Season Ltd is an Australian public company, listed on the Australian Securities Exchange. Season Ltd operates in a volatile industry, and the market price of its shares is highly sensitive to its earnings. The company’s annual general meeting is to be held soon and the CEO is concerned, expecting to be attacked strongly by a group of disgruntled shareholders.

One issue that these disgruntled shareholders are expected to focus on is Season Ltd’s depreciation policy. They will claim that the annual reducing-balance depreciation charges are excessive – that the company’s conservative depreciation policy seriously understates annual earnings per share, causing the shares’ market price to be artificially low. In support of this claim, the shareholders are expected to point to the fact that when Season Ltd announced a 10% increase in profits in the most recent half-year, the company’s share price actually fell (from $38.90 to $38.10). It is rumoured that the shareholders are considering suing Season Ltd’s management and board of directors to “recover the resulting loss in market value suffered by Season Ltd shareholders, relative to shareholders in companies with less conservative depreciation policies”.

Season Ltd’s CEO has asked you to help prepare a defence against the expected attack on the company’s depreciation policy and recent share price movements.

Required:

Write a report summarising your recommendations for how Season Ltd’s CEO should respond to the expected attack. You should refer to relevant Capital Markets Research literature to support your recommendations. (Note: A discussion of the legal aspects of the shareholders’ case against the managers is not required.)

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