The Rise and Fall of ABC Learning

Q1 The aspects of the business schema of rudiment Learning resulted in increase business risk for the familiarity including the quick elaboration of grocery store parcel of land, everywhere-indebt, and blinding afield investment. Rapid expansion of market sh atomic number 18 rudiment, which at its peak had almost 2200 centres in quaternary countries, also had a flawed strategy to handle signifi notifyt and speedy growth. When A. B. C. Learning Centers listed on the stock ex limiting in March 2001, it was a tiny operation with a market majusculeization of just $25m. just five years later that number is approaching $2. bn as the keep company has quickly become Australias leading operator of childc atomic number 18 centers. ABC prosecute acquisition after acquisition buying up as many another(prenominal) be centers as they could, and expanding their appetite by establishing more(prenominal) and more sites slay the back of increasing debt. The companys acquisitions are getting larger so at that place is always a risk with this strategy that they will pay likewise much for a business or be unable to combine it effectively. This meant that every new ABC sign that appeared on the horizon equated to more and more debt.Ultimately ABC could no longer sustain their rapid expansion. With a falling share price and closer examination of their books it became pretend ABCs true cling to was significantly lower than previously thought. Over-indebted In 2005, in order to satisfy the expansion plan, raising capital for domestically and globally expansion was done through issuing shares to public. ABC borrowed an terrific essence of money from Australian big four relys CBA, NAB, Westpac and ANZ). In the wake of the global pecuniary crisis, it couldnt refinance its huge debts, so the administrators were called in.In the end, ABC got too big for its own good, also do itself to the end. Blinding oversea investment After becoming the dominant imposter i n the domestic market, ABC Learning has pursued an aggressive overseas expansion. The high levels of debt and dilutive capital raisings that admit been required to fund its international ambitions gravel not pleased investors, and doubts about the companys ability to parallel its local achievements in the US market have weighed on the share price. As the case told, artificially create apparent shareholder apprize whitethorn be misleading to potential investors in the company. Q2Intangible assets are defined as distinctive non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two elemental forms of impalpables legal intangibles (such as trade secrets, copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities, quislingism activities, leverage activities, and structural activities). Legal intangibles are known u nder the generic term intellectual property and generate legal property rights defendable in a court of law.Competitive intangibles, whilst legally non-ownable, directly uphold effectiveness, productivity, wastage, and opportunity equals within an organization and therefore costs, revenues, customer service, satisfaction, market take to be, and share price. ABC Learning valuated one million millions of dollars worth of now discredited intangible assets that make up most of ABCs repose sheet. It increased profits rapidly through acquisitions, and ca wont the underlying problem when valuated the assets it acquired. oddly given that 70 per cent of its assets were intangibles. The inherent risk associated with the valuation of the assets was enormous and should haven been a red flag, said Dr Ross. In other words, it mover that ABC did not have a particularly strong balance sheet. The company lists total assets of $4. 5 billion of which, more than $3 billion relate to intangible assets (which are predominantly child-care licences and a small amount of goodwill). As a result, ABC has negative net tangible assets. Q3 Principle-based invoice standards whitethorn take the form of general principles, relying on interpretation and plan by the financial statement preparers before they can be executeed. historical cost depreciation trys a better example of a principles-only standard. Whereas, Rule-based Alternatively, standards may take the form of a series of rules, limiting the flexibleness and exercise of judgment allowed in their implementation. Rules-based standards often provide bright-lines tests which can easily be avoided. As a result, representational faithfulness may be avoided and a low degree of comparability will often result. Numerous exceptions may also result. The advantage of principle-based accountancy standard is potentially very conciliative with those new and changing products and environments.As such, they should also require slight maintenance. For this case, applying principle-based account standard would be more flexible with changing conditions, and the trade-off for this flexibility is that strong enforcement is needed to keep the auditors honest the accountants should be more latitude to address unique situations, and it may reduce manipulation of the rules as it provides financial statements which reflect much closer to the firms actual performance. season the rule-based accounting standard may hold a lack of flexibility, then require almost continual maintenance at times.Therefore, the fundamentally change from