Annual Reports of Surf Stitch Limited

Question:

Discuss about the Role Of The Continuous Disclosure Framework.

Every company is required to disclose each and every information whether financial or non financial depending upon the rules, procedures and regulations of the law of the country in which the company is operating. Disclosure of the information gives an insight to the users of the readers of the financial statements of the company regarding the financial position and the financial performance of the company. In this report the continuous disclosure requirement has been detailed. These have been issued by the Australian Stock Exchange and have been named as the Listing Rules. In the first section, the annual reports of the company – Surf stitch Limited has been discussed with reference to the major heads of the balance sheet including the goodwill, investment in subsidiary, cash position, selling and distribution costs and other related items. Along with the said financial analysis, an observation has been made regarding the trading of shares of the company. The second major aim is to define as to what continuous reporting regime is and how the same has been effective for all the companies which are listed in the Australian Stock Exchange.  The references have made from the primary and secondary sources which are reliable for the conclusion and recommendation of the study.

The company is engaged in the business of the online retailing of the sports lifestyle especially for the young and the teens and the company is operating in United Kingdom, Australia and North America. Though formed in the year of 2008, the company has been listed in the year of 2014 and since then the company has been facing financial difficulties.   

As of now, the company has been facing the class action suit of $100 million. The class action suit has been filed by the large group of shareholders on account of the wiping out of the wealth of the shareholders of the company with in the span of two years (Hatch, 2017). The class action has been filed for an on behalf of the shareholders of the company who mainly have purchased the shares between the periods from 27^th of August of 2015 to 9^th of June 2016. The basic premise on which the class action has been filed is that the company has not been able to follow the continuous disclosure norms as laid down by the Australian Stock Exchange and further the company has not fulfill the forecasts that the company has made over the last two years to have the improved Earnings before Interest Tax Depreciation and Amortization (EBITDA) and the Profit After Tax. For instance in the financial year ending 30^th of June 2016 the company has made the forecasts that the company will have the EBITDA between the $15 million to $18 million but in actual the company has received the EBITDA of negative $18.8 million which is 200 percent less of the forecast made by the company (Loughlin, 2017).

Class Action Suit Against Surf Stitch Limited

As per the annual report of the company for the year ending 30^th of June 2015, the following has been analysed:

• Goodwill – As on 30^th of June 2015, the company has recorded the goodwill of $73832 thousands. The goodwill has been recognized on the acquisition made by the company $93534 thousands less the impairment of $19702 thousands. The impairment has made for the Surf stitch brand of Europe which has been closed.
• Investment In Subsidiary – The Company has invested $58633 thousands in acquisition of subsidiaries which is net of cash during the year.
• Cash Position – As on 30^th of June 2015, the company has the cash position of $40837 thousands. This is the actual cash position as on that date as the company has neither an obligation towards the long term debt or short term debts or the company has commitment towards its subsidiaries.       

As per the annual report of the company for the year ending 30^th of June 2016, the following has been analysed:

• Impairment Costs – As per Note 17 and 18 of the Annual Report, The company has recorded the impairment costs of $88999 thousands
• Selling and Distribution Expense – The Company has recorded the expense of $101268 thousands.
• Administrative Expense – The Company has recorded the expense of $49237 thousands.

No, shall not be recommended for the client to buy the shares before the share price decline. It is because the company has been seen as fast in expansion of its business despite of the costs, the company is incurring. Second reason is the incorrect forecast made by the company for the consecutive period of two years.

Disclosure Entities

Entities are the companies working in the industry and the Disclosure entities are those who are required to comply with the continuous disclosure framework as provided by the Australian Stock Exchange. In Australia, first company is required to be registered as per the Corporations Act, 2001 and then in case it wants to go for listing then the company has to apply for listing in Australian Stock Exchange. Thus, disclosure entities means those companies which are listed in the recognized stock exchange of Australia and are required to comply with the guidelines and the rules on the mandatorily basis. As the company has been listed in the year of 2014 and since then the company has been following the disclosure reporting framework as the listing rules prescribed by the Australian Stock Exchange. As the company has not followed the same correctly and has received the class action for the large group of shareholders who has purchased shares during August 2015 to June 2016. 

