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155575201295Financial Statement Analysis:The Bmw Group

Charlotte Gross

6900096000Financial Statement Analysis:The Bmw Group

Charlotte Gross

5673725201295Business Finance II

2420096000Business Finance II

Table of Contents

TOC o “1-3” h z u HYPERLINK l “_Toc386971986″Executive Summary PAGEREF _Toc386971986 h 3

HYPERLINK l “_Toc386971987″Introduction PAGEREF _Toc386971987 h 4

HYPERLINK l “_Toc386971988″The BMW Group PAGEREF _Toc386971988 h 4

HYPERLINK l “_Toc386971989″The History PAGEREF _Toc386971989 h 4

HYPERLINK l “_Toc386971990″Corporate Governance PAGEREF _Toc386971990 h 5

HYPERLINK l “_Toc386971991″Organizational Structure PAGEREF _Toc386971991 h 5

HYPERLINK l “_Toc386971992″The Business Strategy PAGEREF _Toc386971992 h 6

HYPERLINK l “_Toc386971993″The Product Lifecycle PAGEREF _Toc386971993 h 7

HYPERLINK l “_Toc386971994″Competitor Analysis PAGEREF _Toc386971994 h 7

HYPERLINK l “_Toc386971995″Competitiveness PAGEREF _Toc386971995 h 8

HYPERLINK l “_Toc386971996″Financial Analysis PAGEREF _Toc386971996 h 8

HYPERLINK l “_Toc386971997″Financial Performance PAGEREF _Toc386971997 h 8

HYPERLINK l “_Toc386971998″Sales PAGEREF _Toc386971998 h 9

HYPERLINK l “_Toc386971999″Profitability PAGEREF _Toc386971999 h 10

HYPERLINK l “_Toc386972000″Capital Structure PAGEREF _Toc386972000 h 11

HYPERLINK l “_Toc386972001″Ratio Analysis PAGEREF _Toc386972001 h 11

2) Describe the capital structure of the company, what kind of debt is used, calculate and comment on debt ratios. Benchmark with main competitors of the company.3) Explain the company’s policy in terms of leasing and whether it uses operating and/or financial lease.4) Ratio analysis: Apply techniques learnt in class, trying to include added value comments related to the ratio result (suggestion: benchmark with main competitors and try to reach conclusions related to differences). Evaluate Company’s leverage, liquidity, efficiency, profitability and market value.5) Evaluate company’s working capital management, as well as short-term and long-term financial policies.6) Finally, give your view on the following question: If you were the new Company’s CFO, what changes would you suggest, in terms of financing strategy and financial policies or choices? Explain your recommendations.

The BMW Group: Executive Summary

This report seeks to provide the overall performance of BMW group and the strategic measures put in place by the company to survive in an environment that is very competitive. The company has a rich history of success in the motor industry as it involves services such as developing, assembling, selling cars, manufacturing, and a variety of financial services. The company has in the past been ranked the most valuable car brand name in the whole world as it has 140 global sales offices and employing over 100,000 people across the world. The report will provide the basic organizational structure of the company and how corporate governance has contributed to the success of the company. Due to the fact that the company has a target market whose customers vary greatly in their tastes and preferences, the company has put in place strategies that will ensure that all its customer needs are satisfied across the world. The report also explores the strategies that the company has put in place to project and forecast the future in order to improve the efficiency of the company in the dynamic global market.

The number one determinant of success of any company is the maintenance of leadership and efficiency through innovation. This report presents the measures adopted by BMW to counter its major competitors in the motor industry. Proper financial analysis and investment in development and research are some of the factors identified to give BMW a competitive advantage and thereby making it continue being the market leader. The company has also used the strategy of brand acquisitions to diversify its operations in different target markets. The report also presents a summary of financial performance and most notably how its sales volume has performed globally. The financial report also presents the company’s profitability compared to its performances in the previous years. The last part of the report focuses on the company’s management of its capital in relation to its objectives and the mission statement.IntroductionThe Bavarian Motor Works were launched in 1916. It is a German automobile, motorcycle and engine manufacturing company, headquartered in Munich. Their automotive segment consists of developing, manufacturing, assembling, selling cars, off-road vehicles & spare parts and accessories, while they as well offer financial services such as car leasing, retail customer & dealer financing and insurance activities.

The BMW GroupBMW is part of the “German Big 3” among Mercedes and Audi, however as well is a global company as it was recognized and awarded by many market research companies such as Frost & Sullivan or Forbes to be the 1st global company of 2013. Further, BMW was ranked by MillwardBrown as the world’s most valuable brand name in the car industry. It is one of Germany’s largest industrial companies.

It has 140 global network sales offices worldwide and employs over 100,000 people in engineering, manufacturing, R&D and sales. The company has 29 production and assembly line sites in 14 countries on 4 different continents. Its main sites are found in German cities such as Leipzig and Munich and in Shenyang, China.Additionally, BMW Groups global supplier network consists of more than 1200 suppliers.The HistoryThe company first produced airplane engines until it switched to a car production in 1929. However, BMW was forced into the production of airplanes during the WWII. The early expansion of subsidiaries and plants into foreign countries made the company internationally known from the early beginning of existence. BMW launched its first production plant in a foreign country in 1972. It was in South Africa, in Pretoria where the plant was named Rosslyn. With this plant BMW back then began to produce vehicles to provide them to the British, Indonesian and Australian market. One year later they established a distribution center in France. 1975 BMW North America was established. In 1998 they constructed their first production plant in the U.S. Since then the company has been growing with some ups and downs however constantly, being present in.

In the year 1994 BMW took over the British Rover Group, which they sold a few years later again. However, keeping the brand MINI, which belonged to the Rover group. In 2002, then they took over Rolls Royce as well. Through these 3 brands, MINI, Rolls Royce and BMW the group covers the premium and luxury market segment well and strong. Additionally, this targeted three different types of customer types. MINI targets through its advertising campaigns an urban, modern and young audience, whereas Rolls Royce targets the top 1% of the social class and BMW all premium segment interested audiences. In 2012 and 2013 the automotive company introduced the BMW i3 and i8 as well as the electric and first hydrogen vehicles. These achievements made them the leading sustainable car company worldwide due to their fuel efficiency.

Corporate GovernanceBMW AG is a stock corporation based on the German Stock Act. It consists of three representative bodies: The annual general meeting, the supervisory board and the board of management.

Organizational Structure

As demonstrated above, BMW consists of three main divisions, the automotive, the motorcycle and the financial services division.

The automotive division is divided up into three individual sectors. These sectors present individual car brands such as BMW, Mini and Rolls Royce. The motorcycle division consists of BMW and Husqvarna motorcycles. The last sector is the financial one. It offers among other activities car leasing and car sharing programs, insurance activities and customer deposit business.

Target Market

The overall target audiences of the BMW Group are customers found and interested in the premium car segmentation. The main importance of the company is the customer satisfaction, as the customer is the base of their existence and for all their actions. Depending on the individual brands, meaning Rolls Royce, MINI and BMW, the specific target audience varies to a certain extent. The different target market of the individual brands creates diversity and differentiation in the company itself.

The Business StrategyThe BMW Group mainly focuses every approach and decision on sustainability, looking at the long term effects in the future. Their forecasting and projecting of market trends, individual economies and continually increasing company efficiency is their key to success, belonging to the premium products and services providers worldwide.

Therefore, as the world continues to change at a rapid pace, individual mobility remains a focus of political regulation and national industrial policy. BMW Groups mission statement is: “The BMW Group is the world’s leading provider of premium products and premium services for individual mobility.” This already underlines the drive of wanting and maintaining to be the best and the number one company in the car industry worldwide.

In year 2000 BMW developed of new strategy specializing on premium segment in German & international automotive market. The launching of that new business strategy, the “Strategy Number One” was in 2007.

The strategy “Number One” consists of a common automotive platform strategy, where the BMW group shares strategic alliances with Alfa Romeo & Fiat to decrease manufacturing costs. It focuses ultimately on profitability and to enhance long-term value in times of change. It applies to technological, structural as well as cultural aspects of our company. The model below demonstrates each step by step factor of the “Number One” strategy. The ultimate factor, the access to technologies and clients is achieved through their continuous heavy in investing in research and development (R&D). This allows the company to maintain and increase its efficiency and leadership through innovation, new and improving technology and guarantees its future sustainability.

2104390554990The Product LifecycleThe constant introduction of new and existing models can be seen to avoid a negative ROI.

Competitor AnalysisBMW’s strongest and main competitors are Audi, Mercedes and Smart. Further competitors are Porsche, Toyota, Jaguar and Lexus. The return on investment (ROI) comparison graph below indicates the steady growth after the crisis, whereby the BMW Group is the second best performing next to the Audi Group.

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CompetitivenessThe strong investment in research and development provides a strong advantage due to the coming up with innovative and technological development of products and tools before its competitors. This long term thinking makes them continuous market leaders. An example would be the development and launching of increasingly sustainable vehicles such as the first Hydrogen car worldwide.