bright-line rules-based accounting standards to principles-based accounting standards help prevent another ABC-like fiasco. The dangers in removing bright-line rules describes as follows it is more difficult to audit relative to compliance, and vexation over uniform and reliable interpretations across entities. In this case, the system may be less regulated, and to the extent that they rel y on individual judgment to interpret and implement the standards, there is a danger that they can be used to hold financial results.Q4 mission cost of debt refers to an increase in cost of debt when the interests of shareholders and guidance diverge. In this case, the relevant authorization cost that loaners face may include large dividend payments that result in less money in the bank for loan repayment and new debt competes with old debt for repayment. Because the lack of symmetry randomness desires between the management of ABC learning and lenders, managers intended to maximize their in-person wealth which may mean lenders welfare is not maximized.Based on the hypotheses that the higher the debt equity ratio the more likely managers are to use accounting methods that increase income, managers of ABC Learning may violate debt arrangements by manipulating equity. Moreover, the lenders are likely to face risk shifting in this case. Therefore, agency cost happens when ABC Le arning engages in behaviors that benefit more than lenders. For lenders, they could smirch the agency cost in shortening debt due date, it can reduces the agency cost of borrowing in two ways. First, the increase in equity value from increasing the risk of he firms assets is a decreasing function of debt maturity (Barnea, Haugen, and Senbet, 1980). Second, shortening the maturity of debt reduces the likelihood that a firm will have to exercise an option to invest before outstanding debt matures (Myers, 1977). They also can set up a debt covenant to mitigate the risk, and from a lenders perspective, not only does a covenant reduce carelessness risk but is also mitigates the debt-equity agency cost. Often, individual stockholders as owners of a corporation do not have direct control over the agency contract, but as stockholders they do have certain rights granted to them.Q5 It seems that previous and current auditors had divergent opinions about the company. The new audit police squad from Ernst childly took a very different view from ABCs previous auditors from Pitcher Partners in several aspects such as the handling of revenues and earnings, the valuation of intangible assets, for example, after taking over the Pitcher Partners place, Ernst Young did not allow ABC to place the same high value on the licenses to run childcare centers as Pitcher Partners had done.Ernst Young contest the Pitcher Partners work and the situation escalated to the extent that the ABC board was strained to call in another accounting firm, KPMG, for its opinion. One of the reasons for divergent opinions of auditors is the accounting policy choice, The accounting policy choice research area investigates the inter-relations among the contracts existing between various stakeholders of the firm, the associated economic incentives of the contracting parties, and the consequent accounting choices made by managers to influence the payoffs to the various contracting parties.The oth er reason is the degrees of concern of the company are different, in other words, the extent of knowledge for the auditors are different, Pitcher Partners did not have a deep knowledge of the ripe Operational Status of the company, so they can not valuate the physical object value on the childcare licenses.The recommendations of CLERP 9 to promote auditor independence as follows Non-audit consultancy income for auditors has been limited and must be clearly disclosed. Auditors must provide their firms with a declaration that they are free from any relationship that may interfere with their independence. And the audit partner must rotate off a companys audit after 5 years( or 7 years in the case of small or rural firms). quote list history Policy Choice, viewed at 10/05/2010. http//www.business.uq.edu.au/display/research/Accounting+Policy+ChoiceAdam Schwab, ABC learning the sound way as profitsslump, 26 February 2008, viewed at 10/05/2010. http//www.crikey.com.au/2008/02/26/abc-le arning-the-hard-way-as-profits-slump/Ken L, John H, John S, Jennie R, 2009, Company accounting, 8th edition, John Wiley Sons, Australian,p149.Jeremy Sammut Gaurav Sodhi, The ABC of child care policy failure, viewed at 9/05/2010. http//www.cis.org.au/executive_highlights/EH2008/eh71308.htmlJohn C. Easterwood , Palani-Rajan Kadapakkam, Agency conflicts, issue costs, and debt maturity, viewed at 10/05/2010. http//www.questia.com/googleScholar.qstjsessionid=LnzP1BQzKTGJxN2BX6hnvcHzdJcSYW2TGPQNtZLgNtR20dwgMfgc783601474-129296667?docId=5000275458Natasha Bita Andre Fraser, Imploding as easy as ABC, November 15, 2008, viewed at 10/05/2010. http//www.theaustralian.com.au/news/imploding-as-easy-as-abc/story-e6frgaio-1111118041306Tim Searles, Not so easy at ABC, 3 Mar 08, viewed at 9/05/2010. http//www.intelligentinvestor.com.au/articles/A-B-C-Learning-Centres-Limited-ABS/Not-so-easy-at-ABC.cfm?articleID=391596Understand The Difference Between Principle-based Versus Rule-based Accounting Sta ndards, November 10th, 2006, viewed at 10/05/2010.