Accounting Assignment 1 ABC Learning Centres-updated 02 PDF

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Assignment 1 - Mark High Distinction...

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BSMAN3009 -ACCOUNTING FOR MANAGERS – ASSIGNMENT 1 – ABC LEARNING CENTRES KERRY-ANNE JOHNSTONE -STUDENT NUMBER 30353864

Due Date Sunday 2 September 2018 @ 11.55 pm nd

ABC Learning Centres Limited (ABC Learning) was founded by Edmund Groves and this then-wife in 1988 in Brisbane, Australia as a for-profit child care centre. The primary function of business was operating long day care centres. Assisted by increased demand for child care places through change to government policy, Edmund and his wife started to grow their childcare centres. Newberry and Brennan (2013) identify ABC Learning’s expansion model as a mix or newly developed centres and acquisition of existing centres which as the company grew, they replicated the model. From the 1990’s until it’s collapse in 2008, ABC Learning was Australia’s largest corporate child care provider. At its peak, it’s international operations included countries such as Australia, New Zealand and the United States employing over 16,000 staff (Commonwealth of Australia, 2009). ABC was a publicly listed company from 2001 when it was listed on the Australian Securities Exchange. Brown (2009) report at the time of listing on the ASX, ABC Learning was valued at $25 million and increased to over $2.4 billion by 2006. The structured business model separated child care properties from child care operators. During the years 2004-2005 and 2005-2006 ABC learning achieved close to 100 per cent growth (McIntosh, 1998). This can be evidenced in Appendix A. In 2005, the centres were generating almost $300 million annually and controlled approximately 20 per cent market share (ABC, 2005). ABC went into receivership in 2008 due to increasing debt obligations, leading to the sale of 980 centres. Creditors finally wound up the company in 2010, it was subsequently purchased by Goodstart Early Learning. The initial driver of ABC Learning was an aggressive expansion strategy which was promoted by Edmund Groves and supported by the ABC Learning board. Since listing on the ASX, ABC Learning annual reports state the board’s ambition to increase the ABC Learning brand (Rush & Downie, 2006): “Strategic investments have been made in associated companies to maintain and expand investment in key business segments” (ABC 2005, p. 30). “The board expects that the above developments will provide a wider market penetration and enable the group’s activities to be expanded by up to 50 per cent. This will in turn lead to substantially increased profitability” (ABC 2003, p. 21).

ABC Learnings interests diversified to areas such as educational supplies, vocational training and expressed interest in primary education, suggesting they were looking for dominance in the entire education industry.

There were many key milestones throughout the ABC Learning lifespan which included: 1988, ABC Learning began operations in Brisbane and by 1997 was the single largest private childcare provider with 18 Centres. In 2004, ABC Learning began to pursue their aggressive growth strategy reaching peak market value in 2006 with value of shares at $8.62. In 2008, ABC Learning entered into voluntary administration with a receiver appointed and obtained $22 million in Government funding to aid the transition of centres. Further information relating to ABC key milestones can be viewed in Appendix B. ABC’s major acquisitions began in 2004 with the purchase of Peppercorn Management Group, their nearest Australia competitor. Major international expansion throughout 2006 included acquisitions of La Petite Academy in the United States and Busy Bees Group in the United Kingdom. Key notable acquisitions can be identified in Appendix C. ABC Learning’s board expected growth past 2006 to enable wider market penetration and enable the brand’s activities to expand further (ABC, 2006). In 2007, the Singapore Government bought a significant holding in ABC Learning which promoted great confidence to shareholders. Critics cite many reasons for ABC Learning’s collapse however generally agree that the common accepted reasons for ABC’s failure can be broken down into the following categories:      

Rapid expansion strategy Valuation of intangible assets and goodwill High level of debt Operating cashflow Questionable Accounting Practices Poor Governance

CPA Australia discuss in their video, the negative effects of ABC learning’s rapid expansion strategy. ABC learning issued shares to raise capital however went into astronomical debt acquiring the centres. With the acquisition of new centres being bought over market value this contributed to inflated asset values (CPA, 2010).

