Slater & Gordon Limited - Case Study Example

Slater & Gordon Limited Executive Summary This paper aims to examine the accounting practices, policies and issues of a company such as Slater & Gordon Limited. By looking at the company's annual report and financial statements for the year 2008, issues regarding the company's accounting practices, as well as company's performance in relation to strategy are looked at. This paper aims to look at various items that concern the company's accounting policies for its operations. These items include the company's equity, debt financing, tax accounting practices, and property, plant and equipment, the practices of Slater & Gordon Limited as regards recording and accounting for its operations are delved upon. Aside from the quantitative measures, the company's performance in relation to its growth strategy is assessed. By looking at the activities of Slater & Gordon Limited in relation to its growth prospects, a more sustainable picture of its immediate future profitability can be assessed. Lastly, it is concluded that Slater & Gordon Limited has performed well in 2008 as apparent in the key figures found in its financial statement, with the support of the activities and policies that it carries in order to achieve this strong performance and growth. The company's positioning, which is crucial for sustainability of operations, as well as a weak predictor of future profitability is looked at in relation to the analysis. Slater & Gordon Limited is found to be poised for growth as indicated by this market positioning. I. Body A. Operations and its industry's conditions Slater & Gordon Limited is a 73-year old legal firm that originated in Victoria, Australia. Over the years, the company has leveraged its brand name and increased its market presence in different parts of Australia, making it a leading firm in the legal market of the country. The company's specialty is in the field of Personal Injury Practices, where its trademarked No Win-No Fee basis has first been applied, and constitutes the 75% of the company's revenues (Slater & Gordon 2008, 10). The company's commitment to pursuing the interests of their clients is very apparent in this trademark, where the clients will only be charged when their matters are settled and the cases are won. Because of the high success rate that this work basis, the company has been able to build a brand based on this reputation, and grow the company over the year by means of acquisitions. Over the year, the company has aimed to grow by positioning itself as a leading firm in the legal market of the country by extending its geographic presence. The company has done many acquisitions in non-personal injury legal fields during the year, while it has increased its spending for marketing and advertising to build its brand (Slater & Gordon 2008, 4). The growth in the company's revenues from 2007 and 2008 is attributed to these efforts, as well as “investments in selected large scale litigation projects (Slater & Gordon 2008, 4).” B. Equity The total equity of Slater & Gordon, Ltd. has grown over the year from 67,549 to 85,200, a mere 22.13% increase (Slater & Gordon 2008, 46). This increase is part of the company's strategy to finance the increase in its total assets of 41,265: from 122,738 in 2007 to 164,003 in 2008 (Slater & Gordon 2008, 46). The company's equity is 52% of the company's total financing (Slater & Gordon 2008, 46). Slater and Gordon's equity is divided into two parts: the contributed equity and the company's retained profits. The changes in the company's equity in 2008 are attributable to the following: the company's net profit after tax for the year, the additional shares issued, the VCR shares issued, and the dividends paid. Looking at the company's retained profits account, its balance at the beginning of the year amounts to 27,697 (Slater & Gordon 2008, 62). The company has reported a net profit after tax of 15,104 (Slater & Gordon 2008, 47). This is added to the company's retained profits account. However, in 2008, Slater & Gordon has reduced its retained profits by 3,940 as it has paid dividends to its shareholders (Slater & Gordon 2008, 47). These changes result in an ending balance of 38,861 for the company's retained profits account (Slater & Gordon 2008, 62). The company has issued additional shares and increased its issued capital by 5,549 (Slater & Gordon 2008, 47). At the beginning of the year, Slater & Gordon's issued capital amounts to 34,664. As part of the increase, in December 4, 2007, the company