I have read ASX's announcement to the market called "Update on ISX litigation" (have they announced before - is this really an update?- see announcement below). In this announcement, ASX did not state that the ISX current claim is $264m, but ASX did say that it does not believe that it is material at this time and does not require further disclosure to the market.
Perplexed and dismayed, I decided to do some further research to update my understanding of what "material" means and Listing Rule 3.1 states: 3.1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information and includes as relevant examples "the fact that the entity's earnings will be materially different from market expectations" and "becoming a plaintiff or defendant in a
material lawsuit".
Guidance note8 states: ASX considers that their view of materiality "is supported by the decision of Full Federal Court in Grant-Taylor v Babcock & Brown Limited (In Liquidation), note 15 above at paragraph 96: The concept of "materiality" in terms of its capacity to influence a person whether to acquire or dispose of shares must refer to information which is non-trivial at least. It is insufficient that the information "may" or "might" influence a decision: it is "would" or "would be likely" that is required to be shown...
Materiality may also then depend upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event on the company's affairs... Finally, the accounting treatment of "materiality" may not be irrelevant if the information is of a financial nature that ought to be disclosed in the company's accounts. But accounting materiality does have a different, albeit not completely unrelated, focus."
Ok, hmmm, perhaps ASX thinks the likelihood of ISX winning won't occur. But what if it did. What about the anticipated magnitude of the event on the company's affairs? It is obvious if ASX loses, the magnitude of their event on ASX's affairs would be massive (material) - i.e. ASX's manner, right, or effectiveness of enforcing listing rules would change dramatically.
And what about the effect on the "bottom line" of ASX's accounts?
My assumptions, to make this calculation is as follows:
ISX's Claim: $264m
Probable % approved to be paid if successful: 80%
Expected Pay Out based on Probable %: $211.2m
Because I only have 2019 and 2020 accounts, I have projected the 2021 accounts based on the variation found between the 2019 and 2020 accounts and these were: revenue went up .5% and expenses went down 2.6%. So:
| ASX Consolidated Statements | 2020 | 2019 | Projected 2021 | Materiality |
|
|
|---|
| 1 |
| (000) | (000) | (000) | (000) |
|
|
|---|
| 2 | Revenue | $ 1,095 | $ 1,089 | $1,101 | $1,101 |
|
|
|---|
| 3 | Expenses | $375 | $384 | $365 | $576 |
| +Expected ISX Payout |
|---|
| 4 | Profit before income Tax | $721 | $705 | $736 | $525 | 29% | = material affect on bottom line |
|---|
Of course, the problem with this analysis is that in reality, ASX will not have to pay this amount even if ASX loses - the insurance company will, providing ASX has not breached some condition in their legal contract with the insurance company. Therefore the only amount that is probably only relevant to ASX's bottom line is the amount their insurance is likely to increase if ISX is successful and this claim needs to be paid. But wouldn't one need to also calculate in the financial effect of a class action by ISX and ASX shareholders if ISX should win, but that might be, again, the effect only on the insurance company. Should the insurance company be making a disclosure?
Happy for someone to tell me where my assumptions are incorrect, but please base it on fact not emotion.