During 2001-2007, ABC learning’s balance sheet assets increased dramatically, more than 1000% (CPA, 2010). This was due to the purchase of child care centres and the operating licences. ABC Learning continually boasted of their growing balance sheet, which promoted confidence among shareholders. In the 2005 annual report, it was stated “The balance sheet allows ABC to grow even further as our net assets are well above expectations at $845 million. This is due to the revaluation of all of our childcare licences” (ABC, 2005, p. 5). This image was further broadcast to the shareholders by statements from the CEO such as: “I now believe that ABC has some of the best reporting mechanisms of any childcare company in the world” (ABC, 2005, p. 6). Another inflation to asset values can be evidenced in the 2007 Annual Report. During the acquisition of existing childcare centres, ABC learning increased the licence value on their balance sheet from $58.5m which were originally valued at cost “fair value” to $700m “market value” as this is was the ‘goodwill’ revenue ABC Learning believed they would generate from the assets (CPA, 2010). The rapid expansion strategy advocated by the board, led to enormous debt within the company. McRobert (2009) discusses the ABC board's decision to expand by acquisition led to the company paying out enormous payments that were classified on the balance sheet as ‘childcare licences’. These payments did not generate income and were intangible. Parliamentary reports state that the intangible assets ranged between 71 and 81 percent (Commonwealth of Australia, 2009). ABC Learning had a crisis of liquidity, struggled to pay the interest, salaries and dividends on the amount of debt incurred due to poor cash flow. Hurwitz, agreed that contributions to ABC’s bankruptcy were due to inability to raise capital and insufficient earnings to finance debt (Hurwitz, 2009). In 2007, ABC Learnings recorded loan repayment commitments negative cashflow position of $20 million (CPA, 2010). Poor accounting practices have also been contributed to the company failure. In McRobert’s (2009) report, he discusses the poor accounting practices that underpinned and fuelled the expansion strategy were based on materially inflated operating performance.

Poor corporate governance was also stated as another generally accepted reason for failure. It was identified that Edmund Groves and his wife had purchased their shares in ABC Learning with marginal loans. Purchasing shares is a low risk option, and whilst is legal, by not identifying this to potential shareholders it implies bad governance (CPA, 2009). If shareholders had been made aware of this fact, they may have not had as much confidence in the company or its management. The collapse of ABC learning impacted the company internally and externally. Internally the collapse led to job loss for some employees, with other employees able to be retained after the sale of the company had been completed. Externally, the failure impacted families who were customers of the child care centres. When ABC announced they had moved into voluntary receivership, this caused a disruption to thousands of working parents who relied on their childcare services (Stewart & Mackie, 2011). External impacts also reached the commonwealth government and general tax payer as the government was obliged to preserve childcare initially spent $22 million which was later increased to $24 million, to keep centres open for a period of time after the company was placed into receivership. A short time later, the commonwealth government committed a further $34 million, to allow centres to continue as normal until 31 March 2009 (Hurwitz, 2009). The collapse of ABC Learning was the catalyst for legislative change. The government under Kevin Rudd, strengthened the mechanisms for national policy. In 2009, The Council of Australian Government (COAG) set up a National Childhood Development Strategy. The strategy put in place strong national quality standards in early years learning framework, implemented streamlined regulatory arrangements and introduced a quality rating system (Council of Australian Governments, 2009). This new legislation gave more power to the government to shut down non compliant privately owned centres. Many lessons learned can be obtained from the collapse of ABC Learning from both company management and government regulation and policy aspects. The lessons learned from the failure of ABC have changed the private child care industry in Australia. Lessons can be drawn from company management from lack of focus on core business activities. Poor governance and failure to disclose revenue and assets correctly and appropriately on financial statements made it difficult for auditors and shareholders to identify the real financial position of the company.

Government regulations and polices also have takeaways from the ABC crisis as a eyeopener regarding policy changes and the effect they can have on the market and the negative effect private companies can have by monopolising the market. The National Childcare Accreditation Council stated the adverse consequences when allowing a single provider, the ability to corner a market (Commonwealth Australia, 2009). By implementing the national care rebate, the government lost control it possessed pre-1991 (Stewart & Mackie 2011). During the fallout of ABC centres, government funding propped up the child care industry. This government involvement, providing financial assistance to the company has also set a precent (Hurtwitz, 2009). Lessons learned are also positive, with ABC learning becoming the catalyst for increased momentum for the improvement of childcare nationally (Commonwealth Australia, 2009). ABC Learning had a profitable business in Australia prior to its aggressive expansion strategy. When the government implemented the childcare rebate policy, it led to increased demand for childcare centres. ABC learning saw this as their opportunity to expand their current model which was working well and move toward monopolizing the child care industry. It appeared the government were providing a never-ending bucket of funding, rather not directly but through the parents paying for childcare with a portion funded from the government. It is also important to note, that ABC Learning relied on the funding from government policy. Whilst this was not a cause of their ultimate failure, it provided a huge risk to the company if the government were to change their policies relating to childcare rebates. “The operations of the childcare centres and training college benefit from the continued support by statutory authorities of the Federal and State Governments as well as the Federal Government policies on the provision of subsidies to the childcare industry and benefits to parents of children attending childcare centres” (ABC, 2005, p. 79). The greediness and ambition then led to the accelerated expansion strategy domestically and internationally. ABC learning rather than organically grow the business, chose to acquire existing child care centres. Poor management and lack of due diligence led to paying over market value of the properties and licences and left the company drowning in debt, over inflated balance sheets and insufficient cash flow to pay the bills.

