Beacon Lighting Group's Performance Rights

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PART A - 275 WORDS = 3 MARKS = CUT down DONE

a)

Beacon Lighting Group (BLG), implements only a short-term scheme detailing performance right without any plan about a long-term scheme. One key feature defines the number of Performance Rights issued is based on financial performance measured by profit before tax and share prices. Another key feature describes how the Performance Rights issued will vest into 3 parts: one third has vested into shared, one third will vest on 25 August 2015 and one third will vest on August 2016.

b)

The purpose is to align the interest of key executives with those of shareholders’ interests. Performance rights is dependent on profit before tax. Essentially key executives becomes shareholers aswell, therefore alignment of interest in the short and long run (same interest for higher price per share and dividends) as Baecon implements disposal restriction on performace rights.

Another key feature of issuing performance rights vested into 3 different periods ensures a match of interests for both parties during this time. However, since there is not yet a long-term incentive scheme, key executives may concentrate and thrive more on short-term performances rather other opportunities that benefit long-term interests. This may effect shareholders, whose interests lie in gaining higher dividends, that can only acquire a significant increase in the long-term.

Overall, key features demonstrate increases in price per share due to incentive for larger number of performance rights and is maintained/increased as key executives themselves potentially become shareholders. Similarly, another interest is dividends, which will have little effect on the short and long run. Hence, depending on disposal restrictions, the short-term incentive scheme may only be effective in the short-term period, and less effective in the long run.

Part B - 550 WORDS = 6 MARKS

Discuss and form your own view as to what extent the Beacon Lighting performance rights satisfies the:

a) definition of a liability under the Framework; -

Although not legally enforceable, BLGs performance rights arise from a desire to maintain good business relations to align interests of executives to shareholders. Additionally, there is no irrevocable nature of the agreement, however as stated in the prospectus ‘unless otherwise determined by the board, no amount is payable upon the grant or exercise of performance right’, highlighting the probable nature of exercising the rights if employees are still employed at the time, as demonstrated in 2014. Arisen from past events through communicating the scheme through a media release, BLGs performance rights is a conversion of obligation to equity in the form of shares. Thus, performance rights is a liability in 2014 under the framework.

b) definition and recognition criteria of a provision under AASB 137: and

AASB 137 paragraph 10 defines the provision is a liability of uncertain timing or amount. For the definition part, the performance right has been classified to liability. In the prospectus (Beacon Lighting 2015), the issue of performance rights is based on the profit before tax which is uncertain. Therefore, the performance right satisfide the definition of provision.

AASB 137 paragraph 14 recognises a provision when: The entity has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefit will be required to settle the obligation. Besides, a reliable estimate can be made of the amount of the obligation

As to recognition, the usual case is the grant of performance is subject to a legal contract (Pura Vida Energy Nl 2011), and the previous distribution of performance rights can be treated as a constructive obligation as it creates valid expectation in other parties that the company will discharge the obligation. Then, the probablity of the company to execrise performance right is more likely than not, and the 2014 financial statement (Becon Lighting Group 2014) has proved it. However, only the 2014 performance right amount is able to estimate reliably as all the key data were present. For the remaining years, the deficiency of key data will make it hard to judge the significant returns of shares (Hendricks and Singhal 2005), suggesting to make the reliable estimation is not possible. The conclusion is the 2014 performance right is able to recognized as provision under the AASB 137 while the remaing part in 2015 and 2016 may only treated as contingent liabilties.

c) whether any payment recognised in Beacon Lighting’s financial statements in relation to the performance rights for period ended 31 December 2014 could be considered an expense under the Framework.

Expenses are defined as an outflow of economic benefit as per paragraph 60 Framework. In the financial statement ended 31 December 2014, 75927 shares were issued and vested to employees. This payment could be considered as a share-based payment transaction according to paragraph 2 in AASB 2 Share-based Payment. The journal entry to record this transaction could be as follow:

Dr Wages and Employee Benefits Expense82

Cr Share Issue under Performance Rights Plan82

There was no consideration provided by employees for the shares they acquired. Thus, the share vesting meets the definition of outflow of economic benefits.

Part C: 375 WORDS = 4 MARKS at the moment 399 words.