The quick and response and long term thinking towards changes in the market are essential to remain market leaders. BMW has expanded into foreign markets way before the crisis and were one of the first automotive companies to invest in Asia. However, they saw the potential in Asia and the BRIC countries (Brazil, Russia, India & China) as well as the recognition of the saturated European market and its high risk due to the PIGS countries (Portugal, Italy, Greece & Spain).

Another aspect is their constant introduction of new and current products together with their unique design creating permanent market penetration.

Further, through the acquisition of various brands, such as Mini Rolls Royce and BMW the BMW group has achieved a strongly diversified market presence with completely different target markets and marketing approaches.

Financial AnalysisFinancial PerformanceThe past, recent and current financial performance is shown in the table below. One can see that despite the minor reduction in numbers of the year 2008, one year after the crisis, the numbers in revenues and especially in the net profit have recovered and increased constantly throughout the 5 years. The revenue of the BMW Group of 2012 was €76,848 million.

Sales-2952751094740The BMW Group financial performance is not only reaching a yearly all time high overall, the company also achieves that in each sector when one takes a closer look at the sales. The automobile brands sector increased by a total of 10.6% having sold 1,845,186 units from 1,668,882 units in 2011. The motorcycle sector grew by 3.1% as well breaking the sales volume record with 117,109 BMW and Husqvarna units.

The financial services sector also made progress in the number of retail customer contracts worldwide by 12.1% to 1,341,296 units and the leasing and financial contracts with retail customers and dealerships by 7.1% to 3,846,364 units.

Profitability3810001316355The profitability over the time frame of 2000 until the third quarter of 2013 is demonstrated in the table below in Earnings before interest and taxes (EBIT). After the economic crisis, the BMW Group had a profit all time high performance of over approximately 4% above the normal average. However, this peak is fading off slowly, when one takes the quarterly EBIT percentage into account of the year 2013.

Capital StructureWhen it comes to the management of BMW’s capital the company is focusing as mentioned in their objectives and mission statement above on the long term approach, which is also mirrored in their Number One strategy. Additionally to its objectives the company has the goal to provide their shareholders with a fair return.

-2019303781425The capital structure can be influenced by the amount of risk of their assets and certain economic conditions. However, the BMW group takes a large amount of financial instruments and factors into account to find the optimal capital structureand “matching maturities” for the financial management.The debt is managed by having a fixed target debt ratio of the capital. Below in the table is the current structure comparison of the end of the year 2012 and 2011. One can see that the total capital has increased by €4,787. The proportion of the total capital however has shrunk minimally. The target debt ratio is nowhere exactly stated, but it can be assumed that it lies by 60%.

Ratio AnalysisThe added value is a very valuable financial performance indicator. It measures whether the BMW Group is “meeting its minimum requirements for the rate of return expected by capital providers”. In other words, it measures the financial success of the company.

1304925472440The added value formula is the following:

Working Capital Management

Working capital management is an essential function of especially short term and long term financing of a company. The BMW Group has an efficient working capital management, as when many companies struggled due to the economicsovereign debt crisis in the year 2008 and 2009. However, BMW recovered in the year 2010 almost fully again. The company even had the importance of the working capital management stated in their annual report of the year 2009, saying “Stringent working capital management is a further key parameter for managing the business”.

Working capital management basically exists to manage the highly important and essential key to survival of a business, the liquidity of a company. It further is responsible for the management of the cash in- and outflow, cash funds, investments and equity.

Financial Statements

Name

Institution

Date

Financial Statements: How to Navigate in them

Introduction

It is important to determine the financial position of a firm. In most cases, organizations become successful when they prudently carry out financial management and publish the statements as ways of ascertaining their health at any given time. Seconding this is that, financial statements can be applied to woo investors into the firm. This is backed by the knowledge that financial statements either are applied wholly to determine whether the firm is at shutdown, break-even point, or profit making. This research will assess four financial statements of the following companies; General Mills (US), Meiji Group (US), Caterpillar (US) and Komatsu Japan. The case analysis will attempt to examine several factors that makes-up a financial statement, and as a result, prove the firm viability in relation to operations. The research will attempt to prove to that determining the financial position of a firm is categorically imperative in deliberating the future success factors of the firm.

Assignment 1: Case Study Analysis

Balance Sheet

The components that are disclosed

General Mills

According to the Fiscal year 2011, General Mills experienced the following components of stockholders. The company offered pension and other post-retirement benefit plans amounting to about US$220.8 M.

Meiji Group

For the year ending March 31, 2013, Meiji group disclosed an interest cost of US $24, 726, Service Cost $ 42, 362, Amortization of net retirement benefit obligation at transition as $20066, Amortization of actuarial loss at $70266, and Amortization of Prior Service cost US $ 585. The contribution to employees pension Fund was $ 2098 while the additional retirement benefits paid on a temporary basis $ 335, and others amounted to US $ 11,078. These figures present the wider Meiji Group CSR framework and how the group is committed towards achieving decisive goals in relation to CSR.

Preferred Stock

Yes, both companies do have preferred stock on shares. The companies are offering preferred stock shares. For the special features, the group has enabled members to possess shares and voting rights in all profits or losses. This affects the equity investors who do not provide sufficient financial resources vital in supporting the group’s activity. In addition, the group has a legal structure specially mandated to oversee these provisions.

Report treasury shares

Yes, the companies do report to treasury shares. In the year 2010, General Mills shares increased its provision for treasury shares to a magnitude US $ 595 Million this partially offset by $ 568 million related to stock-based compensation plans. In addition, the company improvised Additional paid in capital by $ 13 million from fiscal 2010, which was partially related to stock compensation activity. On the other hand, Meiji increase treasury to common stock by 9,000 shares. The two provisions can be attributed to the purchase of shares that are less than a unit.

Income Statement

Basic and diluted earnings per share for each company

In the fiscal year 2011, the basic earnings per share increased from $2.32 to a present of $ 2.80. General Mills reported diluted EPS of $ 2.70. However, this was still an increase from $ 2.24. This can be attributed to losses from the market-to-market valuation of certain commodity position and grain inventories. In addition, the economic recession did affect the total consumption. On the other hand, Meiji group recorded a $ 24 net income per share in the year ended 2013. This was a significant increase from the previous year, which stood at $ 9.6.

Have the companies reported any discontinued operations

In each of the fiscal year, 2011 and 2013 for General Mills and Meiji Group none of the companies registered a discontinuity of activities.

Stock compensation plans

General mills have recognized a straight-line over the vesting period. The group has been recorded in SGA. Showing the cost of total sales in the consolidated statement, aggregate earnings, and allocation to each of the reportable segments in the results. The value of compensation plans that include income tax benefits is at $ 546.2. In contrast, Meiji Group has a subsequent stock compensation of $ 1,500 and the reporting plans are under the fair value of intrinsic worth since they are segmented into two food and pharmaceuticals.

Financial Ratios

Compute the following ratios. Also, interpret and assess each group of ratios for the company. What type of story are the ratios telling the analyst?

General Mills

Profitability ratios:

Gross Profit Margin = Gross Profit/ Total Revenue 2, 428/ 14.880 billion = 1.631

Net profit margin = Net Income/ Sales Revenue 1,803/ 14.880 = 0.121

Return on stockholders’ equity = Net Income/ Total Equity 1, 803/ 6,612 0.27 of a dollar

Liquidity ratios:

Current ratio = current assets/ current liabilities 18, 674/ 12,063 = 1.54

Quick ratio = cash in hand+ cash at bank+ receivables / current liabilities

= 619+1, 1623/ 995.1 =12.03

Inventory turnover

Inventory Turnover = Cost of goods sold/ average inventory

Average inventory = Beginning Inventory +Ending Inventory/2

= 1,344+ 1,609/ 2 = 1, 476.5

Now Inventory Turnover = (8,926+3,192+17.4.4.4)/ 1,476 =8.22

Inventory Turnover =8.22

Leverage ratios:

Debt-to-assets = Total Liabilities/ Total assets

= 12062/ 18674 = 0.64

•Debt-to-equity

Times-covered ratios = (Net Income + Taxes) / Interest Expense

(1,803.5 +721) / 360 = 7.06

7.06

Meiji Group

Profitability ratios:

Gross Profit Margin = Gross Profit/ Total Revenue 3747/ 11030 = 0.3397

Net profit margin = Net Income/ Sales Revenue 162.99/11053 =0.01465

Return on stockholders’ equity = Net Income/ Total Equity 1, 803/ 6,612 0.27 of a dollar

Liquidity ratios:

Current ratio = current assets/ current liabilities 341211/ 312124 = 1.093

Quick ratio = cash in hand+ cash at bank+ receivables / current liabilities

= 179179+1947729/350267.31 =6.0722

Inventory turnover

Inventory Turnover = Cost of goods sold/ average inventory

Average inventory = Beginning Inventory +Ending Inventory/2

= 7,083,000+ 8,218,000/ 2 = 4500

Now Inventory Turnover = (7,908+3, 793+274)/ 4500 =2.611

Inventory Turnover =2.611

Leverage ratios:

Debt-to-assets = Total Liabilities/ Total assets

= 4,649,000/ 3,206,000 = 1.45

Debt-to-equity

Times-covered ratios = (Net Income + Taxes)/ Interest Expense

(179,128 +130413) / 16,470 = 18.79

7.06

What type of information do you find in footnotes to the financial statements?