The continuous reporting regime is the scheme which entails that every company which falls under the ambit of the governing law have to comply with the requirements and is required to report to the authorities on the continuous basis. The governing law is the listing rules that have been prescribed by the Australian Stock Exchange (Australian Government ,2017). The basic premise of the listing rules has been mentioned in Listing Rule 3.1 which states that the in case any disclosure entity comes to know or becomes aware of the fact that if for the want of any kind of information, it may be financial or non financial, any reasonable person expects to have the effect on the share price of the company in future, then such disclosure entity is required to disclose that information immediately to the Australian Stock Exchange (Field, 2005). The term immediately does not mean that the information shall be furnished without delay but it depicts that the information shall be furnished promptly and in active manner. Listing Rule 3.1 A has prescribed the exceptions as to the situations under which the requirement of the Listing Rule 3.1 does not apply (Lewis, 2013). These situations are:

• By disclosing the information, the disclosure entity will breach or violates the law. It means that the information will be in the nature which is in prohibition of the law.
• The information which the company plans to disclose is incomplete or under proposal or negotiation. It means that the information the company wants to disclose is not proper, incomplete and will not serve any purpose in case it is disclosed.  
• The information itself requires warrant as whether it is required to be disclosed or not. It means when the information itself wants corroborative evidence whether the company is required to disclose the said information or not. This evidence is related to the reference to the governing law or the written announcements, notification or circular issued by the department of the government.
• The information that has been considered is for the internal purpose of the company. There are many instances where the information is generated by the company and that too only for the purpose of the company’s internal communication and management. For instance the management information system (MIS) reports that is generated on regular intervals – monthly or quarterly basis, internal audit report issued by the internal department of the company or the outside consultancy firm, etc (Matolcsy, Tyler and Wells, 2012).  
• The information is purely the secret of the business of the company which the company operates. The secret of the company’s way of doing the business is the premise on which every business functions. In case it is made available in the market to everyone then there will be a case where all will be at the same level and there will be no competitors else there will be a group following one technique of business and other following other technique. Thus, the secret of the business is not required to disclose as per the listing rule.

Disclosure Entities and Continuous Reporting Regime

If any of the above situations applies, then the disclosure entity is exempted from the disclosure of the required information. Apart from the above situation, two more exceptions are there:

• The information that the company wants to disclose is purely confidential in nature and the Australian Stock Exchange has not in any way for the opinion that the information so discussed is ceased to be confidential in nature.
• The reasonable person on the basis of whom the listing rule 3.1 has been formed does not consider the information as valuable to be disclosed (ASX, 2017).

Listing rules have prescribed the procedure which each entity shall follow while disclosing the information. It details that the disclosure entity is required to consider the following scenarios and is required to work accordingly:

• If the information is not like which can affect the share price on the basis of the expectation of the reasonable person, then it is not required to be disclosed. If the information is like then it shall be disclosed immediately as per the listing rule.
• If the information does not falls under the category of the exceptions, then the same shall be disclosed immediately as per the listing rule.
• The information cannot be disclosed straight away if the trading is currently working. At first the trading halt is required to be made and thereafter the information is required to be disclosed.
• In all the other cases, the disclosure entity is required to be disclosed at the Australian Stock Exchange market announcements platform as quickly as the disclosure entity can.

• Informed Market – It entails that the market consisting mainly of the investors shall be informed properly. The word properly exhibits that the clear and true and fair information shall be provided in the market and it shall not in any case be misleading or contains misstatement which can lead to making of wrong decision by the users of the information relating to the company (White, 2007).
• Timely Release – The information that the company is required to provide shall be timely released. If the information is not released in time then it will not serve any purpose. The information is very market sensitive and if it is not provided in time then the usefulness of the same will decline.
• Available for All – The information so provided by the company shall be available to all the investors. It means it shall not be for the benefit for the particular community and the particular group of people.
• Pre Time Disclosure – The information shall not be disclosed before the time. It is because the information that is required to be disclosed is very price sensitive and the premature access of the information can lead to the speculation and other trading activities. This can lead to emergence of fall market also.
• Interests – The interests of the company shall be saved while disclosing the information and there shall be the correct balance between the timely disclosure and interest of the companies.
• Confidential – The market sensitive information shall be kept confidential until and unless it is disclosed to the investors. The company shall not inform the information to the advertisers and similar agencies.
• Penalties and Remedies – The Company shall be informed about the areas where penalties can be imposed and the enforcement procedures can be taken where any default has been made (Debreceny, 2005).        

Apart from the above characteristics an entity is required disclose the following information:

• Information which is very sensitive to the market like material acquisition or disposal (HSU, 2009); on becoming plaintiff or defendant in the major suit like Surf Stitch has received as the Class Action suit.
• Any other like market sensitive information.          