Financial statement preparers of BLG experiences difficulty in presenting true and fair information as a consequence of weighing accounting standard technical requirements over their ethical expectations. When applying AASB to business practices, BLG preparers are responsible for the professional judgements on the treatment of transactions in order to give the most true and fair information for decision making. In the case concerning BLG and performance rights, this judgement comes into play made between recognising future payments as either a contingent liability or a provision where preparers of Beacon Lighting has the ultimatum on whether to expense liabilities or by allocating it as contingent liability (not in financial statments) to adjust a higher profit level for the period.

Ideally, BLG preparers should choose the most appropriate method to present ‘true and fair’ information, although the definition is not strictly defined in accounting, the application of principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey correctness and objectivity. The lack of disclosing non-recognition of performance rights as a provision in the notes to the statement of financial position concerns the qualitative characteristics, relevance and reliability especially it is more likely for performance rights to be exercised in year ending 2015. As BLG preparers fail to present the relevant predictive nature of performance rights to the financial statements in any form, it underestimates the potential payment in the form of shares in the nearby future, hence unreliable.

Principles of code of ethics which are relevant in the case of BLG performance rights comprises integrity and objectivity. Preparers understanding likely outstanding share payable to executives breach of the principle of integrity as it is conceaeled from the statements. Additionally, recognising performance rights as contigent liabilities may be potentially in order to smooth income trends, breaching one of the codes, objectivity.

In conclusion, to a less extent can this unbalance between ethics and technical accounting standards be put onto objectivity, but rather to inherent difficulties in identifying the transactions to be measured or in devising and applying measurement and presentation techniques that can convey messages that correspond with those transactions and events. In the case of BLG, preparers may be uncertain and face difficulty in identifying performance rights more so than for own business performance. Therefore, most financial information is subject to some risk of being less than a faithful representation of that which it purports to portray.

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Reference

Accounting Standards Australia 2009, AASB 2 Share-based Payment, Australian Accounting Standards Board, Victoria.

Accounting Standards Australia 2009, Framework for the Preparation and Presentation of Financial Statements, Australian Accounting Standards Board, Victoria.

Accounting Standards Australia 2014, AASB 137 Provisions, Contingent Liabilities and Contingent Assets, Australian Accounting Standards Board, Victoria.

Beacon Lighting Group 2014A, Beacon Lighting Limited Prospectus, Oakleigh.

Beacon Lighting Group 2014B, Performance Rights, media release, release 25 August, viewed 29 March 2015, <http://news.iguana2.com/beacon/ASX/BLX/410527>

Beacon Lighting Group 2014C, Interim financial report, Oakleigh.

Beacon Lighting Group 2014D, BLX-Annual-Report, Oakleigh.

Hendricks, K. B. and Singhal, V. R. 2005, ‘An empirical analysis of the effect of supply chain disruptions on long-run stock price performance and equity risk of the firm’, Production and Operation Management, vol. 14, no. 1, pp. 35-52.

IFAC 2006, ‘Code of ethics for professional accountants’, Sections 110-120, Victoria.

PART A

a) Two features of Performance Rights Scheme

Beacon Lighting Group (BLG), implements only a short-term scheme detailing performance right without any plan about a long-term scheme. One key feature defines the number of Performance Rights issued is based on financial performance measured by profit before tax and share prices. Another key feature describes how the Performance Rights issued will vest into 3 parts: one third has vested into shared, one third will vest on 25 August 2015 and one third will vest on August 2016.

b) Effectiveness of the Scheme

The purpose is to align the interest of key executives with those of shareholders’ interests. Performance rights is dependent on profit before tax. Essentially key executives becomes shareholders as well, therefore alignment of interest in the short and long run (same interest for higher price per share and dividends) as Beacon implements disposal restriction on performance rights.

Another key feature of issuing performance rights vested into 3 different periods ensures a match of interests for both parties during this time. However, since there is not yet a long-term incentive scheme, key executives may concentrate and thrive more on short-term performances rather other opportunities that benefit long-term interests. This may effect shareholders, whose interests lie in gaining higher dividends, which can only be achieved a significant increase in the long-term.

Overall, key features demonstrate increases in price per share due to incentive for larger number of performance rights and is maintained/increased as key executives themselves potentially become shareholders. Similarly, another interest is dividends, which will have little effect on the short and long run. Hence, depending on disposal restrictions, the short-term incentive scheme may only be effective in the short-term period, and less effective in the long run.

