Impairment of Assets Remuneration it Is Not

Impairment of Assets

Remuneration

It is not in the best interest of Rivercity's Motorway Company to issue such stakeholders large remuneration to the Chief Executive Officer (CEO) Flan Cleary. Flan Cleary received a bonus increment of $370,960 on top of his base salary of $410,670 in the last financial year giving him a total annual income of approximately $831,000.[footnoteRef:1] The issuance of the large bonuses to the CEO and other directors was thus unfair and unreasonable considering the current financial situation of Rivercity Motorway Company.[footnoteRef:2] Awarding the CEO and other top management personnel additional bonuses in the face of economic crisis was not a wise move by the company. Since Rivercity Motorway had announced that it was undergoing receivership. In addition, the company had reported a $1.67 billion loss for the year 2010 and giving the top management additional remunerations summing up to $1 million further led the company into deeper losses. Besides, the chairman of the company had no basis of defending the issuance of the bonuses given the company's current financial position.[footnoteRef:3] [1: Trenwith, C. (2010, September 3). CEO defends 1m in bonuses for clem7 bosses. Retrieved August 31, 2012, from http://www.brisbanetimes.com.au/business/ceo-defends-1m-in-bonuses-for-clem7-bosses-20100902-14ri5.html] [2: Strickland, W., & Strickland, A. (2006). Company Ethics and Conduct. ASI BIC Editorial.] [3: Trenwith, C. (2010, September 3). CEO defends 1m in bonuses for clem7 bosses. Retrieved August 31, 2012, from http://www.brisbanetimes.com.au/business/ceo-defends-1m-in-bonuses-for-clem7-bosses-20100902-14ri5.html]

In line with this, remuneration of the CEO and top managers outweighed the company's performance thresholds and was likely to lower the company's earnings given the low numbers of users and the low car tolls charged. Given the low company earnings and reducing numbers of users and the low car tolls charged, the company's clem7's operators had been forced to reduce the toll to $2 in a bid to boost patronage, and user figures remaining lower than the projected 90,000 cars per day in the first six months.[footnoteRef:4] Besides, during the announcement of the $1.67 billion loss, the company explained that it had little funds to cushion them during the hard economic times and was in talks with banks to help them wade out of the economic stalemate. Therefore the payment of the CEO and the others was unfair and unreasonable considering the company's financial situation.[footnoteRef:5] The company's shares had registered low selling prices closing at 1.7 cents compared to their original selling price of $1. For this reason and the other mentioned above, the Company should have considered before the issuance of the large bonuses to the CEO and other directors. Incentives though are designed to reward employees for their performance, they should be done in relation to the company's share price; a factor the company never considered during the issuance of its bonuses to the top management.[footnoteRef:6] [4: Ibid] [5: Murphy, K., & Jensen, M.C. (2011). CEO Bonus Plans: And How to Fix Them. Harvard Business School NOM Unit Working Paper, 12-022.] [6: Ibid]

The company's argument that the remuneration issued to the top management personnel were done to attract and retain qualified and experienced directors and executives was a farfetched, given the fact that few cars were going through the company's tolling system. This was an issue that was to be factored during the issuance of incentives to the top management based on returns received from the tolling system and not loyalty to the company and efficiency alone. In addition, the company's board usage of independent advice based on comparative analysis of other companies to determine the payouts should not have been applied considering the company's receding fiscal strength.[footnoteRef:7] Therefore, based on these factors, the board should account for issuing the bonuses to the CEO and the others in face of economic difficulties. [7: Murphy, K.J., & Jensen, M.C. (2011). CEO Bonus Plans: And How to Fix Them. Working paper.]

Intangible Assets

There were significant changes according to NOTE17 regarding Rivercity's intangible assets. The intangible assets according to NOTE 17 were 258,738,000 in 2010 from 1,377,460,000 in 2009. The reduction in intangible assets in 2010 was influenced by accumulated amortization and impairment. These two factors recorded negative deviations of $11,720 and $1,560,000 respectively. However, design and development costs, construction as well as capitalized interest recorded significant increases from fiscal year 2009 to 2010. In addition, this downhill shift in the company's intangible assets is likely caused by several factors in the organization's business management.

As outlined in NOTE 17, the first six months traffic volumes indicate that the ramp-up period in 2010 was longer and that the toll prices were much lower than during 2009.[footnoteRef:8] In addition, this could have been due to early operations of the Clem7 toll road which show that traffic levels were lower than the Product Disclosure Statement 2006 and was lower than expectations during 2009. This longer ramp-up period and low prices could have led to the reduction in intangible assets from $1.3 billion to lows of 258 million in 2010. [footnoteRef:9] [8: RiverCity Motorway . (2010 ). Financial Report . RiverCity Motorway Holding Trust Group.] [9: Ibid]

The other factor that could have led to the decrease in the intangible assets could be during the preparation of traffic estimates. The financial report outlines that during the preparation of the traffic estimates, the company used incomplete estimates issued by Integrated Management Information Systems Pty Ltd. These incomplete estimates stood at 90,000 but the company realized that about a third of cars were served daily; a factor that could have led to low returns for the company thus leading to a negative deviation in the intangible assets.[footnoteRef:10] [10: Ibid]

During the fiscal year 2010, design and development costs had significantly increased from $107,805 in 2009 to $134,365.[footnoteRef:11] Additionally, construction costs had also increased during the same fiscal year. These increases could be due to creation of new roads and the company's projection of increasing road patronage. The company had projected that the newly established Clem7 road network was to serve 90,000 cars per day in the first six months; which could have made the company increase these assets. [11: RiverCity Motorway . (2010 ). Financial Report . RiverCity Motorway Holding Trust Group.]