- Dick Smith has entered voluntary administration due to high debt levels and poor liquidity - It announced a $60 million non-cash stock impairment charge and could no longer affirm its profit guidance, sending its shares down 70% - The impairment occurred because Dick Smith's stock was valued at the lower of cost or net realizable value, with some inventory worth $60 million less than it had paid - It began heavily discounting inventory by up to 80% off in a "fire sale" to clear out the old, unsellable stock and raise cash

1. Dick Smith’s in Crisis
• Gone into voluntary administration
• High level of debt
• Poor liquidity
Debt Ratio
(Gearing) = 67%
WCR = 1.23

2. Material Information
• As a public company on the ASX, Dick Smith must publicly announce all
“material information” to the public
Relevance
Information is relevant if it influences the
decision-making of the user by helping them:
• Evaluate past, present or future decisions
• Confirm or correct past decisions
Materiality test
Information should be included if it is:
• Large enough to influence the decision-
making of the business
• Omitting or misstating it would result in a
bad decision
Shareholders
(owners)
Potential
shareholders
Banks and
lenders
Suppliers Government Employees Customers

3. Budgeting
• One “material announcement” public companies provide is their budgets
• In particular, budgeted profit (called a “guidance” report)
• Usually done every quarter – helps users make decisions
1 Jan 31 Dec
“Our profit
was $90m
last year”
1 Jan 1 Apr 1 Jul 1 Oct 31 Dec
“We think
profit will be
$70m”
“We think
profit will be
$100m”
“We think
profit will be
$80m”
“We think
profit will be
$90m”

4. Budgeting – Relevance vs Reliability
• Why do public companies provide “guidance” when it
will most likely not be 100% accurate?
• One way companies try and balance these qualitative
characteristics is by providing a “guidance” range
Relevance
Information is relevant if it influences the
decision-making of the user by helping them:
• Evaluate past, present or future decisions
• Confirm or correct past decisions
Reliability
Information is reliable if it:
• Is free from opinions and estimates
• Is based on data that can be checked or
verified with a source document
1 Jan 1 Apr 1 Jul 1 Oct 31 Dec
“We think
profit will be
$60-80m”
“We think
profit will be
$90-110m”
“We think
profit will be
$70-90m”
“We think
profit will be
$80-100m”
Shareholders
(owners)
Potential
shareholders
Banks and
lenders
Suppliers
Government Employees
Make decisions based on
this information…

5. Dick Smith’s Profit Budget
• Dick Smith’s “guidance” in 2015
• Then a “material announcement”
was made on 30 November
1 Jan 1 Apr 1 Jul 1 Oct 31 Dec
“We think
profit will be…
$45-48m”
“We think
profit will be…
$37-43m”
Special “material
announcement”
• “Management has initiated a review of inventory”.
• “Stock holdings remain above management’s preferred levels”.
• “We remain cautious on the outlook for the Christmas trading period.”
• “We will continue to drive sales, maintaining flexibility on gross margin to reduce inventory.”
• “A non-cash impairment of $60 is required.”
• “The company is unable to re-affirm the profit guidance previously provided”.

6. A New Announcement
• “Management has initiated a review of
inventory”.
• “Stock holdings remain above management’s
preferred levels”.
• “We remain cautious on the outlook for the
Christmas trading period.”
• “We will continue to drive sales, maintaining
flexibility on gross margin to reduce inventory.”
• “A non-cash impairment of $60 is required.”
• “The company is unable to re-affirm the profit
guidance previously provided”.
Understandability
Information is understandable if:
• Users can comprehend its
meaning easily
• Assuming a reasonable
knowledge of business and
economics
“We had a bunch of old
inventory sitting there for ages
that we couldn’t sell.”“We’ve got way more stock
leftover than we thought we’d
have this close to Christmas.”
“Christmas sales will be much
lower than we thought they
would be”
“To sell all this old stock, we’re
going to lower the price… if we
have to, we’ll sell it below cost.”“The old stock we can’t sell is
now worth $60m less than we
bought it for.”“Our last profit guidance of
$37-43m will now decrease at
least $60m. We can’t say if we’ll
even make a profit this year.”

7. A New Announcement
1 Jan 1 Apr 1 Jul 1 Oct 31 Dec
“We think
profit will be…
$45-48m”
“We think
profit will be…
$37-43m”
Special “material
announcement”
70% fall in one day

8. The Sales Begin
As they said they would, during December 2015
Dick Smith tried to sell the old stock at heavily
reduced prices.
• Dick Smith is offering discounts of up to 60 per cent
smartphones, tablets, fitness, toys, GPS and printers, and up
to 70 per cent on TVs, Blu-ray players and audio equipment.
• Dick Smith has kicked off its “mammoth clearance” fire sale
offering discounts of up to 80 per cent off unwanted stock in
what rival retailer Gerry Harvey earlier this week described as a
“suicidal” move.
• “They are not making any money if they sell everything in a fire
sale. They will lose a lot of money. Why would they do that —
that’s committing suicide”, Mr Harvey said.

9. Lower of Cost v Net Realisable Value (NRV)
• The “$60m non-cash impairment” simply meant that the stock could only be sold for
$60m less than its cost.
• This is an application of the rule…
Inventory should be valued at the lower of:
Cost
Net Realisable
Value (NRV)or$400m $340m
This is called a
Stock Write
Down
$60m Expense
NRV = Estimated selling price of stock
 Selling, marketing and distribution costs

10. Dick Smith’s in Crisis
Recording a Stock Write Down Expense…
Stock Write Down [E]
31 Dec Stock control 60m
Stock Control [A]
31 Dec Balance 400m 31 Dec Stock write down 60m
General Journal
Date Particulars
General Ledger Subsidiary Ledger
Debit Credit Debit Credit
31 Dec Stock write down [E] 60m
Stock Control [A] 60m
General Journal
Date Particulars
General Ledger Subsidiary Ledger
Debit Credit Debit Credit
31 Dec Stock write down [E] 60m
Stock Control [A] 60m
Stock Write Down [E]
31 Dec Stock control 60m
General Journal
Date Particulars
General Ledger Subsidiary Ledger
Debit Credit Debit Credit
31 Dec Stock write down [E] 60m
Stock Control [A] 60m
Stock Control [A]
31 Dec Balance 400m 31 Dec Stock write down 60m
1 Jan 1 Apr 1 Jul 1 Oct 31 Dec
“We think
profit will be…
$45-48m”
“We think
profit will be…
$37-43m”
“A $60m Stock
Write Down
expense has occurred”

11. Lower of Cost v Net Realisable Value (NRV)
Why did Dick Smith’s record a $60m Stock Write Down expense before they’d sold the
stock?
Conservatism
Caution must be used when preparing financial
reports
• Losses are recorded when they are expected to
occur
This is done so:
• Assets and revenues are not overstated (too high)
• Liabilities and expenses are not understated (too
low)
Stock Write Down [E]
31 Dec Stock control 60m
Stock Control [A]
31 Dec Balance 400m 31 Dec Stock write down 60m