ASSESSMENT 3 – WRITTEN REPORT

This assessment is to be undertaken after Assessment 2, and relates to the analysis

completed for Fosters.

You are to develop a detailed written advice to the Management of Fosters that covers
each of the following:
 Discuss company compliance protocols in place – are they sufficient to meet statutory
requirements? Do they meet all the Corporate Governance principles?

Foster’s supports the Australian Securities Exchange’s (ASX) Corporate Governance

Council’s Corporate Governance Principles and Recommendations (ASX guidelines).

It is committed to delivering best practice in corporate governance and transparency in

reporting. The charters, codes and policies in respect of Foster’s corporate governance
practices referred to in his Statement are available on the corporate governance section of the
Foster’s website – www.fostersgroup.com

Role of the Board:

The Foster’s Board is responsible for the overall corporate governance of the Company. The
Board sets out the following objectives of the Board:

• To provide strategic guidance for the Company and effective oversight of management;

• To optimise Company performance and shareholder value within a framework of

appropriate risk assessment and management; and

• To recognise the Company’s legal and other obligations to all legitimate stakeholders.

Principles and Recommendations:

1. Lay solid foundations for management and oversight: A listed entity should establish and
disclose the respective roles and responsibilities of its board and management and how their
performance is monitored and evaluated.

2. Structure the board to add value: A listed entity should have a board of an appropriate
size, composition, skills and commitment to enable it to discharge its duties effectively.

3. Act ethically and responsibly: A listed entity should act ethically and responsibly.

4. Safeguard integrity in corporate reporting: A listed entity should have formal and rigorous
processes that independently verify and safeguard the integrity of its corporate reporting.

5. Make timely and balanced disclosure: A listed entity should make timely and balanced
disclosure of all matters concerning it that a reasonable person would expect to have a
material effect on the price or value of its securities.
 6. Respect the rights of security holders: A listed entity should respect the rights of its
security holders by providing them with appropriate information and facilities to allow them
to exercise those rights effectively.

7. Recognise and manage risk: A listed entity should establish a sound risk management
framework and periodically review the effectiveness of that framework.

8. Remunerate fairly and responsibly: A listed entity should pay director remuneration
sufficient to attract and retain high quality directors and design its executive remuneration to
attract, retain and motivate high quality senior executives and to align their interests with the
creation of value for security holders.

The phrase “corporate governance” describes “the framework of rules, relationships, systems
and processes within and by which authority is exercised and controlled within corporations.
It encompasses the mechanisms by which companies, and those in control, are held to
account.”
These Principles and Recommendations set out recommended corporate governance practices
for entities listed on the ASX that, in the Council’s view, are likely to achieve good
governance outcomes and meet the reasonable expectations of most investors in most
situations. The Council recognises, however, that different entities may legitimately adopt
different governance practices, based on a range of factors, including their size, complexity,
history and corporate culture. For that reason, the Principles and Recommendations are not
mandatory and do not seek to prescribe the corporate governance practices that a listed entity
must adopt.

 Research and comment on the following

- What are the financial risks that should be considered?

Risk is inherent in any business enterprise, and good risk management is an essential aspect
of running a successful business. A company's management has varying levels of control in
regard to risk. Some risks can be directly managed; other risks are largely beyond the control
of company management. Sometimes, the best a company can do is try to anticipate possible
risks, assess the potential impact on the company's business and be prepared with a plan to
react to adverse events.
Market Risk

Market risk involves the risk of changing conditions in the specific marketplace in which a
company competes for business. One example of market risk is the increasing tendency of
consumers to shop online. This aspect of market risk has presented significant challenges to
traditional retail businesses. Companies that have been able to make the necessary
adaptations to serve an online shopping public have thrived and seen substantial revenue
growth, while companies that have been slow to adapt or made bad choices in their reaction
to the changing marketplace have fallen by the wayside.

Credit Risk

Credit risk is the risk businesses incur by extending credit to customers. It can also refer to
the company's own credit risk with suppliers. A business takes a financial risk when it
provides financing of purchases to its customers, due to the possibility that a customer may
default on payment.

A company must handle its own credit obligations by ensuring that it always has sufficient
cash flow to pay its accounts payable bills in a timely fashion. Otherwise, suppliers may
either stop extending credit to the company, or even stop doing business with the company
altogether.

Liquidity Risk

Liquidity risk includes asset liquidity and operational funding liquidity risk. Asset liquidity
refers to the relative ease with which a company can convert its assets into cash should there
be a sudden, substantial need for additional cash flow. Operational funding liquidity is a
reference to daily cash flow.

General or seasonal downturns in revenue can present a substantial risk if the company
suddenly finds itself without enough cash on hand to pay the basic expenses necessary to
continue functioning as a business. This is why cash flow management is critical to business
success – and why analysts and investors look at metrics such as free cash flow when
evaluating companies as an equity investment.
Operational Risk

Operational risks refer to the various risks that can arise from a company's ordinary business
activities. The operational risk category includes lawsuits, fraud risk, personnel problems and
business model risk, which is the risk that a company's models of marketing and growth plans
may prove to be inaccurate or inadequate.

- For the above risks, outline options for contingencies – e.g. Insurance options,
investment options etc.

