Journal of Law and Financial Management - Volume 7 (1) June 2008

Editorial »


Implications of the Sons of Gwalia Decision

By Cary Di Lernia

Abstract

The question as to whether aggrieved shareholders should rank equally with creditors in cases of insolvency involving illegal or misleading conduct sits at the crossroads of both insolvency and securities law. Important questions arise at this juncture concerning the fairness, certainty, transparency and efficiency of the treatment of such claims when in competition with creditor claims. In Sons of Gwalia Ltd (admin apptd) v Margaretic [2007] HCA 1 the High Court allowed shareholders to rank equally with unsecured creditors in insolvency cases involving illegal or misleading behaviour, flying in the face of traditional perceptions of the distinction between debt and equity, and the primacy historically accorded to creditors upon insolvency. Whether the resulting legal position is a good fit with the Australian insolvency regime and general law is the subject of a current Corporations and Markets Advisory Committee review. This paper is concerned to illuminate the development of legal thought and precedent in this technical area before focussing on the judgments delivered by the High Court in Sons of Gwalia. The paper advocates legislative change via the abrogation of precedential authority preventing parity ranking of aggrieved shareholder claims to solidify the resulting legal order post Gwalia.

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An Analysis of the Compliance Level and Disclosure Quality of Singaporean Listed Firms

By Khairil Faizal Khairi

Abstract

The issue of goodwill has been a topic of intense debate. In response to growing concerns voiced around the issue, new standards which provide firms the unique opportunity to provide more transparent financial disclosures by reporting goodwill impairments when viewed by financial reporting users are required. The reporting framework in Singapore that deals with the disclosure of goodwill accounting treatment is prescribed under FRS 36 Impairment of Assets. To gain a better understanding of the characteristics of the goodwill reporting regime, developing an understanding of the level of compliance and quality disclosures related to determining the recoverable amount of the CGUs are matters of prime significance. The sample of this study consists of 192 Singaporean listed companies in the Singapore Stock Exchange (SGX) Mainboard for the first year after their transition to FRS. The results indicate that the rate of compliance with the provisions of FRS 36 and disclosure quality were very poor and failed to reach the expectations of standard setting bodies. The outcomes of this analysis also suggest that there is a high degree of complexity in relation to the conceptualisation, measurement and reporting of goodwill faced by reporting entities in Singaporean Mainboard firms.

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FASB EITF 99-16 Provides Necessary Guidance to Avoid Overstatements of Net Income

By Timothy L. McCoy & Margaret A. Hoskins

Abstract

Before merging with Johnson & Johnson in 2001, ALZA Pharmaceuticals Corporation was on the cutting edge of both drug delivery systems and creative financial arrangements. This paper explains the creation of two spin-off corporations by ALZA for the purpose of funding research and development (R&D) activities to be carried out primarily by and for the benefit of ALZA. The agreements between ALZA and its two spin-offs are outlined, the financial statement impact for ALZA is examined, and the disclosures made regarding the arrangements are critiqued. Results show that existing GAAP was circumvented to enhance revenue and net income over a period of eight years. Finally, the paper discusses the potential efficacy of a principles-based accounting standard in preventing the overstatement and circumvention of GAAP and argues for the continuing need for detailed guidance in the standard-setting process.

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