Although the two companies had significant difference, there were significant similarities in how each of the companies managed growth. Growth is calculated on the income statement as well as the balance sheet on a three-year basis. On the other hand, cost management ratios are evident to take many forms. In the two reports, financial statement analysis and profitability analysis, the developers looked at the costs as a percent of total sales – evident in the two. Secondly, the financial statements have considered balancing. Everything is considered which include product positioning and the company product strategy. Consequently, a low-cost profit strategy seems appealing to the two companies.

While it is evident that the cost of sales is high, it is good to note that the companies have developed a coherent financial analysis mechanism. In this case, if General Millers or Meiji desired to manage cost, then schemes of profit maximization would be the key towards achieving decisive goals. As such, the two companies have experienced an upward growth strategy in relation to sales. As a result, it is good to argue that sales are changing in-accordance to the total volumes of produce. According to the financial statement, a higher expenditure on inputs is resulting in better output as well as better remuneration.

Balance sheet, income statement, or other measures such as ratios the most informative?

Yes, the two companies approach is informative on the desired information. Primarily, the goal of developing a balance sheet or a financial statement is entirely obliged to determine the company current state in productiveness. In this case, a balance sheet or a financial statement assists the respective stakeholders of this firm to determine the current position of the firm. Skinner (2011, pp. 206) joins this discussion in what the journals discusses as derived necessity to create authentic administration protocols.

Consequently, accounting and administrative controls are adequate to ensure that different transactions are executed according to standards and financial that is required in most of these developments. From the financial statement, each item can be analyzed independently. As such, we see that the total operating expenses (which in this case include costs of revenue) in both balance sheets has reduced substantially as the firms increased their activities. The cumulative results of these changes can be explained by the percentage changes of total income, which automatically means a marginal change in tax ratio.

Advantages and disadvantages of using ratios for analysis

Rations are vivid since they give a more accurate data regarding the firm current situation. In fact, the cost accounting approach in the above financial statements/ report are valuable since they do not have any of the problems of regarding the data used to prepare them they are indeed rigid requirements. As for this case, Easton (2002, pp. 75) joins the debate in his argument on what he contemplates as achieving acceptable accounting principles. Acceptable accounting principles are accomplished since any desired adjustment can be realized in the course of developing the report. Secondly, reports become easy to develop and reorganize. Thirdly, through this approach, it becomes possible to ensure that trends are established. In fact, comparing two or more things in a company is possible. Fourthly, this approach highlights important information in a simpler concise manner, and in this case, it is easier to judge the company be using ratios in studies. However, Easton (2002, pp. 75) further assess that ratios explain the relationship between the companies’ past information while ideally users are concerned about the current information. Secondly, the comparison of the two companies is not appropriate since one company is based on the service industry while the other company is operating in goods dispensation. Therefore, in this regard, the ratio approach is not constructive since it fails to meet the sense of the target. Lastly, the ratios tend to use assumptions, and this approach can be contested significantly.

Assignment 2: Session Project

Part I

Caterpillar and Financial Statements

Caterpillar makes a series of equipments, which include large-scale turbine generators capable of powering cities and earthmoving equipments. Its closest rival is Komatsu based in Japan that manufactures similar product and have the same color and branding. Caterpillar has implemented various technologies all geared towards combining mechanical and electronic platforms on a back-to-back methodology.

Because of constant blending with other industry, Caterpillar financial position has faced significant challenges. Firstly, the recession of 2008-2009 triggered low economic growth in the company although significant microeconomic decline was experienced in the 80s. Secondly, falling oil prices and stiffened economies are primarily responsible performing poorly in the general economic analysis. Thirdly, it should be noted that rivals (Komatsu) had adopted Caterpillar Maru, and due to the good political ties between Japan and developing countries, Caterpillar was losing influence of business. Caterpillar made a loss of US $ 1B in the late 1980s and early 90s.

Scholarly, it has become appropriate to examine how Caterpillar survives in the capital industry. Primarily, Caterpillar took advantage of growth by applying decisive technologies as answers to the needs of the dwindling financial statement. Secondly, the company continued to introduce new models the line excavators which used high-pressure hydraulics and thus, affecting positively to the market. Caterpillar interests me because it announced 1.1 billion investments even after suffering a 20 percent loss in total revenue and subsequently one billion losses in the same decade (Spirkina, 2008, pp. 900).

Ideally, Caterpillar management demonstrated to the public that the nature of a financial statement did not constrain the firm from achieving vital goals.

Pratt (2010, p. 4) joins this argument in what the texts argues as re-costing investment strategy. In this case, the company in question does not use financial statements to determine its weaknesses or inability but the feasibility of achieving its vital goals using a collective approach. In fact, through financial statements, the company can determine areas of investments, and subsequently invest in these areas, taking to account the firm needs a much wider approach in relation to dealing with finances. Based on this approach, I will benefit collectively in understanding the importance of financial statements in motivating the firm total health.

Assignment 2: Session Project

Part II

Financial position of Caterpillar

As established earlier in this discussion, Caterpillar closest rival is Komatsu and the company does have keen business strategies all geared towards ensuring that Komatsu does not prevail in key Caterpillar markets.

Compute:

Return on Assets =

Caterpillar

Return on Assets = Net Income/ Average Total Assets

= 1,011/ 35, 138 =0.0287

Versus

Komatsu

= 1.344/24653 = 0.0545

Profit Margin =

Caterpillar

Gross profit margin = gross profit/ total revenue

208/ 711 =0.2925

Versus

Komatsu

2003/18456 = 0.1085

Assets Utilization Rate =

Revenue/ Total Assets

Caterpillar

711/ 35, 138 = 0.0202

Versus

Komatsu

1845/24653 = 0.07486

Assess your company’s competitive financial position.

After a close analysis of the above report, it is good to argue that the Caterpillar edges out rivaling Komatsu in the financial profitability section. The following internal analysis has identified the main sources of information based on strategic development. In this case, it is prudent to argue that Caterpillar has enjoyed significant performance in the last decade. This is distanced from the company performance in 1980s, which saw Komatsu charging negatively against the company. Then it is good to argue the 80s investment in the capital assets led sustainable competitive advantage.

Compute the free cash flow for your company and its competitor.

Free Cash Flow for the company

ITEMS Cost of debt 14% EBIT

Tax rate 34% Investment

Cost of equity 16% Amount borrowed

CASH FLOWS TO STOCKHOLDERS Year 2011 2012 2013

Earnings before Interests taxes 3,803 6,999 8,692

Less interest -246 -363 -482

Earnings before taxes 11,307 15,734 18,023

Taxes 968 1,720 2,528

Net income 2,700 4,928 5,681

Investment by shareholders -24 -24 -14

Net cash flow to shareholders 3 3.36 3.36

WEIGHTED AVERAGE COST OF CAPITAL Proportion Weighted

Cost of of Market Cost of

Capital Value Capital

Debt (after-tax) 5.00% 11.50% 4.80%

Equity 9.00% 69.50% 14.50%

Weighted average cost of capital 11.30%

Caterpillar relative cash position

In assessment, Caterpillar demonstrates a higher degree of roll returns and guarantees superior returns. The increased number of financial assets is what makes the overall returns. In this case, the roll returns pushes the company to relatively high cash position for inquiring cash on investment to a spot position. In analysis, investing in financial investments ensures that the company has derivative advantages. A financial asset directly offers the benefit of avoiding the finance cost and technically disadvantage of losing the dividend. According to Caterpillar income statement, it is good to note assets are primarily responsible for forward contract, which generates positive roll return.

Assignment 3:

3.1 Managerial accounting versus financial accounting

In context, both management and financial reports seek to adhere to the fundamental concept of cost measurement and recognition when contemplating of future, presents, and past. Financial accounting measures and reports do follow strict guidelines and largely those accepted accounting principle in reporting to past operations to external users. However, on the other hand, management accounting guides a firm on the desired decisions, creation of effective at their jobs and on overall improvement of the aggregate organization’s performance. Secondly, managerial accounting is not a subsequent of financial accounting but it player a wider role in the process of tax accounting, financial accounting, and information analysis. Thirdly, managerial accounting reports for internal use and in this case, it reports to user driven needs. In fact, this approach is decisive since it encourages the use of innovative presentation techniques proper data analyses and to a greater regard expand the usefulness of information to stakeholders.