has issued additional shares amounting to 2,475 (Slater & Gordon 2008, 61). Some of the company's VCR capital shares are also converted to ordinary shares, which amounts to 3,202 (Slater & Gordon 2008, 61). After deducting the company's capital raising costs, the balance of the company's issued share account amounts to 40,213 in 2008—higher by 5,549 than the previous year (Slater & Gordon 2008, 61). Apart from this increase, the company has increased the VCR shares that it has issued by 938 in 2008 (Slater & Gordon 2008, 47). VCR shares, according to the company are shares issued under the Employee Ownership Plans or EOP, where these shares can be bought by employees as part of their compensation schemes, however, they are only treated as 'potential' ordinary shares as their vested powers cannot be exercised until they are converted to ordinary shares (Slater & Gordon 2008, 68). While in the beginning, the balance of the VCR share capital account amounts to 5,188, based on the previous discussion of ordinary shares, it is to be reckoned that 3,202 of these VCR capital shares have been converted to ordinary shares, which signifies the amount of the reduction (Slater & Gordon 2008, 61). But, in February 19, 2008 the company has issued additional 3,083, and an additional 1,057 as share-based payment costs (Slater & Gordon 2008, 61). The company's VCR share capital account's balance at the end of the year is 6,126, higher by 938 than the previous year's (Slater & Gordon 2008, 61). All these have contributed to the increase in the company's equity position over the year. C. Debt Slater & Gordon's debt comprises 48% of its total financing, which amounts to 78,803 in 2008, out of 164,003, the amount for the company's total assets. The company's debt has increased by 42.79% from 2007, to 2008 which amounts to 23,614 (Slater & Gordon 2008, 46). The company's debt in 2008 is categorized into two: current liabilities, which amount to 33,382; and non-current liabilities which amount to 45,421. The company's current liabilities account is comprised of payables, short-term borrowings, current tax liabilities and provisions. The increase in the company's total liabilities is partly to the large increase in the current liabilities, which amount to 43.96% or from 23,189 in 2007 to 33,382 at the end of 2008 (Slater & Gordon 2008, 46). The company's current payables have grown from 15,947 in 2007 to 24,531 in 2008 (Slater & Gordon 2008, 62). This can be attributable to the increase in the amount of payables to legal creditors and accruals, from 12,097 to 15,822 (Slater & Gordon 2008, 62). The liabilities to the company's vendors also increase from 3,232 in 2007 to 8,317 in 2008 (Slater & Gordon 2008, 62). Despite these increases, the amount of payables to trade creditors have decreased from 618 in the previous year, to 392 in the 2008 (Slater & Gordon 2008, 62). Clearly, Slater & Gordon has used payables as part of financing the increase in its assets. All these are unsecured credits, as they are negotiated terms with the company's vendors. The company utilizes bank overdraft and bills of exchange for its short-term borrowings. Bank overdraft provided by Wespac Banking Corporation increases from 447 in 2007 to 749 in 2008 (Slater & Gordon 2008, 62), while the bills of exchange remained unchanged for the period of one year. This is the reason behind the change in the company's short-term borrowing amount from 1,447 in 2007 to 1,749 in 2008 (Slater & Gordon 2008, 62). Apart from these, current provisions also increased from 4,596 in 2007 to 5,489 in 2008 (Slater & Gordon 2008, 62). This increase is comprised of increase in employee benefits from 4,321 to 5,309, and a decrease in solicitor liability claim from 275 in 2007, to 180 in 2008 (Slater & Gordon 2008, 62). The company's non-current liabilities include payables, long-term borrowings, deferred tax liabilities and provisions as well. The company's long-term liabilities has grown only by 42.79% from 2007 figure of 55,189 to the 2008 figure of 78,803 (Slater & Gordon 2008, 46). The company's non-current payables have increased from 1,201 in 2007 to 4,242 in 2008, where the increase is comprised of the huge increase in vendor's non-current liabilities from 512 in 2007 to 4,017 in 2008, and a decrease in non-interest bearing payables from 689 in 2007 to 225 in 2008 (Slater & Gordon 2008, 62). As for the borrowings, the company has increased its long-term bills of exchange from 8,350 in the previous year to 13,000 in 2008 (Slater & Gordon 2008, 62). Apart from this, the