Part B

a) Definition of a liability under the Framework

Although not legally enforceable, BLGs performance rights arise from a desire to maintain good business relations to align interests of executives to shareholders. Additionally, there is no irrevocable nature of the agreement, however as stated in the prospectus ‘unless otherwise determined by the board, no amount is payable upon the grant or exercise of performance right’, highlighting the probable nature of exercising the rights if employees are still employed at the time, as demonstrated in 2014. Arisen from past events through communicating the scheme through a media release, BLGs performance rights is a conversion of obligation to equity in the form of shares (Beacon Light Group 2014B). Thus, performance rights is a liability in 2014 under the Framework.

b) Definition and recognition criteria of a provision under AASB 137

AASB 137 paragraph 10 defines the provision is a liability of uncertain timing or amount. The performance rights have been classified to liability. According to the prospectus (Beacon Lighting Group 2014A), the number of performance rights to be issued is subject to the financial performance which indicates it is uncertain. The performance right satisfied the definition of provision with uncertain amount.

AASB 137 paragraph 14 recognises a provision when: The entity has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefit will be required to settle the obligation. Besides, a reliable estimate of such economic benefits can be made.

Firstly, the previous distribution of performance rights can be treated as a constructive obligation as it creates valid expectation in other parties that the company will settle the obligation. (Beacon Lighting Group 2014B) Then, the probability of the company to exercise performance right is more likely than not, since it could reasonable infer the company will reach the targe through its previous financial reports (Beacon Lighting Group 2014D). However, only the 2014 performance right amount is able to estimate reliably as all the key data were present. For the remaining years, the deficiency of key data will make it hard to judge the significant returns of shares (Hendricks and Singhal 2005), suggesting to make the reliable estimation is not possible. The conclusion is the 2014 performance right is able to be recognised as provision under the AASB 137 while the remaining part in 2015 and 2016 may only treated as contingent liabilities.

c) Expense in relation to the payment of shares under Framework

Expenses are defined as an outflow of economic benefit as per paragraph 60 Framework. In the financial statement ended 31 December 2014, 75,927 shares were issued and vested to employees. This payment could be considered as a share-based payment transaction according to paragraph 2 in AASB 2 Share-based Payment. The journal entry to record this transaction could be as follow:

Dr Wages and Employee Benefits Expense 82

Cr Share Issue under Performance Rights Plan 82

There was no consideration provided by employees for the shares they acquired. Thus, the share vesting meets the definition of outflow of economic benefits (Beacon Lighting Group 2014A).

Part C Evaluation on the statement

Financial statement preparers of BLG experiences difficulty in presenting true and fair information as a consequence of weighing accounting standard technical requirements over their ethical expectations. When applying AASB to business practices, BLG preparers are responsible for the professional judgements on the treatment of transactions in order to give a true and fair information for decision making. In the case concerning BLG and performance rights, this judgement comes into play made between recognising future payments as either a contingent liability or a provision where preparers of BLG has the ultimatum on whether to report the future payments as a liability or a contingent liability (not in financial statements).

Ideally, BLG preparers should choose the most appropriate method to present ‘true and fair’ information, although the definition is not strictly defined in accounting, according to the framework the application of principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey correctness and objectivity. The lack of disclosing non-recognition of performance rights as a provision in the notes to the statement of financial position concerns the qualitative characteristics, relevance and reliability especially it is more likely for performance rights to be exercised in year ending 2015. As BLG preparers fail to present the relevant predictive nature of performance rights to the financial statements in any form, it underestimates the potential payment in the form of shares in the nearby future, hence unreliable.

Principles of code of ethics which are relevant in the case of BLG performance rights comprises integrity and objectivity. Preparers’ understating of outstanding share payable to executives may breach the principle of integrity as it is concealed from the statements.

In conclusion, to an extent can this unbalance between ethics and technical accounting standards be put onto subjectivity, but rather more to inherent difficulties in identifying the transactions to be accounted or in applying measurement and presentation techniques that can convey messages that correspond with those transactions and events. In the case of BLG, preparers may be uncertain and face difficulty in identifying performance rights more so than for own business performance. Therefore, most financial information is subject to a certain degree of risk of being less than a faithful representation of that which it claims to portray.

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