3.2 Explain the contribution margin concept/computation and when to use the information

The contribution margin of revenue received is chiefly responsible for the enhancement of variable costs of producing a product. This concept is important and complicated than it my first appear. In computation, it is necessary to consider the nature of constrained resource and the impact that they do have on relative organizational development. The basic formula for calculating contribution is contribution margin = price – variable cost. In this case, the fixed cost is paid in any event in an excess of the revenue is paid on variable costs and is used to provide extra money to the organization. As this is the case, the general rule to achieve a contribution margin is based on the financial viewpoint. The organization is required to proceed with elements that should contribute directly and inherently to improve the overall financial life to the organization. As a result, one can use this information when computing the aggregate financial situation of a firm. In fact, these computations will naturally guide a firm to determine when to reinvest (for instance, Caterpillar when to buy more tractors) and when to hoard.

Conversely, it is good to acknowledge that management accounting examines and compare, the past, present, and the future of the firm. Indeed, management accounting looks to the important past, present, and the future of the firm. As a result, management accounting specifies the structural cogitation of analysis. They can be applied towards examining converging industries economic markets and operation decisions. Therefore, in the analysis is positive to argue that management accounting is applied widely in determining what should be done in the financial accounting.

References

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Duncan, P. J., & Easton, S. A. (2002). The pricing of High Yield Equity Notes. Accounting and Finance, 42(3), 239-249.

Skinner, D. J. (2011). Accounting Research in the Japanese Setting. The Japanese Accounting Review, 1(2011), 135-140

Spirkina, G. V., & Efimova, L. B. (1987). Steels for parts of the propulsion system of industrial Caterpillar tractors. Metal Science and Heat Treatment, 29(12), 899-901

Pratt, J. (2011). Financial accounting in an economic context. Hoboken, NJ: Wiley

Principlesofaccounting.com. (n.d.). Chapter 17 Multiple Choice Questions. Retrieved from HYPERLINK “http://www.principlesofaccounting.com/questions%20-%20%20multiple%20choice/chapter%2017%20-%20multiple%20choice.htm” t “_blank”http://www.principlesofaccounting.com/questions%20-%20%20multiple%20choice/chapter%2017%20-%20multiple%20choice.htm

Unknown. (n.d.). The Role of Management Accounting in The Organization. Retrieved from HYPERLINK “https://docs.google.com/viewer?a=v&q=cache:MWZE_XMqFOUJ:www.swlearning.com/accounting/albrecht/management_2e/expanded/exp_01.doc+Financial+versus+managerial+accounting%3F&hl=en&gl=us&pid=bl&srcid=ADGEESjWheQRI7nzm3i5Zmwsd3la9aWDQDy9N3RbBWiQns9ic71gNJoRxVa75E4KWSi0GthsbXrfNpSEQ_UZvr0QenNE-Ut6XU_9v6Yda0SVULodDfzIGRSb8Pf30b9I3qN0lWmUoXzZ&sig=AHIEtbRDmHJSiuRsS9v6FrbERAz9cqTPEw” t “_self”https://docs.google.com/viewer?a=v&q=cache:MWZE_XMqFOUJ:www.swlearning.com/accounting/albrecht/management_2e/expanded/exp_01.doc+Financial+versus+managerial+accounting%3F&hl=en&gl=us&pid=bl&srcid=ADGEESjWheQRI7nzm3i5Zmwsd3la9aWDQDy9N3RbBWiQns9ic71gNJoRxVa75E4KWSi0GthsbXrfNpSEQ_UZvr0QenNE-Ut6XU_9v6Yda0SVULodDfzIGRSb8Pf30b9I3qN0lWmUoXzZ&sig=AHIEtbRDmHJSiuRsS9v6FrbERAz9cqTPEw

Financial statements of Enron Waste Management

Executive Summary

Financial statements are developed to respond directly to reflect on the company financial history, current situation and project the future. In fact, through financial statements, a firm will be a better position to orient strategic management. Consequently, issues related to excesses, and losses can be singularized out this point. Financial statements have been applied to woo investors to get committed to the firm financial health. However, improper auditing of financial statement are applied to portray false figures and the firm illegal portrayal. In fact, recent strategies in the fraud arena have focused on using financial statement and a lucrative feint is overstatement of profits. The commencing analysis will attempt to examine the nature of fraud

Enron Waste Management

In October 2001, Enron Waste Managers conducted one of the most corrosive accounting fraud by twisting accounting practices and defrauding stakeholder over $ 6 billion American dollars. The fraud took centre stage in a span of five years. As a result, stakeholder presentations began complaining about the situation. The company senior management violated and aided corrupt individuals to process fraud incidences. Consequently, the management aided violations of antifraud, reporting and record/keeping provisions of federal securities laws. As part of the technicalities, Enron top management overstated earnings to a magnitude of 1.4 billion and this was a seductive approach to attract new investors.

Technically, fraudsters affiliated to the Enron, adjusted the SEC document to influence wooing of the funding. The management hired independent auditors who would earn additional fees for configuring reports to fraudulent orientation. To achieve this, waste management officials presented an illegal document called Proposed Adjusting Journal Entries. In fact, officials constantly refused to make corrections and instead of entering on closed door agreement with auditing bodies. This forced one auditing Anderson to write off the accumulated errors over ten year period this affecting reliable accounting practices. For this conduct, Andersen was forced to pay $ 220 million to Waste Management shareholder and $ 7 million to SEC.

However, this repayment was not satisfactory since waste management shareholders further lost $ 20.5 billion U.S dollars. Further to this, over eleven thousand Enron were laid off as part of the downsizing program to repay the amount resulted in the fraudulent activities. However, Enron had to pay Andersen along with the consulting fees and spin/off firm. Although Andersen was finally paid its auditing dues, it should be recalled that Andersen one of its largest client.

Following the development of Enron case, it became integral to respond to corporate scandals and this forced the American Congress to develop Sarbanes Oxley Act of 2002. The US congress envision a law which would minimize fraudulent. Many hearing in response to Enron case were devoted towards examining the role played by Arthur Andersen in influencing external information statement. Enron as well performed audits on WorldCom and Waste Management. Through the influence of Securities and Exchange Commission (SEC) banned Anderson from accepting new audit from clients.

Explain the causes of the frauds using the fraud triangle

There are two primary causes of fraud in an organization. One ethical factors causing greed, and two a general will to conduct fraud with intent to appeal to the public and potential investors. The list below shows potential causes of fraud in an organization. Firstly, this report identifies lack of transparency as the lid cause factor of fraud. Secondly, procuring of an non/independent internal audit department. In this case, an organization internal audit department is not independent and does not report according to the standard expectations. Thirdly, excessive complex organizational structure is as well primarily responsible for hindering revenue streams. Fourthly, improper provision of accounting controls. The organization constantly ignores documents such as bank reconciliation and this can be an early indication of corporate fraud. Sixthly, lack of proper moral direction from the executive encourages the development of unprofessionalism in auditing system.

To achieve corporate deceit, fraudsters develop a financial triangle one that strategizes on the nature of corporate fraud. On the top is the perceived opportunity. Fraudsters will convince the top executive on the possibility of a ghost opportunity. The goal is to make sure that the opportunity appears very legitimate on the short and long run. The fraudsters move to the next level, which is the incentives pressure. The pressure to build incentives is primarily oriented from the ability to orient fraud pressures constantly. Thirdly, the fraudsters create a rationalization policy one that seeks to approach the situation in more repellent. The goal here is to minimize visibility entirely.

Compare and contrast the causes of the frauds across the three international jurisdictions.

There are several similarities that explain similarities of the fraud cases in three jurisdiction, Australia, United Kingdom and United States, with the following companies HIH Insurance and Onetel of Australia, Enron and waste management of US, and Barings Bank and Equitable life Ins (UK). The three situations have common similarities and to some extent numerical differences. Firstly, as part of the similarities, it is notable that the three situations do involve top management in influencing decisions made and consequently altering the quality of auditing. However, as noted, there are a number of differences in each of the corporate fraud. In this case, the quality of auditing system is heavily debatable. One will notice that the level of involvement of auditing companies naturally differs. While Anderson, the principal auditing company for Enron was an integral engineer in Enron, other firms the situation is different with the auditing firms not being in central fraud planning section.

Part 2 XYZ Ltd

Balance Sheet Year 1 ($) Year 2 ($)

Assets    

Current Assets    

Cash 45,000 15,000

Accounts Receivable 150,000 200,000

Inventory 75,000 150,000

Fixed Assets (net) 60,000 60,000

Total Assets 330,000 425,000

Accounts Payable 95,000 215,000

Long/term Debt 60,000 60,000

Total Liabilities 155,000 275,000

Stockholder’s Equity    

Reserves 25,000 25,000

Paid/up Capital 75,000 75,000

Retained Earnings 75,000 50,000

Total 175,000 150,000

  330,000 425,000

INCOME STATEMENT    

     

Net Sales 250,000 450,000

     

Opening Inventory 55,000 75,000

Purchases 145,000 375,000

Closing Inventory /75,000 /150,000

Cost of Goods 125,000 300,000

Gross Margin 125,000 150,000

Operating Expenses    

Selling Expenses 50,000 75,000

Administrative Expenses 60,000 100,000

Net Income 15,000 /25,000

Additional Information    

Average Net Receivables 150,000 210,000

     

Required:

Apply horizontal and vertical analysis to the financial statements of XYZ Ltd

Horizontal, reports each amount on the financial statement in comparison to another item. Each item on the balance sheet is configured in relation to the total assets.

