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 27th of August of 2015 to 9th 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 30th 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).
As per the annual report of the company for the year ending 30th of June 2015, the following has been analysed:
As per the annual report of the company for the year ending 30th of June 2016, the following has been analysed:
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:
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:
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:
Apart from the above characteristics an entity is required disclose the following 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 30th of June 2015 and 30th of June 2016. As per the annual report of the company for the year ending 30th 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.
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