Avoidance of Risk

The easiest way for a business to manage its identified risk is to avoid it altogether. In its
most common form, avoidance takes place when a business refuses to engage in activities
known or perceived to carry risk of any kind. For instance, a business could forgo purchasing
a building for a new retail location as the risk of the location not generating enough revenue
to cover the cost of the building is high. Similarly, a hospital or small medical practice may
avoid performing certain procedures known to carry a high degree of risk to the well-being of
the patient. Although avoiding risk is a simple method to manage potential threats to a
business, the strategy also results in lost revenue potential.

Risk Mitigation

Businesses can also choose to manage risk through mitigation or reduction. Mitigating
business risk is meant to lessen any negative consequence or impact of specific, known risks,
and is most often used when business risks are unavoidable. For example, an automaker
mitigates the risk of recalling a certain model by performing research and detailed analysis of
the potential costs of such a recall. If the capital required to pay buyers for losses incurred
through a faulty vehicle is less than the total cost of the recall, the automaker may choose to
not issue a recall. Similarly, software companies mitigate the risk of a new program not
functioning correctly by releasing the product in stages. The risk of capital waste can be
reduced through this type of strategy, but a degree of risk remains.
Transfer of Risk

In some instances, businesses choose to transfer risk away from the organization. Risk
transfer typically takes place by paying a premium to an insurance company in exchange for
protection against substantial financial loss. For example, property insurance can be used to
protect a company from the financial losses incurred when damage to a building or other
facility takes place. Similarly, professionals in the financial services industry can purchase
errors and omissions insurance to protect them from lawsuits brought by customers or clients
claiming they received poor or erroneous advice.

Risk Acceptance

Risk management can also be implemented through the acceptance of risk. Companies retain
a certain level of risk brought on by specific projects or expansion if the anticipated profit
generated from the business activity is far greater than its potential risk. For example,
pharmaceutical companies often utilize risk retention or acceptance when developing a new
drug. The cost of research and development does not outweigh the potential for revenue
generated from the sale of the new drug, so the risk is deemed acceptable.

 Give advice on how Fosters can ensure they do not have another similar loss of cash
at the end of the next financial year

Review of operations:

The consolidated net loss of the Group attributable to shareholders, after income tax expense
and minority interests, comprising the results of continuing operations and discontinued
operations, was $89.0 million in comparison to the previous corresponding period net loss of
$464.4 million. Income tax benefit was $235.5 million in the current period compared with
income tax expense of $164.2 million in the previous corresponding period. Net interest
income was $16.3 million compared with net interest expense of $118.8 million in the
previous corresponding period.
Foster should adopt an integrated approach to corporate sustainability. The Group is
committed to continuously improving its business practices to maximise positive and
minimise negative social, environmental and economic impacts. This enhances employee
engagement and retention, supports corporate reputation, manages risk and protects the
Company’s social licence to operate.

The Group’s 2011 sustainability activities are reported in the Business and Sustainability
Review. The review provides details of the sustainability work undertaken at Foster’s in the
previous financial year. It will be released to the market in September 2011 and will be
available on the Foster’s website.

 Conclude with a list of alternative sources of short and long term investment, giving a
brief description of each.

Source of long term loans:

1. Term loans

– Paid off over some number of years

– Usually negotiated with commercial bank, insurance company, or some other

financial institution

– Fully amortized (principal and interest are paid off in installments over life of
loan)

2. Bonds

– Intermediate to long term debt agreements issued by governments,

corporations, and other organizations

– Issued in units of $1,000 principal value per bond

– Two “promises” to:

1. Repay $1,000 principal value at maturity

2. Pay stated interest rate (coupon rate) when due

 – Most bonds pay interest semiannually at a rate equal to one-half of the annual
coupon rate

3. Lease Financing

• Many businesses lease assets as an alternative to owning them.

– Business has the use of the asset and incurs an obligation either to pay off loan
or meet monthly lease payment.

– At the end of lease term, residual value of asset belongs to lessee.

– Leasing is a form of debt financing.

4. Operating leases

More like true rentals rather than means to finance long-term use of asset

For substantially less than expected useful life of asset and provide for both financing and
maintenance

Contain cancellation clauses so that lessee is not locked into long-term agreement.

No asset and associated liability are created

5. Sale and Leaseback

Firm sells fixed asset (e.g. building) to lender/lessor and then immediately leases back the
property.

Seller/lessee receives large inflow of cash that may be used to finance other aspects of
business and in return, enters into long-term lease obligation.

Short Term loan options:

1. Trade Credit:

Trade credit refers to credit granted to manufactures and traders by the suppliers of raw
material, finished goods, components, etc. Usually business enterprises buy supplies on a 30
to 90 days credit. This means that the goods are delivered but payments are not made until the
expiry of period of credit. This type of credit does not make the funds available in cash but it
facilitates purchases without making immediate payment. This is quite a popular source of
finance.

2. Bank Credit:

Commercial banks grant short-term finance to business firms which are known as bank
credit. When bank credit is granted, the borrower gets a right to draw the amount of credit at
one time or in instalments as and when needed. Bank credit may be granted by way of loans,
cash credit, overdraft and discounted bills.

3. Loans from Co-operative Banks

Co-operative banks are a good source to procure short-term finance. Such banks have been
established at local, district and state levels. District Cooperative Banks are the federation of
primary credit societies.