company's non-current provisions for employee benefits increase from 845 in 2007 to 1,489 in 2008 (Slater & Gordon 2008, 62). All these contribute to the huge increase in the amount of long-term liabilities of Slater & Gordon over the period of one year. D. Provision for income-tax figure and deferred tax assets/liabilities The company's current tax liabilities amount to 1,613 in 2008, higher than its 2007 figure of 1,199 (Slater & Gordon 2008, 46). The company's deferred tax liabilities has increased from 21,604 in 2007 to 26,690 in the current year (Slater & Gordon 2008, 46). The company's current tax liability at the beginning of 2008 amounts to 1,199 (Slater & Gordon 2008, 55). With the company's current tax of 2,719 added to its tax liabilities as well as some adjustments relating to corporate restructuring during the prior year which amounts to 582, Slater & Gordon's current tax liabilities at the end of 2008 after subtracting the cash tax payments of 2,887 amount to 1,613. The company's deferred tax liabilities is computed by subtracting its deferred tax assets from its total deferred tax liabilities (Slater & Gordon 2008, 56). The deferred tax assets' total amount of 3,457 in 2008 is comprised of provision for doubtful debts and non-recoverable disbursements amounting to 711, employee benefits amounting to 2,039, provision for legal costs of 54, accruals amounting to 39, undeducted business related costs of 564, and other 50. The deferred tax liabilities' total amount of 30,147 in 2008 is comprised of prepayments amounting to 29, work in progress amounting to 22,954, unrendered disbursements amounting to 7,231, and a deduction of 67 for the plant and equipment (Slater & Gordon 2008, 56). Subtracting the deferred tax assets from the deferred tax liabilities results in the amount of 26,690 for the net deferred tax liabilities. These amounts, according to the company are computed based on the tax rates that are applicable when the deferred tax “is realized or liability settled (Slater & Gordon 2008, 50).” The company determines deferred tax by the balance sheet approach, or as according to the annual report, by “providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the appropriate tax bases (Slater & Gordon 2008, 50).” The computation for the company's income tax expense differs from the computation of current tax liabilities as part of it is allowed to be deferred. E. Plant and equipment, and intangibles One of the most notable increases in the company's non-current assets is attributable to the increase in intangibles, from 3,460 in 2007 to 16,075 in 2008—an increase of 365% over the year (Slater & Gordon 2008, 46). The company's plant and equipment has increased only slightly, from 1,130 in 2007 to 1,762 in 2008 (Slater & Gordon 2008, 46). The company's plant and equipment account is categorized into two classes: the plant and equipment, and the low value asset pool. According to the company, assets classified under the plant and equipment category are depreciated using the straight line & diminishing value method for depreciation rates ranging from 7.50% to 40.00% (Slater & Gordon 2008, 51). In the beginning of 2008, this account amounts to 1,029 (Slater & Gordon 2008, 58). The company has incurred additional fixed assets that are classified under this account which amounts to 634, as well as other fixed assets that are added to the company through acquisition of entities, amounting to 256 (Slater & Gordon 2008, 58). The depreciation expense that is assigned using the methods and rates mentioned above amounts to 335 (Slater & Gordon 2008, 58). This leaves an amount of 1,584 for the plant and equipment account (Slater & Gordon 2008, 58). As for the assets that qualify under the category of low value asset pool, they are depreciated using the diminishing value method at the rates ranging from 18.75% to 37.50% (Slater & Gordon 2008, 51). The beginning balance of assets under this account amounts to 101 (Slater & Gordon 2008, 58). With additions amounting to 142, and a deduction of 65 which amounts to the depreciation expense for this category of fixed assets, the ending balance amounts to 178 (Slater & Gordon 2008, 58). The combined total balances for the plant and equipment category, and the low value asset pool category amount to 1,762 at the end of 2008. The intangibles comprise of the company's goodwill and software development costs. According to the company, the goodwill is “not amortized but is tested annually for impairment […] in accordance with AASB 136 impairment of assets (Slater & Gordon 2008, 51-52),” which is dependent upon projections and budgets that are approved by the senior management. The impairment of goodwill is determined by the senior management with key assumptions that include growth in fees, the risk-free discount rate, the assumed debt ratio, equity risk premium, and therefore, the weighted average cost of capital allocated for each cash generating unit of the company (Slater & Gordon 2008, 59). Software development costs are “carried at cost less accumulated amortization and accumulated impairment losses (Slater & Gordon 2008, 51).” The company's goodwill in 2008 amounts to 15,386, due to an addition amounting to 11,926, but without an accumulated impairment loss; this figure is higher than its 2007 figure of 3,460 (Slater & Gordon 2008, 59). The company's software development costs amount to 689 in 2008; which gives a total amount for the intangibles of 16,075 (Slater & Gordon 2008, 59). F. Summary of company's financial operations The year 2008 is a good year for Slater & Gordon, where the profit after tax are higher at 15,104 than the previous year's amount of 10,655 (Slater & Gordon 2008, 45). However, even when the profits after tax are higher in 2008, due to the increase in equity issue over the year, the basic earnings per share amounts to 15.3 cents, lower than the 2007 figure which amounts to 16.2 cents (Slater & Gordon 2008, 45). The diluted earnings per share of the company however is higher in 2008, at 13.8 cents than 12.9 cents in 2007 (Slater & Gordon 2008, 45). This higher profit is attributable to the higher revenues of the company, which amount to 79,715 in 2008, higher than 2007's 62, 933 (Slater & Gordon 2008, 45). This figure is comprised of 77,586 for rendering of services, 1,057 for service and license fee, 68 for interest revenue from other persons, 675 for interest revenue from VCR share loans to employees, and 329 for other revenue (Slater & Gordon 2008, 54). The profit before income tax expense amounts to 21,741 in 2008, higher by 41% than 2007's figure of 15,386 (Slater & Gordon 2008, 45). Although all the expenses for 2008 amounts to 57, 974, which is higher than 2007's 47,547, the increase in the profit before income tax expenses from the previous year is very significant for the company. By dividing the company's profit after tax by the company's equity, the return on equity is computed. Slater & Gordon's return on equity in 2008 is 17.73%, higher than last year's 15.77%. the company also has a significant net cash provided by operating activities which amount to 11,563 for 2008; while the company has put 14,805 in its investing activities, mainly payments for acquisition of businesses (Slater & Gordon 2008, 48). Cash from the company's financing activities have amounted to 77 in 2008; all these resulted in a net decrease of 3,165 in cash held by the company. II. Conclusion Slater & Gordon Limited has performed well in 2008, as apparent in key figures such as the company's after tax profits, the company's return on equity, as well as the company's growth in assets. This growth in assets also signify the company's policies for sustainable growth in its operations as apparent in its acquisitions and new brand positioning strategy. These assets are not only financed by outside financing such as additional capital and debt, but a major part of it is also financed by its retained profits—a strong measure of the company's profitability and ability to grow through its operations. The company has positioned itself as a leading firm in Australia's legal market, while it banks on the reputation of serving its clients well, with the No Win-No Fee trademark as the brand's reason-to-believe. In order to live up to this positioning, the company, as apparent in its cash used for investing activities, has acquired many different firms in various fields aside from its expertise, which is personal injury. These companies are also all over the country, so that Slater & Gordon Limited which is originally based in Victoria, can have a national market presence through these acquisitions. The growth in the company's revenues is also largely attributable to its increase in scope in terms of geographic area as well as other legal fields. This is a sustainable growth strategy for the company. Reference List Slater & Gordon Limited. (2008). “Annual Report for Slater & Gordon Limited 2007/08.” Slater & Gordon Lawyers. Retrieved August 31, 2008, from http://svc015.wic046p.server-web.com/docs/prospectus/S&G%20Annual%20Report%20200708.pdf Read More