The Incentives S&G Had to Go Public
Slater and Gordon, a law firm from Australia, was the number-one law firm to publicly enlist itself in the stock market. The biggest motivation for Slater & Gordon’s decision to go public was the need for more capital. S&G designated 35 million shares of AUD 1.00 per share (Grech and Morrison 2009). The sale, which aims to raise financial capital, was to give stability to vendor stakeholders to get 17 million shares out of the total 35 million dollars. This move was one of the incentives for stakeholders to get interested in and participate in the initial public offering (IPO). It assured the company of long-term success and rapid growth by opening it to investors.
Going Public and S&G’s Stated IPO Objectives
Nonetheless, going public offered the firm the chance to improve the organization’s image and attract talented workers. The generated funds will give the organization long-term equity and an incentive for retired attorneys to invest in new lawyers to ensure the organization’s long-term prosperity (Grech and Morrison 2009). Nonetheless, being the first publicly traded legal firm, S&G gained immense fame in 2007. People knew of its purpose as a law firm that protects the underdogs in companies. With many injuries and workplace accidents, there was an increase in clients. Moreover, there were fewer publicly-traded companies in 2014, which were 44; thus, adding to the list would increase the company’s profile and invest in talented workers.
From the 2008 annual report for Slate and Gordon, the company had achieved some of its objectives for publicly listing the company. In 2008, revenue increased by 26.7%. The company had a tax profit of $15.1 million, up 34.0 percent from the expectation and 41.8 per cent from the prior year. The conventional markets continued to rise by double digits. The company grew regionally, with sales from outside Victoria increasing to 42.6 percent of total revenue, a 37.4 percent increase in 2007 (Slater and Gordon 2008). Through acquisition and recruiting, capacity increased in non-personal injury areas such as business litigation, commercial law, financial activities and advising, family law, and wealth management. It built a significant presence in commercial civil suits and acquired nine smaller firms in New South Wales, Queensland, Westside Australia, and Victoria. It launched additional offices in Gosford, Southport (Queensland), and Reservoir (Victoria), and its national brand awareness continued to increase by June 2008. All these achievements were in line with Slater and Gordon’s objectives of running a publicly listed legal firm.
No Win, No Fee Policy
The Company’s “No Win-No Fee” Business Policy
The company came up with the “No Win, No Fee” policy to attract clients and generate high returns. The plan notes that the organization will receive a payment if the case is completed. Averagely, the firm had a 95% success rate on all cases they had in history; thus, they were assured of payment after the fourth period of the case (Grech and Morrison 2009). With this strategy, the corporation was responsible for internal staff costs and the extra costs of expert witnesses, research, and other legal costs associated with each lawsuit. When lawsuits are pending, the corporation gives its consumers or clients free money. Because of this, the clients pay the firm when cases are completed and won.
The Implications of the Policy for the Amount of Revenue
The “No Win, No Fee” business model allowed the corporation to generate significant and considerable profit returns over time, influx new clients, and become more productive. With a 95% success rate record, the bar was high enough to motivate many clients to work with them (Grech and Morrison 2009). Under the AASB 15, when the basis for a contract is adjustable, revenue can be recognized to the extent that the consideration is changeable. The whole amount of revenue recognized concerning a contract is extremely unlikely to be subject to a taxable rate, thus increasing the company’s revenue. Many clients knew that the company depended on a win to get paid; thus, the clients would not lose any money if the lawyers lost the case. Additionally, it ensured more productivity in the firm as without winning any case, the lawyers would not earn any income. The revenue would be estimated as follows; fee *completion period *success rate. The typical basic fee for a personal injury lawsuit that would take from six months to two years is AUD 15,000 (Grech and Morrison 2009). However, it affected the business financially as, during the cases, the firm incurred internal expenses of research, retaining witnesses, and other legal costs. Such expenses are complex for the firm if they lose a case. To the firm, the benefits of this policy outweighed the negatives.
Contingent Assets and Contingent Liabilities
The Credibility of the Financial Statements
The 2015 annual report for Slate and Gordon highlighted various contingent assets and liabilities in its financial statement. The firm proves they know the same profits or losses they would incur by showing these entities. One of the contingent liabilities shown in the financial statement is the foreign exchange rate differences which gross the company AUD 63,542,000 (Slater and Gordon 2015). A contingent asset is a potential asset that may exist as a result of dependence on future circumstances outside the control of the business. Additionally, contingent liabilities are obligations contingent on the result of a future event. In the future, these entities are likely to become assets or liabilities.
