Case Study
Webjet Limited Disagreement with auditor BDO Audit (SA) Pty Ltd
Webjet announced to the Australian Stock Exchange on 28 July 2017 that it had a disagreement with its auditor relating to the preparation and disclosure of items in its financial statements for the year ended 30 June 2017.
The company stated the following:
‘The issue relates to the treatment of transactions associated with the Thomas Cook agreement which the Company entered into in August 2016. BDO has indicated to the Company, that despite its review and subsequent sign-off of the Company’s accounts for the six months ending 31 December 2016, it no longer agrees with the accounting treatment adopted by the company in respect of recognition of the agreement as an intangible asset and of recognition of the fixed management fee payable to Webjet under the agreement as income.’
Specific details of the transaction and dispute relating to the above matters were reported by Webjet to be as follows:
‘In August 2016, Webjet entered into an agreement with Thomas Cook pursuant to which it was appointed to be the preferred supplier for the majority of the volume of Thomas Cook’s complimentary hotel business (Contract). Under the terms of the Contract, Webjet paid £21M to Thomas Cook for the right to enter into the supply agreement, the transfer of around 3,000 hotel contracts and for the implementation costs of the deal. During the initial transitional period, Thomas Cook agreed to pay Webjet a fixed management fee (in installments) in order to retain access to the hotel contracts. Thereafter, Thomas Cook will pay a volume based fee for ongoing access to the hotel contracts. Webjet’s current expectation is that the revenue earned under the Contract, once it becomes a volume based service fee arrangement, will be greater than the fixed management fee being paid during the initial transitional period.
The accounting treatment applied by Webjet to the Contract was to record an intangible asset, to be amortised over a period of 10 years, and then to recognize the fixed management fee as a revenue on a monthly straight-line basis over the transitional period. The volume based fee, which applied after the initial transitional period, will be treated as revenue on an accrual basis.
In December 2016, Thomas Cook paid the first instalment of the management fee to Webjet. Consistent with the accounting treatment above, Webjet included the amount of $5.3 million AUD as revenue in its financial statements for the half year ended 31 December 2016. During this period, Webjet also recorded expenses reflecting the amortization of the intangible asset as well as interest.
In completing its half year review, BDO reviewed the Thomas Cook arrangements and was provided with full access to senior management and the written advice obtained by Webjet from one of the Big 4 accounting firms. ...
Subsequently, BDO advised Webjet that it may no longer agree with Webjet’s accounting treatment of the Contract (i.e. it being recorded as an intangible asset) and Webjet’s recognition of the fixed management fee as income. On 27 July 2017, BDO advised the Company of its final decision in which it confirmed that it had indeed changed it mind concerning the accounting treatment of the Thomas Cook Contract and the transactions under that Contract. ...
For completeness, if Webjet were to adopt the accounting treatment in FY17 proposed by BDO, the $11.00 million AUD revenue recognized by Webjet from the Thomas Cook Contract would have to be reversed, and incorporating FX impact, the adjustment to EBITDA would be a reduction of $11.5 million AUD. Furthermore, the $32.7 m carrying value of the intangible asset associated with the Thomas Cook Contract would be derecognized.’
Required Tasks
What does your Group need to do?
1. Student A–ReportA25%
Assume you are the Chief Financial Officer for Webjet Ltd. You are required to prepare a report justifying why the company should include intangible assets on its balance sheet and treat the fixed management fee as income. In preparing your report you are required to demonstrate and apply your knowledge of accounting theory to justify the accounting treatment you are recommending. Your report should be a maximum of 1200 words and be supported by detailed references and evidence based research.
2. Student B – Report B 25%
Assume you are the Senior Audit Partner for BDO. You are required to prepare a report justifying why the company should not include intangible assets on its balance sheet and treat the fixed management fee as income. In preparing your report you are required to demonstrate and apply your knowledge of accounting theory to justify the accounting treatment you are recommending. Your report should be a maximum of 1200 words and be supported by detailed references and evidence based research.