The continuous disclosure regime is required in almost every spheres of the World where there is the great opportunity of doing business. As the country of Australia, is the hub for every business, the law is required which can govern that the companies which are operating and listing in Australia or only listed in Australia shall disclose the information which for the investors in the market is very useful. Through this information they usually take the very well informed and communicated decision regarding the investment or the acquisition or the merger, etc (Gray, 2009).

In response to the continuous disclosure, the regimes had been very effective since its beginning. Every company which is listed in the Australian Stock Exchange is required to disclose the market sensitive information as quickly as possible. If the regime was not there then the companies would not have been able to disclose all the information on the timely basis. There has been major collapse of many companies due to non disclosure of the relevant information like Lehman Brothers and HIH Insurance (Beekes and Brown, 2006; Aitken, 2008). There would have been the chances of the insider trading. But in the given case, the wrong disclosure has made the non compliance provisions of the Listing rules active due to which the company has faced the very worst situation. The whole management of the team has been considerably changed within the period of two years (HO and Wong, 2007). 

In the given case, the company I Surf Stitch Limited has been facing financial loss since the last two years ending 30^th of June 2015 and 30^th of June 2016. As per the annual report of the company for the year ending 30^th of June 2016, the company has incurred the loss of $154.70 million and has fell very less of the projections. Therefore, the financial health of the company is not good though also not in the situation of insolvency or bankruptcy (Olson, 2017). Surf Stitch has also not made the correct disclosure of the forecasts due to which the dissenting shareholders have filed the class action due to decreased share price (Chan, Faff, Ho and  Ramsay, 2007). 

Conclusion And Recommendation

To conclude with the report, the continuous disclosure regime is very important for all the company listed in stock exchange so as to facilitate the fair trade and fair availability of information.

It is recommended to have the true and correct information and on timely basis so that the investors can take relevant action on timely manner.

References

Aitken, M.J., (2008). Short sales are almost instantaneously bad news: Evidence from the Australian Stock Exchange. The Journal of Finance, 53(6), pp.2205-2223.

Australian Government , (2017), “ Part 8: Continuous Disclosure”, available at       https://archive.treasury.gov.au/documents/403/HTML/docshell.asp?URL=Ch8.asp accessed on 09/09/2017

ASX, (2017), “ ASX Listing Rules – Guidance Note 8”, available at https://www.asx.com.au/documents/about/guidance-note-8-clean-copy.pdf accessed on 09/09/2017.

Beekes, W. and Brown, P., (2006). Do Better Governed Australian Firms Make More Informative Disclosures?. Journal of Business Finance & Accounting, 33(34), pp.422-450.

Chan, H., Faff, R., Ho, Y.K. and Ramsay, A., (2007). Management earnings forecasts in a continuous disclosure environment. Pacific Accounting Review, 19(1), pp.5-30.

Debreceny, R., (2005). Firm-specific determinants of continuous corporate disclosures. The International Journal of Accounting, 40(3), pp.249-278.

Field, L., (2005), “Does disclosure deter or trigger litigation?”, Journal of

Accounting and Economics, Vol. 39, pp. 490-499.

 Gray, P, (2009). Accruals quality, information risk and cost of capital: Evidence from Australia. Journal of Business Finance & Accounting, 36(12), pp.51-72.

Hatch P, (2017), “Surf Stitch faces $100 m class action over share Wipeout” available at https://www.smh.com.au/business/retail/surfstitch-faces-100m-class-action-over-share-wipe-out-20170522-gwatsh.html  accessed on 09/09/2017.

HSU,(2009). Impact of earnings performance on price sensitive disclosures under the Australian continuous disclosure regime. Accounting & Finance, 49(2), pp.317-339.

Ho, S.S. and Wong, K.S., 2001. A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation, 10(2), pp.139-156.

Lewis K, (2013), “Continuous Disclosure”, available at https://www.asx.com.au/documents/rules/gn-8-presentation.pdf accessed on 09/09/2017

Loughlin W, (2017), “The Rise and Fall of Surf Stitch” available at https://www.rivkin.com.au/news/investing/2016/08/30/the-rise-and-fall-of-surfstitch-84051.aspx  accessed on 09/09/2017

Matolcsy, Z., Tyler, J. and Wells, P., (2012). Is continuous disclosure associated with board independence?. Australian Journal of Management, 37(1), pp.99-124.

Olson F, (2017), “Surf Stitch Limited – Financial Strength Analysis” available at https://simplywall.st/news/2017/03/01/surfstitch-group-limited-asxsrf-financial-strength-analysis/  accessed on 09/09/2017.

White, G, (2007). Drivers of voluntary intellectual capital disclosure in listed biotechnology companies. Journal of intellectual capital, 8(3), pp.517-537.