Cash

45,000/ 45,000=100%

Against

15,000/45,000=33.33%

Accounts Receivable

150,000/150,000=100

Against

200,000/150,000=133.33

Inventory

75,000 /75,000=100%

Against

150,000/75,000=200%

Fixed Assets

60,000/60,000=100

Against,

60,000/60,000=100

On the other hand, the Vertical analysis ensures the percentage amount is presented in relation to sales. The figures are listed from the income statement.

Sales, 250,000/250,000=100%

Against

450,000/250,000=180%

Cost of goods

125,000/125,000=100%

Against

125,000/300,000=240 %

Gross Margin 125,000/125,000=100%

Against 125,000/150,000=120%

This analysis attempts to reveal relationships among items on the financial statement and trends of individual items, which occur with time. The relationship guides this report in making a better and sound judgment on what current performance of the company. In fact, the two major techniques vertical analysis, and horizontal analysis are imperative in aiding the understanding of the firm’s health.

b) Undertake ratio analysis for years 1 and 2.

Ration analysis in financial statements is applied to obtain a proper indication of a firm total financial performance in key areas. This approach will guide this report to determine debt management rations, assets management rations, market value rations, and profitability rations. The approach further guides computation ratios and facilitates the comparison of the firm total industry competitiveness. The accounting information provided is based on the nature of historical costing mechanism. Hence, it is good to note

Current Ration = Total Current Assets/ Total current liabilities

Year One= 330,000/155,000 =2.12

Against Year Two = 425,000/275,000= 1.54

Inventory Turnover= COGS/ Inventory

Year one, 125,000/ 75,000=1.66

Against year two=300,000/150,000= 1.5

Fixed Assets Turnover= Days 365/ Net Fixed Assets

Year One, 365/60,000=0.006

Against Year Two, 365/60,000=0.006

Total Assets Turnover = Sales/ Total Assets

Year One, 250,000/330, 000=0.75

Against Year Two, 450,000/425,000=1.05

Profit Margin = Net Income/ Sales

Year one, 15,000/250,000=0.06

Against Year Two,

25,000/450,000=0.055

Return on Assets= Net Income/ Total Assets

Year One, 15,000/330,000=0.045

Against Year two, 25,000/ 425,000=0.058

Identify any trends and abnormalities in the financial statement and provide possible explanation.

A key thing which as been identified from this financial statement is limitation from ration analysis. The financial statement places emphasis on indicators and key rations. It is abnormal since there is no single measure, which is capable of capturing relevant and important information on the company. In this company, the calculation on different rations happens to be the starting point. Analysis requires development of ratios, understating of reasons and forming expectations. The overarching rule of a ration is in fact ought to be and depends on the nature of particular of the industry that the financial statement is adopted from.

Consequently, from the financial statement one will notice the ratios are expected to be generated on a benchmark framework. After looking at the financial statement, one fails to notice this framework. Additionally, from the above financial statement, one will notice that they will be non-operating items; for instance, judgements include effects on the comparison between year and year two. While this approach seems legitimate, it is more meaningful to ignore effects on items and the financial ratio. For this reason, one will notice that ratios mean that there is a comparison between past ratios is not specified on given industrial or business standard. The financial statement is basically blank and does not demonstrate proper or what can be considered coherent information.

To analyse this, the best possible option is applying financial statement, which does place greater emphasis on the summary of key ration and current ration. However, as stated, there is lacks a single approach that seek to merge a single approach into a collective financial statement. It should further be noted that the possibility of engaging on window dressing presents a working challenge. Based on these two, one will notice that the above financial statement are ratios computed using standard numbers and this presents serious problems which can evoke fraudulent activities.

d) Identify the related accounts that the forensic accountant might want to further investigate.

A forensic auditor may identify the contra account and how it can be applied to offset inefficiencies in the financial statement. A contract account builds normal debit balance and creates a credit balance. The contra account is vital since it is deducted from the balance of the related assets accounts in the financial statement and resulting difference is understood as the book of assets. Improvising the contract account ensures that journal entry reduces the overall book value of assets.

In fact, the forensic accountant will be in a better position to derive a contra assets accounts. This is regular account that carriers a debit balance and also carriers a credit balance. The advantages of a contra account are that it carries doubtful accounts on accumulated depreciation depression. The accounts also create an allowance for doubtful account, which offsets a company accounts. Secondly, a contra account creates a liability account. The credit balance created has a common liability on accounts. This ensures that cash receivables are issued on a bond on maturity.

The contra account also creates a contra revenue account. This allows the creation of sales allowance, sale returns and sale discounts. The accounts also creates total amount of company’s revenue.

Conclusion

Topic; Citibank

Name

Course

Instructor

Date

Introduction

A fundamental issue in macroeconomics is the consideration of whether or not the markets, if left alone can routinely bring about a long run economic equilibrium. If the market operation was done freely and in due course resulted in a total employment level of national income with firm economic growth and prices, then there would be no need to call for government intervention in the macro economy- no use of supply side policies and fiscal monetary exchange rates. The fact is that every government intervenes by use of their macroeconomic policies in a bid to attain specific policy objectives as well as improving the entire performance of the economy (Warsh 2006, pg 35).

A good climate for operating a business is the first factor every business person or group is looking for, this climate is vital to private companies led growth, development and investment, which in turn is very crucial for income growth, generating employment and poverty reduction (Warsh 2006, pg 39). Successful policies to advance the investment climate calls for development of sound facts based on the constraints and problems to private company’s investment. With the rise of macroeconomic policies, more business opportunities are coming up in different parts of the world and the results are encouraging (Warsh 2006, pg 41). These policies have provided a good climate for business transaction in Citibank and there is now a universal consensus that a good climate is very crucial for most private companies’ led economic growth. Researchers have noted that a good climate for doing business provides incentives and opportunities for companies from micro enterprise to global enterprise to create job opportunity and invest productively. Due to the good climate created by macroeconomic policies in a number of businesses, it has been noted that the investment climate molds the risks and costs of doing business, including the hindrances to competition, all of which highly influence the impact and task of the private companies’ in economic and social development, poverty reduction and economic growth (Warsh 2006, pg 44). A good business climate has been perceived as a key issue in international policy debates on promoting the private companies’ development.

Studies have shown that, in order to improve the business climate a firm can streamline the multitude regulations and rules that make life difficult for businesses of which drives the business people into the informal sector. Citibank is an example of a company that has applied the act of rules and regulations, these kinds of rules govern the registration of upcoming businesses and the capability of the companies to hire more employees and get credit, transact and enforce contracts and reinvest. The macroeconomic policies play a major role in every company for example the federal monetary policy, whereby a loose fiscal policy drives the interest rates down creating an opportune time for consideration of funds borrowing (Knoop 2004, p. 41). However macroeconomic policies can affect any business organization in a positive or negative way.

Financial statues of Citibank

The Citibank is among the top list in syndicated loans with over two billion dollars reported in the past one year. However Citibank was once bailed out with five hundred and ninety million investment dollars and it was nearly ruined by the savings and loan crisis, following real estate fall down that forced the United States into a serious recession (Walter 1996, pg 30). Currently some investment firms believe that more billion dollars will be needed by Citibank so as to save this global financial giant. As every investor across the globe wants to save Citibank, there will come a time that majority of this investors will turn towards this bank in a different way where they will be throwing good money after bad in a fruitless effort to save it. Most clients are not ready to buy the Citibank’s stock while for others it’s a game of risking. Although the reporters were not saying the business was about to go down due to its depreciating financial rates, it was very clear that, this world wide financial giant was affected badly due to the bad loans in the United States real estate sector.

