The following background relates to Southern Lights Holdings Pty Limited (SLH), who haveengaged you as an independent consultant ahead of what they anticipate will be the successful
raising of capital, the completion of two major projects, and ultimately, the listing of the company on
the Australian Stock Exchange.
Assessment Instructions
Prepare a concise slide deck that supports a brief in-class presentation addressing the
needs of your client (not more than 11 slides and a 7 minute presentation).
Your slide deck and presentation should address all 3 of your client’s concerns and must
be supported by sources relevant to the slide deck (e.g., Annual reports, journal articles,
textbooks, websites, regulatory bodies etc.). At least 3 of these must be academic journal
articles, but various sources should be used. Your final slide should clearly and correctly
identify and reference your sources.
The slide deck used to support your presentation should be visually engaging and highlight
the key points for your client. It should not contain complete paragraphs or extended text.
Your presentation will have a strictly applied 7 minute time limit. It is expected that the
presentation will briefly expand on the points highlighted in your slide deck. You will not
have sufficient time to explain technical matters in detail. Remember, the presentation is
effectively an initial discussion with your client on these matters and should be sufficient
for them to understand possible ethical, accounting practice and reporting matters for
future consideration.
A suggested format is outlined below:
Slide 1: Cover slide
Slide 2: Issues to be addressed (3 brief points)
Slide 3: Current accounting practices of SLH – overview
Slide 4: Issues arising from current accounting practices
Slide 5: Suggested changes to future accounting practice
Slide 6: Current remuneration reporting of SLH
Slide 7: Remuneration reporting of selected listed company
Slide 8: Suggested changes to future remuneration reporting
Slide 9: Ethical issues and concerns facing SLH
Slide 10: Summary (points only)
Slide 11: References (minimum 3)
Case Study
BRIEF BACKGROUND
1. A BRIEF HISTORY
During the 1960s, Harbhajan Ashwin, an accomplished engineer, commenced business in
partnership with Rory McGuiness, a master builder, and Nazar Al Sharaf, a prominent architect.
Initially trading as Lakeside Residential and Commercial (LRC), the business achieved
considerable success in designing and building several apartment blocks and suburban shopping
precincts throughout the southern suburbs of Melbourne, Victoria.
Following continued growth, the partners employed and eventually passed the ownership and
management of LRC to their family members. Subsequently, the proprietary company Southern
Lights Holdings Pty Limited (SLH) was incorporated in 1995 and has continued to complete
construction contracts of increasing size and scope. Shares have remained equally held by
members of the Ashwin, McGuiness and Al Sharaf families and related entities.
2. CURRENT OWNERSHIP AND CONTROL
Shares in SLH are currently held as follows:
3. MANAGEMENT AND EXECUTIVE REMUNERATION
SLH has reported the following remuneration of its executives:
Your initial discussions and investigations have determined that the following
arrangements are also in place:
a. Al Sharaf Holdings (ASH) are the exclusive supplier of air-conditioning, kitchen and
bathroom fittings for all SLH projects. This has resulted in a profit of $200,000 per
year for ASH in each of the past 3 years as a result of markups.
b. Daisy O’Toole’s 3 adult children have each been granted parcels of land worth
$400,000 each from projects undertaken by SLH.
c. 5 separate apartments built by SLH have been retained by the company and have
been provided to Melissa Parker’s parents and each of her 4 adult children. The
apartments have been provided rent free where the market rate would otherwise
have totalled $200,000 per year.
d. In 2022, Melissa, Daisy and Yasin were each issued $500,000 of bonus shares
from reserves. Daisy’s shares were issued directly to the McGuiness Family Trust
(of which she is Trustee).
e. The above arrangements have been agreed to ensure parity between the total
benefits flowing to each family.
4. FINANCIAL PERFORMANCE AND POSITION
The following is a summary drawn from SLH financial reports from each of the past 3 years:
5. ACCOUNTING ESTIMATES AND PRACTICES
Discussions with Melissa (the CFO) have determined that SLH have exercised the following
accounting practices:
•
SLH sells many of its developments ‘off the plan’ requiring a 15% deposit from investors.
While this does not currently apply as SLH is yet to commence either of its upcoming
projects, SLH has previously recognized these deposits as revenue as it has always
carefully vetted its buyers.
•
SLH has typically not recognised leave entitlements (including executives) as the company
has rarely had employees eligible for long service leave and cease operations for 4 weeks
each summer. Where executives have become due for leave, they have generally accepted
company assets in settlement.
•
SLH has retained units from several of its developments (some held for resale, some
leased to tenants). As these are typically in high value areas of Melbourne, SLH annually
revalues units held. All revaluations are performed by directors as they have the clearest
understand of the value of each development.
•
SLH recognises work in progress (WIP) from the commencement of each development.
Although there is not any current WIP, SLH generally includes the capitalisation of a portion
of executive salaries and head office overheads in determining these amounts.
6. OTHER ISSUES
Daisy is currently separated from her husband Keith. Current divorce proceedings have not been
amicable and Daisy has intentionally structured her remuneration and bonus shares in a manner
that makes it difficult for Keith to successfully seek a divorce settlement against her interest in SLH.
SLH has a debt covenant with their principal finance provider Bendigo Bank. The covenant
specifies that the current ratio must not fall below 0.7:1 and the debt to equity ratio must not
exceed 2:1. Although the company is not in danger of breaching these requirements, the SLH
executive is aware that meeting the future financial needs under the same covenant terms will be
difficult. This has influenced some of the accounting practices noted above.
CLIENT BRIEFING
SLH executive had requested that you summarise and address the following concerns:
1. Are there any issues with their current accounting practices and earning management?
Outline changes that may need to be made in the event of accepting capital from the
general public.
2. How does SLH’s reporting of executive remuneration compare with ASX listed companies?
Select an ASX listed company and briefly compare and contrast the reporting of key
management personnel with that of SLH.
3. Briefly summarise any other ethical issues and concerns that should be brought to the
attention of SLH owners.
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Formatting
Title Page
Citation
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