The credibility of a financial statement depends on whether various provisions for the contingent assets and contingent liabilities are met. First, the worth of the contingent liability and contingent assets must be estimated. If the asset’s or liability’s net worth can be calculated, it must have a fifty percent chance of being determined (Jerman and Manzin 2008). Auditors are especially wary of contingent assets documented in a financial statement and will demand that they be removed before offering an opinion on its financial statements. Even though the related prospective gain is likely, a company is not required to record a contingent asset under accounting principles. Before contingent liabilities may be recorded in financial statements, contingent liabilities must meet two requirements. The obligation should not be represented on the balance sheet or income statement if the contingent loss is distant, suggesting it has a 50 percent chance or less of probably occurring.
Disclosing Contingent Assets and Liabilities in the Financial Statements
When the flow of economic advantages is likely, a corporation may report contingent assets and contingent liabilities in the footnotes of the income statement. The auditors of the financial accounts should note that contingent assets at the bottom of the income statement at least expose the presence of a probable asset. According to GAAP accounting regulations, probable contingent liabilities must be documented in financial statements if they can be assessed and are likely to materialize (Jerman and Manzin 2008). Contingent liabilities should be noted in the footnotes of a financial statement if they are probable to appear but cannot be anticipated.
Credible Presentation of S&G’s Financial Performance and Financial Position
Nonetheless, a company is advised to disclose contingent assets and liabilities when they are optimistic about the benefits and losses they would incur from the entities. On the financial statement, contingent liabilities that meet the set standards are shown as costs and reported as liabilities on the balance sheet. A hypothetical case of a journal entry on contingent liability and assets can be as follows:
Table 1
Furthermore, the hypothetical cases of a law firm’s balance sheet and income statement would loo lie in the following:
Table 2
Table 3
Changes to the Contingent Assets and Contingent Liabilities
The 2015 Slater and Gordon report included foreign rate differences as contingent assets and liabilities. However, it did not disclose any lawsuits and warranties it faced as they were not sure if they would be a profit or loss to the company. Nevertheless, the 2016 report noted that they would not recognize any profits or losses realized because they were unsure of the probable loss and profits they would incur. Slater and Gordon reported a net loss after tax of $546.8 million for 2017 from lawsuits and a loss from operational operations of $39.1 million as a note on the financial statement (Slater and Gordon 2017). The company ended with $361.3 million in intangible assets disclosed under the AASB 138, such as copyrights. They also addressed the exchange rate differences that caused losses as a liability, proving they had established the losses they incurred that year and disclosed them. 2015 and 2016 majorly reported on the exchange rate difference. However, the 2017 annual report disclosed more than the previous years on the contingent assets and contingent liabilities, such as the lawsuit costs they incurred.
Impairment Charge
The Correct Journal Entry to Account for the Impairment Loss
Assets are periodically examined for impairment to guarantee that the balance sheet’s total value of the asset is not inflated. Certain assets, such as goodwill, are evaluated annually according to generally accepted accounting principles (GAAP). GAAP implies that firms should examine occurrences and market circumstances between annual impairment tests to determine if the current price of an asset has declined below its amortized cost. As a result, there are daily postings on impaired loss.
When there is an impairment charge, the entry can be recorded to the debit side if it is a loss or an asset if it generated a profit for the company. A contra asset can be used to maintain the asset’s one-time cost on a particular section item and be used as a credit. The connected asset account has a positive balance, whereas the counter impairment charges account has a negative amount. In this situation, the additional carrying cost is included in the total profit, cumulative loss, and counter impairment charges account. Following the impairment, the investment’s holding cost is reduced. The asset’s decreased carrying cost will be recorded in future quarters. When the market value of the impairment-charged asset returns to its previous level, GAAP requires that the impaired asset be documented at the reduced adjusted dollar amount (Jerman and Manzin 2008). This rule follows conservative accounting concepts. Any gain in value is recorded when the asset is sold.
The Causes for the Impairment Loss
One of the causes for the impairment loss is the acquisition of Quindell, which was a wrong move. The Australian company’s stock dropped nearly a fifth after reporting a significant loss of AUD 1.02 billion, compared to a profit of AUD 62.4 million a year before. An impairment charge of AUD 879.5 million was at the core of the losses (Grech and Morrison 2009). As a result, stock prices dropped 17.9% in 2016, implying that the company lost 92.5 percent of its value from its high in April 2015 (Slater and Gordon 2016). Most of the impairment loss stems from the $673 million acquisition of property insurance of Quindell. It was a foregone conclusion that the purchase would get losses.
Additionally, the legal issues following the firm contributed to the loss. Quindell’s accounting and business operations were investigated by the Serious Fraud Officer in the UK after the purchase from Slater and Gordon. The firm, which has since been rebranded Watchstone, was also impacted in November when the UK government announced steps to minimize personal injury claims. The public legal claims following Quindell made it hard for the Slate and Gordon to progress, as the limit put on the firm would make it hard for it to broaden its services.