These are the latest report available of Citibank Quarterly report as from December 2005 to December 2007. (Table by Turk 2008)

  31-Dec-05 31-Mar-06 30-Jun-06 30-Sep-06 31-Dec-06 31-Mar-06 30-Jun-07 30-Sep-07 31-Dec-07

Total Liabilities 1,381,500 1,471,783 1,511,123 1,628,383 1,764,535 1,898,883 2,093,112 2,231,153 2,069,108

Stockholder Equity 112,537 114,418 115,428 117,865 119,783 122,083 127,754 127,113 113,598

Stated Leverage 12.3 12.9 13.1 13.8 14.7 15.6 16.4 17.6 18.2

% Equity/Liabilities 8.1% 7.8% 7.6% 7.2% 6.8% 6.4% 6.1% 5.7% 5.5%

  Intangible Assets 47,879 48,025 48,760 48,894 49,316 53,710 62,206 63,600 63,891

Tangible Assets 1,446,158 1,538,176 1,577,791 1,697,354 1,835,002 1,967,256 2,158,660 2,294,666 2,118,815

Tangible Equity 64,658 66,393 66,668 68,971 70,467 68,373 65,548 63,513 49,707

Real Leverage 21.4 22.2 22.7 23.6 25.0 27.8 31.9 35.1 41.6

T-Equity/T-Assets 4.5% 4.3% 4.2% 4.1% 3.8% 3.5% 3.0% 2.8% 2.3%

 

Nevertheless the Citibank is trying to appreciate its financial transaction rates and from the table above, it’s very clear that, from year 2005 to current Citi’s leverage has appreciated in each quarter from 12.3-18.2 times (Turk 2008, no page). This indicates that the equity as a percentage of the liabilities has depreciated during this season from 8.1 percent to 5.5 percent. The infrequently traded assets, which stood at twenty eight billion dollars, were valued on the basis of the company’s own estimates. Studies have shown that the Citibank may end up making losses on the CDOs (Turk 2008, no page). It took more than twenty billion dollars in credit associated losses in the last years and the conditions are getting worse given that the United States is in a recession. It is still not easy to comprehend how a bank as large and old as Citibank allowed itself to get swallowed into the sub prime leading markets in such a huge way. The Citibank was the only bank that understood the basic rules and regulation of leading; this was brought about by their years of banking expertise and billions of dollars of cash treasury (Walter 1996, pg 35). Currently the Citibank future is left up to Arab billionaires and eventually the United States federal government with the threat of its economy excepted to remain in recession up to the end of year twenty ten. The city group corporation has currently an approximation of three hundred and six billion dollars in risky assets which are the major issues the bank is working on, however, in spite of this negative report the Citibank is working very hard to stabilize itself once again in this economy. There is still hope for Citibank with the help of the government who are currently investing billions of money.

References

Knopp, T. Recessions and Depressions: Understanding Business Cycles. London. University Press, 2004.

Warsh, D. Knowledge and the Wealth of the Nation. London. Norton publishers, 2006.

Walter, Wriston. Citibank, and the Rise and Fall of American Financial Supremacy. New York. Crown Publishers, 1996.

Turk, J., (2008). The Markets Oracles. Retrieved on 23 November 2010, Available at; HYPERLINK “http://www.marketoracle.co.uk/Article4088.html” http://www.marketoracle.co.uk/Article4088.html

Financial Status of My Firm: Onthehouse

Name

Institution Affiliation

Date

Financial Status of My Firm: Onthehouse

Executive Summary

The information that I am going to share in this report will reflect on my firm’s 2012 and 2013 financial statement. The information will seek to clarify that my made losses for a general decline in activities. For this reason, the report will examine the number of the subsidiaries affiliated to my firm, and this information will seek to clarify the percentage ownership that my firm owns each of the subsidiaries. This information will illuminate on the later sections of the report that will explore in depth the income statement and the balance sheet. The second section of this report will clarify on the nature of the in contemporary transactions.

Does your company have subsidiary companies? How can you tell whether your company has subsidiary companies or not?

A subsidiary company is a company that is owned partly or fully by the main company. The main company naturally acts as a holding company and provides administrative provisions, policies to the daughter corporation.

My company has plethora subsidiaries located in Australia and New Zealand. Some of these are; Subsidiary of Console Australia Pty limited and Subsidiary of Console New Zealand limited and Subsidiary of Residex Pty Ltd. These subsidiaries have been listed in the company financial statements. Besides, they have been offered equity interests and each of the revenue has been registered on the financial statements. A close example of these subsidiaries is Suncorp subsidiary and REA group (Seltzer, 2010, p. 21).

If your company does have subsidiary companies (and, yes, every listed company I have ever come across has subsidiary companies), how many subsidiary companies do your firm have? Has this varied over the past three years?

From the year 2011 to 2013, My Company has acquired nine subsidiaries. The firm’s most subsidiaries are in the property industry. As stated earlier, all subsidiaries are in either Australia or New Zealand.

Name Country of Incorporation Equity 2012 Equity 2013

Onthehouse.com.au.Pty Limited Australia 100 100

Console Australia Pty Limited Australia 100 100

Console New Zealand Limited (ii) (vi) New Zealand 100 100

PortPlus Pty limited Australia 100 100

PortPlus (NZ) limited (ii) (vii) New Zealand 100 100

Agent Apps Pty Ltd (iii) Australia 100 100

Residex Pty Ltd (iv) Australia 100

Residex Technologies Pty Australia 100

The Ad Network Pty Ltd (v) Australia 100

What activities are conducted in your company? Why does not your firm simply conduct all its activities in a single company rather than in a group?

The firm is common in the businesses providing housing Mortgages to Australians and New Zealanders people. For specialization purposes, the firm does not desire to conduct its business in one house since this is financially constraining. Secondly, the goal of profit maximization is a key objective for the firm. Most of these firms provide services to other companies/ clients, which is not part of my company business. Additionally, the subsidiary companies are not necessary mortgage companies. Most of these companies either are in service resale or involved in direct technology orientation (Investopedia. (n.d.). My company naturally consolidates a company on a single console or a double console brand. Our company subsidiaries have been full consolidated and transferred to the group. The process of acquisition is based on accounting audits that determine the value of the group to the acquiring company (Investor Centre. n.d.). Any company carrying out the process of acquisition does this always. The approach enables the development of non-controlling interests in the results and equity as demonstrated separately in the statement of comprehensive income statement and financial position. In this case, my company obtains control over the subsidiary. This can be accounted in the group as a jointly controlled entity. Additionally, the group measures the fair value of identifiable net assets as considered on the bargain price in profit or loss parameters (Seltzer, 2010, p. 34).

The group also operates interests in joint ventures. A joint venture is a contractual arrangement between two or more parties entitled to undertake an economic activity. The jointly controlled entities are incorporating the group’s financial statement by applying the equity method of accounting. This is further achieved by integrating the group’s share interests on net assets of the jointly controlled entity. The existing entity carries a statement about the financial position at cost plus post-acquisition changes of the group’s share of net assets (Rexel Worldwide. (n.d.).

Does your firm have non-controlling interests (or minority interests) in its balance sheet and income statement? Why or why not?

According to Investopedia, Non-controlling interest is a stake corporation investor has not influenced on the company’s decision. Indeed, the majority of investor positions are considered as non-controlling interest since its ownership is insignificant or relative to the total number of share being offered (Investopedia, 2014).

Our group has non-controlling interests and they are presented in the group’s financial statements. These are presented in the profit and loss controlling subsidiary of the reporting period. In this case, losses are allocated to the parent and the non-controlling interests may exceed their respective interests. Thus, the company continues to offer subsequent periods of excess as well further losses located in the parent and non-controlling interests. However, in our company, non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of comprehensive income and statement of financial positions. However, my company does not have non-controlling interests in the balance sheet. For all the eight subsidiaries, my company owns one hundred percent of all shares and this ownership has been maintained with time (Investor Centre, n.d.).

If your firm does have non-controlling interests (or minority interests) in its balance sheet and income statement, what are they? What do these items mean to you?

As stated, non-controlling stipulates that the subsidiaries in our firm do not have a decision making power. In addition, the firm subsidiaries are not accrued to losses incurred by the firm. This means that the subsidiaries are autonomous and cannot suffer from losses incurred by our firm. If your firm does not have non-controlling interests (or minority interests), identify the firm of another person in our course that does have non-controlling interests. I identified Jacob Martins choice of company Relex Holdings Australia as a firm that had non-controlling interests. This firm has invested in technology, and all of its subsidiaries are in the mining or engineering sector (Seltzer, 2010, p. 47).

Discuss with that other person in our course what they think non-controlling interests are for their firm. Describe carefully what they think their firm’s non-controlling interests mean to them. Do you agree or disagree with them?

The firm Ideal Electrical Supplies specializes in supplying complete data, and lighting services and devices to home. The firm was established in 1990 operates within five locations. The firm operates over forty-five lighting showrooms in Victoria and Queensland. Rexel holdings Australia acquired Ideal Electrical in the year 2009 on 72 percent basis. After conversing with my friend, I realized that Ideal Electrical Supplies are presented by the parent entity Rexel holding in the group financial statement. This is included in the equity section of the consolidated financial statements, albeit segregated from the parent entity stockholders’ equity interests. In addition, the long tradition of displaying Ideal Electrical supplies as subsidiary category is reflected on a double basis of debt and equity (Relex, 2014).

Additionally, I leant that under the income of each component and the comprehensive income statement is attributed to controlling and non-controlling interests. In this case, minority interest will not be displayed as a deduction in the income statement. As a result, this attributes will not be included in the equity section of the consolidated financial statement. In fact, Rexel holdings push them below debts sections (Accounting Information, 2014).

