of the pubs?

(d) If it sells the pubs and then leases them back would you expect Lion Nathan to change how it accounts for the depreciation of the buildings?