In this assignment, we want you to use analytical skills to assess and understand how

businesses make decisions. The assignment has been designed to encourage you to
consider the relationship between accounting theory, accounting standards and how
accounting is actually practised by businesses.

Assignment :

In 2007, Slater & Gordon (S&G) became the world’s first law firm listed on a stock exchange.
S&G is headquartered in Melbourne, where William Slater and Hugh Gordon founded it in
1935. Progressively, S&G has become one of the industry’s most recognised brands,
developing a reputation for defending the underdog and being regarded as “anti-globalist,
anti-capitalist, pro-worker, pro-environment and pro-indigenous peoples”1.

Since listing, net fee revenue grew by over 10% per year and the share price rose from a $1
to $8.07, prior to crashing in 2015. This collapse started from the 2014 acquisition of
Quindell PLC, a UK law firm. The acquisition cost GBP637million (about AUD1.3billion),
funded by an AUD890million share issue and a AUD375million bank loan. Approximately
AUD1billion of the acquisition price was recognised as goodwill. By the time S&G released
its 2016 annual report, it had recorded about AUD787million of ‘badwill’ (impairment losses
on goodwill).

Question 1

a) Identify the incentives S&G had to go public (1 marks).

b) Read the first annual report published after S&G’s listing. Analyse if going public had
served S&G’s stated IPO objectives (2 marks).

For each incentive, you must provide sufficient evidence to justify your analysis. Evidence
may include – but is not limited to - legislative changes, figures and proof from documents or
media resources released by the company or any other reliable source. You must correctly
reference all sources used.

1
Full article, see https://www.crikey.com.au/2007/04/11/slater-gordon-float-not-without-pitfalls/.
Question 3

Select an annual report of S&G where the company disclosed contingent assets and
contingent liabilities. Consider the following three alternatives and the three possible ways to
account for them:

Method one: Do not include contingent assets and contingent liabilities in the financial
statements. Do not provide information about contingent assets or contingent liabilities in the
notes to the financial statements.

Method two: Do not include contingent assets and contingent liabilities in the financial
statements. However, disclose details of the contingent assets and contingent liabilities in
the notes to the financial statements.

Method three: Fully disclose contingent assets and contingent liabilities, and any gains or
losses related to them, in the financial statements.

You must answer the following questions (see next page):

Question 3 (continued)

a) If S&G were to adopt method one, would it affect the credibility of the financial
statements? Provide an analysis to justify your answer (3 marks).

b) If S&G were to adopt method two, why would they prefer not to disclose contingent
assets and liabilities in the financial statements? Provide at least two reasons to
support your answer (3 marks).

c) If S&G were to adopt method three (3 marks total):

i. Provide the journal entries (hypothetical in this case) required to recognise the
contingent assets and contingent liabilities.

ii. What will the income statement and balance sheet look like after these
adjustments? Consider contingent assets and contingent liabilities separately, by
providing two scenarios: one where only contingent assets are recognised and
one where only contingent liabilities are recognised. Do not offset contingent
assets and liabilities.

iii. Would adopting method three result in a more credible presentation of S&G’s
financial performance and financial position?

iv. Under what circumstances would contingent assets and contingent liabilities be
instead considered provisions?2

d) Finally, review the next two annual reports after the annual report you selected for
this question. Did S&G follow up these contingent assets and contingent liabilities in
the next one or two years? If yes, what changes did they make to the contingent
assets and contingent liabilities, if any? (3 marks total. Note: this question is based
on S&G’s actual published annual reports. It is not connected to the above questions
about adopting methods 1, 2 or 3.)

2
You should consider the differences between provisions and contingent assets and liabilities as
defined in the accounting standards.