Why do firms show non-controlling interests in their balance sheets and income statements? ….. What do these items tell us?

When a firm does not control 100% of the total share, it means that the subsidiary firm does have a collective justification in the decision making process. Secondly, the parent firm consolidates all assets and liabilities. This shows the interest of the outside shareholders as a non-controlling interest. In this case, a specialty of IFRS standards requires that a non-controlling interest is indicated in the balance sheet within the group’s equity. This prompts the indication of equity on a separate section from the financing side of the balance sheet (New investor Perspective, 2014).

Secondly, it is important for the parent firm to produce the general-purpose reports. General purpose financial reporting is to present financial information about the reporting entity. This information is directed to present useful and potential equity investors, creditors, and lenders thus making decisions in the capacity of capital providers. In this case, financial reports communicate information about entity economic resources, transaction events, and circumstances that change the nature of the reports.

How are your firm’s investments in subsidiaries treated in your parent company’s accounts? … Why or why not?

In my firm, investment in subsidiaries is treated as separate legal entities. Each prepares its own financial statement, but a copy is forwarded to the parent firm for clarification. However, ownership of not less than 50 percent of voting stock required in accounting recognition of control. Because of their special relationship, they are viewed for external financial reported purposes as single driven entity. Hence, there is a derivative need to combine the financial statement into a single set of statement named consolidated financial statements.

This item appears on the firm consolidated financial statements. My company considers this a convenient for economic, legal, and tax to operate parent-subsidiary relationships. The inventory accounts include the inventory held and its subsidiaries. Hence, the consolidated income statement includes the sales account of the total revenue from the sales by the company and its subsidiaries. The overview is vital in helping management, creditors, and stockholders of the company progress in meeting its goals (Investopedia. (n.d.).

Participate in the discussion forum “General Discussion” on Moodle.

My company has eight subsidiaries companies which six of them in Australia and two in New Zealand. The direction of my discussion was centered to investigate whether my company subsidiaries were presented in my company and whether the benefits were instrumental to the development of the firm. In the year 2012, my company acquired three companies and integrated them into business. This was impressive since the revenue was impacted on EBTDA growth. In fact, growth met 2012 prospectus forecasts. This led to an increase by 19% and continued strong operating cash flow. In fact, my company has realized that periodically investment to potential firms adds the total value of reinvestment (New investor Perspective, 2014). Now my question is, according to this result, do you consider my firm profitable to the nature of investments?

For the part of the answer, my company has consistently demonstrated strong financial performance in the year 2013 financial year. In the year ending June 30, 2013, the operating revenue had increased by 19 percent to 24.1 million up from 20.3 million. This was after acquisition of the three companies. Secondly, the decision to expand our workforce by a magnitude of 40 percent resulted to an approximately 8 million increase in revenue.

Discuss the issues on how your firm shows a group of accounts rather than simply the accounts of a single company

Group accounts should comply with regulations 5 (1) (b) as if the undertakings included in the consolidation were a single company excepts where the group will qualifies as a small or medium-sized group. These groups of accounts are presented in the company financial statement. Firstly, the firm request for separate disclosures in respect to the auditing of the accounts in questions and each of the services. Separate disclosures are required in respect to the services supplied to the company and its subsidiaries. Secondly, there was a disclosure is not required of remuneration of receivable for the supply of service.

According to the discussion from the income statement, the amounts on the balance sheets inventory naturally differs based on the subsidiary. In this other words, the inventory is reported on the amounts. Thus, in my company, the interpretation of what should constitute of a fair and genuine view varies with time on the requirements of accounting standard being pursued by at the time.

How helpful did you find these discussions… What insights have you gained?

After discussing with others, I realized the differences in having non-controlling interests and not having them. I discussed with my friend Jennifer to determine the understanding of non-controlling interests. The discussion later found out that the advantages of that my firm is accrued to for owning 100% of a firm.

Step 2: Intercompany transactions

After closely looking the consolidated income statement for the year ended 2013, one will notice that my company combined revenues and expenses of the parents and subsidiary companies. This means that my company had complex activities between the company and its subsidiaries. Combining was essential since it would prevent double counting of revenue and expenses. This list of transactions is notable after observing my company performances and they are included in the group’s financial accounts. Firstly, income and expenses related to receivables, loans, bond indebtedness between my company and its subsidiaries. Secondly, there is a complex interrelation between income and expenses. Thirdly, there are sales and purchases of goods and services parents and subsidiary (Seltzer, 2010, p. 63).

My company realized that the only way to maximize earning is by jointly participating in cash management plan. This has allowed the intra-company borrowing in order to reduce reliance on third party loans. When you look closely at the balance sheet, you will realize that subsidiaries were either borrowing from each other or borrowing to the main company. This has aggregate maximized the total earning that my firm has with time generated (New investor Perspective, 2014).

Does your firm’s parent company and subsidiary companies have the same balance date?

Yes, since the companies are owned entirely by my company on a 100 % basis, it is appropriate to have the same balance date. Since both my company and the firm subsidiary operate on the consolidated balance sheet, goodwill will appear on the assets representing the portion. Running the same balance data is based on the knowledge that cost of investments over book will not be allocated to any specific assets. Indeed, my company pays less than the book value for its investment in the subsidiary. This is derived from the reason that the marketable securities are among least reliable of estimates. Thus, my accounting principles board advises from applying negative goodwill but this is not applied in all cases.

Does your firm have Goodwill in its balance sheet? Why or why not?

Yes, my firm improvises goodwill on its balance sheet, and since it owns the subsidiaries 100 percent. Our valuation expert accepts 10 percent of the net earnings as takeover price. This then added as goodwill amortization. This then implies that earning is adjusted upwards to include net annual earnings of all subsidiaries plus the parent firm (Investopedia. (n.d.).

If your firm does have Goodwill in its balance sheet, what is this item? … If so, why? If not, why not?

The items on the goodwill provision include the foreign currency translation. According to the balance sheet, my company made profits. Profits were attributed to the owners of the Onthehouse holdings limited. The firm offered and identifiable net assets of 295; hence, goodwill arising on acquisition stood at 1,502. In 2012, my firm earned 2141 and 2013 was 1008 in profits and this could be attributed to a shortfall in general operations. This means that my firm made a loss of 1,133. This further means that each subsidiary is treated independently from one another.

Did your company acquire (or dispose of) any companies or businesses during the past three years? …

My company acquired three companies courtesy of Residex Pty Ltd (iv), Residex Technologies, and The Ad Network Pty Ltd. The firms have showed good prospects of success as seen from their financial performance. The financial statements were also clean and had not involved themselves in any underhand dealings that would later mar the reputation of my company.

Clear description of your firm’s disclosed inter-company transactions If the company does not disclose the information, students could either talk about the intra-group transactions of other person or their understanding of intra-group transactions.& Identify and discuss takeover/acquisitions/business combination & Describe and reflect on your discussions with others

Intra-group transactions refer to activities that are carried between the group and the parent company. For the parties, these transactions refer to members of the same groups who conduct similar transactions in the general intra-group entity. In relation to my companies, it is notable that transactions between entities in an economic environment are recorded in separate accounts. This will require any minimum amounts owed to, or are receivable between members of a given economic entity within my company inter-entity transactions. For this reason, the inter-entity transaction creates loss or profits realized by the economic entity which are eliminated when developing consolidated accounts.

After conversing with my friend Audry Hao, I realized that the consequent acquisition of the parent company to subsidiaries was primarily responsible for increasing existing capital stake reaching desirable thresholds. These increases in overall stake portfolio were primarily responsible for the expansion of limited liabilities within companies. In fact, Hao made me understand that his company choice losses were evenly distributed reducing the overall risk involved in the production. However, different subsidiaries are at given thresholds in terms of financial development. As a result, intra-group transactions result to deductible or assessable temporary differences. For this reason, Hao made me understand that these differences are caused by adjustment of the amount of assets for accounting purposes. Hence, eliminating entries causes temporary differences between accounting and accrued tax.

I had to explain to Hao that taking acquiring new business was for the best interests for my company. Taking over and acquiring Residex Pty Ltd (iv), Residex Technologies Pty, and The Ad Network Pty Ltd (v) was a collective strategy since it allowed welcoming of investors and entrepreneurs. New investors and entrepreneurs will expand the capital base for financing other ailing firms within the holding. As a result, this year is expected to be prosperous in relation to total growth in assets and activities.

