The Rise and Fall of Abc Learning

Q1:

The aspects of the business strategy of ABC Learning resulted in increased business risk for the company including: the rapid expansion of market share, over-indebt, and blinding overseas investment.

Rapid expansion of market share: ABC, which at its peak had almost 2200 centres in four countries, also had a flawed strategy to handle significant and rapid growth. When A.B.C. Learning Centers listed on the stock exchange in March 2001, it was a tiny operation with a market capitalization of just $25m. But five years later that number is approaching $2.5bn as the company has quickly become Australia's leading operator of childcare centers. ABC pursued acquisition after acquisition - buying up as many existing centers as they could, and expanding their appetite by establishing more and more sites off the back of increasing debt. The company's acquisitions are getting larger so there is always a risk with this strategy that they will pay too much for a business or be unable to integrate 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 clear ABC's true value 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 enormous amount of money from Australian big four banks: CBA, NAB, Westpac and ANZ). In the wake of the global financial crisis, it couldn't refinance its huge debts, so the administrators were called in. In the end, ABC got too big for its own good, also made itself to the end.

Blinding oversea investment: After becoming the dominant player in the domestic market, ABC Learning has pursued an aggressive overseas expansion. The high levels of debt and dilutive capital raisings that have been required to fund its international ambitions have not pleased investors, and doubts about the company's ability to repeat its local achievements in the US market have weighed on the share price. As the case told, artificially create apparent shareholder value may be misleading to potential investors in the company.

Q2:

Intangible assets are defined as identifiable 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 primary forms of intangibles - legal intangibles (such as trade secrets, copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities, collaboration activities, leverage activities, and structural activities). Legal intangibles are known under the generic term intellectual property and generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price.

ABC Learning valuated billions of dollars worth of now discredited intangible assets that made up most of ABC's balance sheet. It increased profits rapidly through acquisitions, and cause the underlying problem when valuated the assets it acquired. Especially 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 means 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: Accounting standards may take the form of general principles, relying on interpretation and judgment by the financial statement preparers before they can be implemented. Historical cost depreciation provides a better example of a principles-only standard. Whereas, Rule-based: Alternatively, standards may take the form of a series of rules, limiting the flexibility and use 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 accounting standard is potentially very flexible with those new and changing products and environments. As such, they should also require less maintenance. For this case, applying principle-based accounting 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 firm's actual performance. While the rule-based accounting standard may include a lack of flexibility, hence 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 concern over consistent and reliable interpretations across entities. In this case, the system may be less regulated,