QUESTION 1 ACCOUNTING FOR REVENUE RECOGNITION

Read the article by Garry West called ‘Salomon claims $2.5m fee' and determine whether Salomon Smith Barney Australia Corporate Finance should recognize the $2.5million as revenue. Provide detailed explanation and reasons for your answer.

Garry West

The Australian Financial Review, 12 December 2000, p. 12 Salomon Smith Barney Australia Corporate Finance is claiming $2.5 million from Allgas for investment banking services provided in 1997 and 1998. Allgas was taken over the Queensland government-owned power supplier Energex for $250 million in August 1998.

SSB's counsel, Mr. Peter Dunning told the Queensland Supreme Court that in June 1997, when Allgas engaged SSB to find a strategic investor, it set the bank's fee at 1% of the equity value.

He said Allgas ideally sought an international utility to take a 40% to 50% stake to provide financial strength and technical expertise.

Mr. Philip Morrison QC, who is representing Allgas, said the fee was not payable because the original contract with SSB ended when the Allgas board decided in January 1998 it wanted a 100% takeover. ‘From that point of view it was a new transaction. The features of it were quite different,'Mr Morrison said.

Energex outbid US group Texas Utilities and Boral Ltd.

But Mr. Dunning said the decision was part of a ‘seamless development' of the transaction and the fee was never revised. He said the board elected at meeting in July 1998 not to pay the $2.5 million because the Energex bid had ‘come from the clouds'. It decided instead to negotiate a lower fee, but no payment was made.