Agenix Limited And Alchemis Limited - Making Sense Of Company Executives - Financial Statements Assessment Answer

Agenix Limited And Alchemis Limited Assignment

Assignment Task

Making sense of company executives’ compensation and employee benefits through the lens of cultural effects. How the conceptual framework revision to include Prudence is likely to address the disparity in Corporate Reporting

Download the latest annual report of AGENIX LIMITED AND ALCHEMIA LIMITEDlisted companies. Annual Reports are available on the company website or ASX website.

Analyse annual reports of your chosen companies in light of the reporting requirements imposed on accountants and those charged with governance of corporations. Your analysis should include the following:

• Are the annual reports in compliance with the conceptual framework and AASB standard requirements?
• You need to use extracts from the annual reports to support your analysis.
• Provide screen shots of the relevant sections from the reports in your assignment.
• If they are not in compliance, explain the reason.
• How the conceptual framework revision to include Prudenceis likely to address the disparity in Corporate Reporting
• You may find the explanations in the notes to the financial statements or in the Director’s Report.
• Compare and contrast the two annual reports, identify the differences in disclosures of these corporations.
• Reference to material of Advanced Accounting and a critical analysis of the annual reports is required.

Another Areas HIGHLY REGARDEDto focus in analysis:

• Use of advance accounting languagee legitimacy in place of reputation etc.
• How ethicalwere directors or CEO and any obligation involved?
• Diversityin board of company?
• Information provided by organizations is relevant, reliable and faithfully represented in accounts; and all the data in reports were fairly presented?Media release of any issue?

Introduction

The two companies chosen for the purpose of analysis are Agenix Limited (Agenix) and Alchemia Limited (Alchemia). Both the companies are listed on ASX.

IASB has proposed an amendment in the conceptual framework to include the concept of prudence. Two companies Agenix Limited (Agenix) and Alchemia Limited (Alchemia) have been chosen for this analysis. The relevant sections of the annual report of these companies are studied and attached as an appendix to this report. Initially, there is study of individual annual reports of each company and thereafter the comparison and contract of the accounting policies is conducted.

A background discussion of the prudence concept is done at the start of the report, which is followed by analysis and comparison of the accounting policies and disclosures; and at last conclusion is provided.

Background Info of companies

Legitimacy

Agenix is a biotechnology company and its main business activity is to reviews its intellectual property owned by it(Agenix, 2016). Agenix is known for its intellectual property and company is maintaining it, though due to poor financial results.

Alchemia sells the products related to the biotechnology and engaged in research work related to drug development(Alchemia, 2016). However this year company failed clinical trial of its much hyped product HA-Irinotecan.

Director’s role

Agenix has appointed new direct named Craig Chapman. As the company is not performing well, directors are not taking a higher financial remuneration.

Alchemia is also facing financial crisis due to poor performance. However, a study of the annual report indicates that the company is paying enough attention to the corporate governance policies. The directors has not done any act which appears to violate the concept of prudence.

Investor’s expectations

Investors of both the companies not happy with the financial performance of the companies. Agenix is also facing several law suits and this may create problems for the company.

Corporate Social Responsibility

None of the companies has a good track record of maintaining the corporate social responsibility. There was no incident of any corporate social activity done by the companies in recent past.

Other Aspects

As both the companies are in financial trouble, it is up to the management to show the ethical behavior. It may be noted that the companies with financial trouble are more likely to violate the prudence concept.

Analysis

IASB conceptual framework revision of Prudence concept

“Prudence” has been considered as a fundamental accounting concept, since a long time. It may be noted that around one and half decade ago, prudence was discussed in the conceptual framework issued by International Accounting Standard Board (IASB). However due to various reason the term “Prudence” was removed from the framework in the year 2010. This was a debatable act and IASB also faced a lot of criticism for this. However, now IASB is planning to reintroduce the term “Prudence” in the conceptual framework.

During the year 2015, IASB issued an exposure draft ED2015/3 and this ED proposed several changes along with proposed inclusion of “Prudence”. People are free to send their comments on the proposed amendments. It was felt that the present conceptual framework was lacking in certain areas and this forced IASB to come with these amendments. It may be noted that present conceptual framework does not define or discuss the term “Prudence”. Earlier it was deemed that the concept of prudence is against the concept of neutrality. However now, IASB has changed its view and defined prudence as exercising the caution while making judgment under uncertainty. It may be noted that prudence requires correct estimation of assets and liabilities and these should neither be overstated nor understated.

The ED states that the uncertainty of conditions may be taken as a base for the evaluation of the prudence. However it would be better if ED introduces the concept of asymmetric prudence which deals with the recognition of losses and liabilities for the events which have lower level of likelihood. It would be better if conceptual framework defines and discusses the concept of prudence in detail.

Strategy for analysis

Both the companies i.e. Agenix and Alchemia represents the biotechnology sector and are listed on ASX. These companies has to follow the reporting requirements of accounting standards issued by Australian Accounting Standard Board (AASB). It may be noted that Australia has converged its accounting standards in line with the accounting standards issued by IASB(Daske, 2006). Besides that these companies has to follow the rules and regulations of the Corporation Act, 2001 and of the Australian Stock Exchange (ASX). Sometimes ASIC may also ask the companies to make certain changes in the financial reporting in exceptional cases.

The analysis of the accounting policies and disclosures in the annual reports has been conducted in to three stages.