It wasn’t realised the trouble they were in until it was too late. In the 2007 annual report, the CEO stated they had targeted a further 400-500 centre acquisitions for 2008-2011 which would lead to a further increase of 40-50% of their portfolio (ABC, 2007). Had ABC learnings left their ambition and ego at the door and grown their business slowly and organically, they may still be Australia’s biggest child care provider.

Appendices Appendix A Graph: ABC Learning Growth in Centre Numbers

(Source: ABC, 2007 p. 7) Appendix B Table 1: ABC Learning Milestones

1988 1995 1997 2001 2004 2005 2006 2006 2007 2008 2008 2008 2008

ABC Learning Milestones ABC Learning centres begins operations in Brisbane ABC Learning established National Institute of Early Childhood to train internal staff ABC Learning is largest single child care provider with 18 centres ABC Learning is listed on Australian Securities Exchange with 43 centres ABC Learning begins to pursue aggressive growth strategy ABC Learning purchases Judius proprietary limited (toy and equipment supplier) ABC Learning market capital reaches $2.6 billion, $1.0 billion raised from 2002-2006, 100% per annum growth with over 800 centres ABC reaches peak market value of shares at $8.62 Singapore Government buys significant holding in ABC Learning at $7.30 per share December 2007 half year results show drop in pre-tax earnings to $49.5 million ABC Learning announces Morgan Stanley deal, 60% of ABC for $742 million investment, deal later collapses Shares suspend with bank debt amounting to $1 billion, company announces write offs of $437 million ABC Learning goes into voluntary administration with receiver

appointed, Government injects $22 million to keep centres open until year end (Source: Adapted from Social Ventures Australia Review 2012) Appendix C Table 2: ABC Learning Major Acquisitions ABC Learning Major Acquisitions 2004 Acquisition of Peppercorn Management Group Ltd – ABC Learning’s nearest competitor 2006 Acquisition of La Petite Academy in the United States for $330 million USD 2006 Acquisition of Busy Bees Group Ltd in the United Kingdom for $71 million pounds 2006 Acquisition of Learning Care Group in the United States 2006 Acquisition of Kids Campus Limited (KDS) in Australia for $127.9 million (Source: Adapted from ASIC (2018); ABC (2005))

References A.B.C Learning Centres Limited (2003), 2003 Annual Report, Australia A.B.C Learning Centres Limited (2006), 2006 Annual Report, Australia A.B.C Learning Centres Limited (2007), 2007 Annual Report, Australia Council of Australian Governments (2009) , Agreement on the national quality agenda for early childhood education and child care, Retrieved from http://files.acecqa.gov.au/files/NQF/nap_national_quality_agenda_early_ childhood_education_care_signature.pdf Commonwealth of Australia (2009) Provision of Childcare Retrieved from https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Ed ucation_Employment_and_Workplace_Relations/Completed_inquiries/20 08-10/child_care/report/index Commonwealth Parliament, & Parliament House. (2014, October 17). Childcare in Australia: Current provision and recent developments. Retrieved from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/ Parliamentary_Library/Publications_Archive/Background_Papers/bp9798 /98bp09 CPA Australia (2010). The ABC of a Corporate Collapse - Chapter 1 Foundations and Growth. [video] Available at: https://www.youtube.com/watch?v=YYF6JW9vJKo CPA Australia (2010). The ABC of a Corporate Collapse - Chapter 3 (part 2) The Balance Sheet. [video] Available at: https://www.youtube.com/watch?v=B8PoK2S16w0 CPA Australia (2010). The ABC of a Corporate Collapse - Chapter 3 (part 1) The Balance Sheet. [video] Available at: https://www.youtube.com/watch?v=sMZExHXNlJQ CPA Australia (2010). The ABC of a Corporate Collapse - Chapter 2 Cash Flow Statement. [video] Available at: https://www.youtube.com/watch? v=DIIrFV1p78Y

Goodstart (2012). Goodstart: a social investment story Prepared by Social Ventures Australia for the Australian Government Department of Education, Employment and Workplace Relations Retrieved from https://www.socialventures.com.au/work/goodstart/ Hurwitz, A. (2009). The abc of bailing out. Charter, 80(8), 28-29. Newberry, S., & Brennan, D. (2013). The Marketisation of Early Childhood Education and Care (ECEC) in Australia: A Structured Response. Financial Accountability & Management, 29(3), 227-245. McRobert, Andrew (2009) ABC Learning Centres Limited - did the annual reports give enough warning? [online]. JASSA, No. 1, 2009: 14-17. Rush, Emma & Downie, Christian. (2006). ABC Learning Centres A case study of Australia's largest child care corporation. Retried from http://www.tai.org.au/sites/defualt/files/DP87_8.pdf Penn, H (2010). Australia – Childcare reformed in the wake of ABC collapse Stewart, J., & Mackie, K. (2011). When Policy Goes Wrong: The Problem of Transmitted Risk. Australian Journal Of Political Science, 46(4), 669682....