A Non-Cash Impairment Charge
It is essential to have a non-cash impairment charge to reduce the levy of the damage on the company. A non-cash asset like goodwill from purchases during the economic boom, when firms overpay for purchases with overvalued shares, enables a balance sheet balance. For instance, purportedly, Quindell had a poor statutory account where it oversold its financials to the public (Grech and Morrison 2009). When Slate and Gordon purchased it, they overpaid for the goodwill because of the expectation that Quindell is a high-performing business. Massively high financial statements skew not just a company’s analysis but also the price at which shareholders pay for a share in the company. The new laws compel businesses to valuate these failed acquisitions, revalue the company, and be accountable to investors.
Changes in the Finance Reports
One of the significant changes Slater and Gordon (S&G) made was filing a £600 million lawsuit against the corporation Quindell over its 2015 plan to buy Quindell’s professional services section. Quindell’s deceptive deception, according to S&G, would have prevented the purchase, which led to the company’s current financial difficulties. The first issue presented itself in the 2015’s annual reveal of the financial statements, where there were many negatives as the numbers dropped in six months. From the 2015 annual report, one can see a drop from AUD 54 million to AUD 40 million in cash generated by investments (Slater and Gordon 2015). One of the investments made in 2014 leading to 2015 was the acquisition of Quindell, a 375 million loan to pay off the acquisition, and an 890 million share issue. Therefore, there was a need for a lawsuit to charge back at Quindell in the hope of exposing the fraudulent scheme that the legal firm was a victim.
Table 4
Another change the legal firm made was cutting costs by reducing offices and employees. The financial records in 2016 show there is an AUD 738 million debt from acquisitions expenses (Slater and Gordon 2016). Part of the expense was Quindell’s offices in the United Kingdom. The banks had control of Slater & Gordon, which was on the verge of defaulting on its $830 million debt (Fortney and Gordon 2012). Slater & Gordon was obliged to slash expenses and close offices in the United Kingdom as the year progressed. At the same time, its more prominent Australian firm began to feel the effects of its financial troubles. To battle these problems, the company had to reduce expenses they faced through Quindell, such as offices they rented to cut ties with Quindell and balance their revenue and expense entities.
Nonetheless, they decided to recapitalize by looking for other investors and pitching their new strategies. In the Chair’s report of 2017, the firm acknowledged the need for a lender to uplift the business (Slater and Gordon 2017). Anchorage, based in New York, made the initial move for Slater & Gordon by purchasing debt from Barclays, a British bank, for 38 cents on the dollar. Anchorage, which has participated in multiple debt-for-stock exchanges in Australia, grew its participation in the lending group as additional lenders in the group lowered their losses. Moelis, a business consultancy company, was hired in January to start discussions (Fortney and Gordon 2012). The lenders gave Slater & Gordon until February to submit a turnaround strategy, which included the crucial acknowledgment that the legal firm’s current levels of bank loans exceed overall company value and other details. The stockholders of Slater & Gordon had long ago bailed out as the stock’s price plummeted past $1. The legal firm did this with the hope of resuscitating the business.
Moreover, big Australian banks such as Westpac offered hurdles preventing the swaps of equity between an American ban and an Australian legal firm to recover the company through lenders. The loan value dropped, decreasing the number of losses the company incurred in 2017 of AUD 553,298,000 from 2016’s AUD 1 billion loss (Slater and Gordon 2017). Lenders could dissolve the business or convert their loans to stock to recapitalize it in its current financial situation. However, the large banks were hesitant to acquire the civil suit firm, which was a pain on their commercial clients’ sides. The loan value eroded from January through March while they pondered until they eventually decided to sell their loan to hedge funds. The board of directors and its new financiers could now openly arrange a debt-for-equity swap, the only viable alternative for a turnaround.
Bibliography
Fortney, Susan, and Tahlia Gordon. 2012. “Adopting law firm management systems to survive and thrive: A study of the Australian approach to management-based regulation.” U. St. Thomas LJ 10: 152.
Grech, Andrew, and Kirsten Morrison. 2009. “Slater & (and) Gordon: The Listing Experience.” Geo. J. Legal Ethics 22: 535.
Jerman, Mateja, and Massimo Manzin. 2008. “Accounting Treatment of Goodwill in IFRS and US GAAP.” Organizacija 41 (6). Web.
Slater and Gordon. 2008. Slater and Gordon Limited Annual Report 2007 2008. Melbourne: Slater and Gordon.
Slater and Gordon. 2017. Slater and Gordon Limited Annual Report 2014 2015. Melbourne: Slater and Gordon.
Slater and Gordon. 2016. Slater and Gordon Limited Annual Report 2015 2016. Melbourne: Slater and Gordon.
Slater and Gordon. 2017.Slater and Gordon Limited Annual Report 2016 2017. Melbourne: Slater and Gordon.