Study of the auditor’s report has been conducted in the first stage. Main idea behind the analysis of the audit report is that audit reports represents the opinion of the auditor whether the financial statements represents a true and fair view of the state of the affairs of the company(Fields, et al., 2001). Thus if these is any lacuna in financial reporting, auditors has several options such as providing negative or a qualified audit report. Please refer to appendix 1 for the extract of audit report of Agenix Limited and appendix 5 for the audit report of Alchemia Limited.

Study of directors’ report has been conducted in the second stage. Directors’ report provides a summary of the affairs of the company during the reporting period and also provides comments on the opinion of the auditors. The extent of the disclosure of information may reveal the level of prudence, the directors are applying. Another important fact is that the Corporation Act, 2001, puts a liability on the directors for the accuracy and reliability of the financial statements presented in the annual general meeting of the company. A study of the notes to financial statements and other information contained in the annual reports has been conducted in the third stage. Various screen shots are attached as appendix.

Analysis of Agenix Limited

A study of the audit report of Agenix reveals the fact that though the auditors have not provided a negative or qualified audit report, still they have provided an emphasis of matter. Auditors has drawn attention to the note3 of the annual report, regarding the consolidated loss of the company. Auditors has raised the concern regarding the applicability of the going concern concept to the company(Christie & Zimmerman, 1991). Thus Agenix becomes a sensitive case due to its accumulated losses, as far as prudence is concerned as directors may not want to reveal the facts which indicates an inability to continue business. Please refer to appendix 1 for the annual report of Agenix.

However the director’s declaration and the director’s reports of Agenix, do not indicate any fact which challenges, the going concern assumption(Zeghal, et al., 2012). Though the directors have discussed about the loss incurred by the company, there is not much discussion in this respect and the most of the report is more formal and routine facts. Please refer to appendix 2 for extracts of directors’ declaration and appendix 3 for directors’ report.

There is contradiction between the reports of auditors and report of directors. It appears that directors have not applied the concept of prudence(Wai Fong Chua, 2008). A study of the notes to accounts and other parts of annual report indicates that company has provided only minimum required information and wants to hide its actual position form the stakeholders. Agenix has not provided explanation of the borderline accounting policies(Bruhn, 2009). For example note 17, states that company took a loan from SHRG vendors in year 2007 but this loan was not recorded in financial statements as it related to original china acquisition. Now the company has recognized the loan and issued the security against it. This example is sufficient to portray the poor level of prudence in the company as far as accounting policies and disclosures are concerned(Carson, 2003).

The extract of notes to accounts are provided in appendix 4.

Analysis of Alchemia Limited

Auditors states that the directors are primarily responsible for the maintenance of the books of accounts and auditors are responsible only for providing their opinion whether the financial statements represents a true and fair view of affairs of the company(Bartlett & David, 2000). Auditors has recognized the importance of independence while conducting the audit, however there is no reference of the prudence concept(Deangelo & Deangelo, 1994). Auditors have concluded that the financial statements of the Alchemia Limited, gives a true and fair view and is in compliance with the Australian accounting standards and Corporation Act, 2001.

Directors’ report has a significant focus on the reporting of the products and segment analysis. There is less focus on the operating aspects of the business. The notes to accounts provides a detailed description of the terms and figures used in the financial statements(AASB, 2010). Alchemia management has provided detailed information in respect of the remuneration of the key management personnel. The extracts of notes to accounts are provided in appendix 6. Besides the explanation is more of standard accounting terminology. As company is suffering from loss, there are higher chances of material misstatement.

Comparison of both companies

A study of the annual reports and other information indicates that both the companies has followed the accounting standards and the rule of Corporation Act, 2001. However the compliance part is better in case of Alchemia. This is evident from the auditors’ report where in case of Alchemia, auditors have provided a clean report while in case of Agenix, auditors have provide an emphasis of matter, which is not answered by directors of Agenix Limited. Besides that the disclosure made by Alchemia were more detailed and were more akin to the concept of prudence(ASB, UK, 2007).

Conclusion

An analysis of the annual report and the financial statements of both the companies, indicates that at present companies are free to define and mold the concept of prudence as per their own convenience. Thus it depends upon the ethics and values of the company and the management to the extent they apply the concept of prudence. At present there is a large disparity among the financial reports as far as the concept of produce is concerned. Some of the companies may be applying the produce in financial reporting as their own initiative, while some of the companies may not be applying the concept of prudence at all. It is suggested that inclusion of the prudence concept with proposed amendment in the conceptual framework will definitely help the various stakeholders and especially users of the financial statements. It may be noted that the accounting standards derive their force from the conceptual framework. Inclusion of the prudence concept will also have impact over the accounting standards and overall financial reporting.

Recommendations

Inclusion of the “Prudence” concept will help the various stakeholders and it is advised that IASB shall bring this concept after a complete study of advantages and disadvantages. Obviously the advantages are much more than any said disadvantage(IASB, 2015). Making the prudence as a fundamental accounting concept shall cast a responsibility on the management, directors, accountants and auditors of the company. Besides amending the conceptual framework to include the concept of prudence, it is also advised that IASB should make necessary changes in the accounting standards also. When the necessary changes are made in the accounting standard than the concept of prudence shall be more practical and more visible in the financial statements. However it may not be easy to incorporate the required changes in the existing accounting standards due to multiple reasons. Thus, as a priority, IASB may try to include this concept in the developing and new accounting standard. This shall be relatively easier for the IASM and the companies which has to implement these changes. The inclusion of prudence concept shall also increase the workload and professional responsibilities of the auditors. Now, besides vouching the accuracy of the transactions, auditors also have to be sure that the company has applied the concept of “Prudence”.