Bibliography

Money Instructor. 2014, Accounting Relationship: Linking the Income Statement and Balance Sheet | Money Instructor. (n.d.). Money Instructor. Retrieved May 16, 2014, from http://content.moneyinstructor.com/1496/linking-income-balance.html

Investor Centre. (n.d.). â onthehouse.com.au. Retrieved May 16, 2014, from http://investors.onthehouse.com.au/

New Investor Perspective. 2014. Dynamic risk management-accounting in an age of complexity. IFRS -. Retrieved May 16, 2014, from HYPERLINK “http://www.ifrs.org/Alerts/Publication/Pages/New-“http://www.ifrs.org/Alerts/Publication/Pages/New-Investor-Perspectives-article-Dynamic-risk-management-accounting-in-an-age-of-complexity-April-2014.aspx

Investopedia. (n.d.). Non-Controlling Interest Definition | Investopedia. Retrieved May 16, 2014, from http://www.investopedia.com/terms/n/noncontrolling_interest.asp

Rexel Worldwide. (n.d.). Rexel – Electrical Supplies Distribution – Rexel – Electrical Supplies Distribution – Rexel Worldwide. Retrieved May 16, 2014, from HYPERLINK “http://www.rexel.com/en/rexel-“http://www.rexel.com/en/rexel-worldwide/ideal-electrical.php?do=2&id=5

Seltzer, J. C. 2010. An Approach to Issuance Modeling Of Financial Statements. Revista Universo Contábil, 6, 114-128.



Financial Reporting and Compliance by Oil and Gas Companies in UAE

Student Name:

University:

Subject:

Instructor:

November 4st, 2013.

Financial Reporting and Compliance by Oil and Gas Companies from United Arabs Emirates (UAE)

Abstract

This study proposal intends to investigate the level of financial reporting and compliance with the IASs (International Accounting Standards) by oil and gas companies from the UAE. Based on the study sample of 60 oil and gas companies, the study establishes that financial reporting and compliance has improved overtime, from 60% in late 90S to 90% in 2010. In spite of strong cultural and economic ties among UAE states, there was considerable variation in financial reporting and compliance among oil and gas corporations based on the internationality, leverage and size. The study offers de jure evidence as opposed to de facto harmonization within the region.

Introduction

Speedy globalization of financial markets has resulted to increased demands for more globally comparable accounting and financial reporting. Harmonization of financial and accounting reporting is one approach of promoting a more consistent and transparent reporting and in that aspect, IASB (International Accounting Standards Board) generates global accounting standards for utilization by private sector companies or entities across the globe. Generally from 2005, there has been extensive adoption of International Accounting Standards Board standards on compulsory basis. Accordingly, there is growing interest in reporting comparability being attained as well as the role of enforcement bodies and auditor promoting compliance.

This paper aims to investigate the level of financial reporting and compliance with the IASs by gas and oil companies from UAE and the factors related to compliance. The UAE states has from 1986 progressively made IASs mandatory for all or some listed companies. This background enables us to examine the application of IASs in various economically important states that were early IASs’ adopters. Compulsory use within the UAE states offers an opportunity to explore the role of enforcement bodies and external auditors in promoting IASs financial reporting and compliance.

The UAE setting has a number of features that are important for the study of compliance. Some states within the region have been early compulsory IASs adopters, which imply their firms have greater experience with the application of IASs in a compulsory as opposed to voluntary environment. Within the UAE setting the study can examine the relationship of the state regulatory frameworks and compulsory compliance over a period of time. In some nations such as the European Union, companies have more recently adopted the IASs or their application has been voluntary as in the case of Germany and Switzerland in the early 90s. This study contributes to the literature by examining financial reporting and compliance within a mandatory setting. Moreover, it offers useful insights regarding the relationship of compliance levels, IASs adoption and the effectiveness of enforcement bodies and independent auditors. As a result of the extensive adoption of the IASs, the focus has now been geared toward the level upon which firms comply with IASs within the mandatory setting. This study is among the few if not first to offer empirical evidence regarding this matter. Although the study only looks at UAE states, the findings highlight issues that may be equally important in other nations where the IASs have been utilized.

The rest of the paper is structured as follows. The following section explores the institutional framework for financial reporting and compliance within the UAE member states, literature reviews as well as the research question. Section three describes data collection, sample selection and statistical methods. The last section summarizes the study.

Literature Review

Earlier studies examining the adoption of IASs indicate that differences between firms in the level of financial reporting and compliance reflect their state of origin, meaning that there are important elements within the frameworks of national financial reporting that affects their compliance. The framework of a nation’s financial reporting (that is the practices and laws that govern or regulate financial reporting) has a fundamental role in outlining the requirements of financial reporting, creating a due process for enforcing and monitoring accounting and financial reporting standards, and in influencing the level of compliance with such standards. Oil and gas companies within the UAE share a number of common features, for instance company law require that audited accounting and financial reports be developed and submitted to a department of the government. The enforcement bodies, such as the central banks, stock exchanges and government departments are in place and there are provisions within the law for noncompliance penalties. Likewise auditors must be licensed and could be culpable for penalties for violation of the company law.

Jensen and Meckling (1976) agency-theory model argues that minimizing information asymmetry between firms manages (insiders) and capital providers (outsiders) reduce agency costs (residual loss, bonding, and monitoring). The purpose for reducing agency costs offers an incentive for IASs adoption because adoption results to more transparency and greater disclosure in comparison to the situation within the GAAP. Nonetheless, to optimize benefits from implementing higher quality standards, firms have to exhibit compliance to the standards. The incentive to seek compliance benefits may systematically differ between oil and gas companies, founded on their individual features. The study explores below various firm features that could be associated with the compliance level. Large oil and gas firms are more visible and hence, could be highly expected to comply with IASs. Hussain, Islam, M Gunasekaran & Maskooki (2008) state thatlLarge oil and gas firms act to avoid state intervention and to safeguard their reputation. Whereas the scholars base their arguments on advanced markets, they as well apply in UAE states, where large oil and gas corporations are economically important and politically visible. The privatization of large state-owned oil and gas corporations imply that are a focus of investor and government attention. Besides, large oil and gas corporations have huge resources to utilize on compliance and are less probable to be affected by proprietary information disclosure as opposed to their smaller counterparts. The other important point is that large oil and gas firms could be older, with well developed financial and accounting reporting systems, implying that compliance is affordable to them.

In addition, large oil and gas companies are more likely to be international, meaning, to have more international sales, foreign investors, or have international listing on stock exchanges. Ahmed (2009) demonstrate that oil and gas companies cross-listed have greater compliance levels. Within the UAE most oil and gas companies are not cross listed outside their region, nevertheless, they seek international investors. This could offer motivation for greater compliance, to render accounting and financial reporting more comparable and transparent and to enhance the credibility of the company. Oil and gas companies with greater leverage could be anticipated to disclose more financial and accounting information minimize agency cost, thus reassuring debt-holders that the company safeguards their interests.

Within the UAE setting, three shareholder entities characteristically have significant ownership equity in oil and gas companies list on the UAE stock exchanges. These shareholder groups include the institutional investors, dominant families and government together with its agencies all of whom can influence the quality and level of disclosure and IASs compliance level. In UAE these shareholder groups are considered insiders since they normally have representatives in the board of directors of these companies and hence have greater access to the companies’ internal information. As a result, this study anticipates that oil and gas companies with more insiders (i.e. greatly held ownership) has little incentive for financial reporting compliance to the IASs that oil and gas companies with extensively held ownership share.

Method and Data

Selection of Sample

The purpose of this research study is to investigate financial reporting and compliance to the IASs by oil and gas companies from the UAE during the period between 2001 and 2010. We selected 2000 as the beginning point because all the UAE states had adopted the IASs.

Financial Reporting and Compliance Measurement

Financial reporting and compliance with the IASs is evaluated using self-developed compliance index, as this is in conformity with prior financial reporting and compliance studies( Hussain, Islam, Gunasekaran, & Maskooki, 2008).. The checklist is founded on 14 standards comprising, IAS 1, 10, 14, 16, 18, 21, 23, 24, 27, 28, 30, 32, 33 and 37. Initially, all the IASs were considered to be factored in, but some were omitted since they were not applicable to the UAE oil and gas companies (such as IAS 12, 15, 19, 26, 34, 20, 11, 38, 35, 31). Since a number of reporting years for every state were factored in the study, various standards were applicable for every state. Each applicability standard to companies’ annual financial report was established and the relevant section of the checklist was applied in data collection. The entire financial annual report was perused and data obtained. Every disclosure item within the checklist was allocated a value of (1) when it was disclosed and (0) when it was to disclosed by applied. The items, which were apparently not applicable, were assigned N/A. The items that did not have sufficient information were provided to determine applicability was denoted as do not know (DK). The principal index is the general compliance measure, with the DK and N/A items excluded, and comprising a measurement and disclosure-compliance measure. Robustness test were conducted to establish the results’ sensitivity to the treatment of possible ambiguous DK and N/A items. The checklist items were not weighted since this procedure could introduce bias and subjectivity.

A multivariate evaluation was deployed to analyze differences between states in levels of compliance as well as relationships and time trends between the compliance level and company features. Due to the fact that dependent variable (compliance index score) ranges between 0 and 1, it was rearranged by taking the odds ration logarithm. For instance, if the overall compliance level to the IASs for firm is given by P, then the odd ratio logarithm Y is given by;

Summary

The study has established that the average level of financial reporting and compliance by oil and gas companies in 85% of the checklist index items in the study period, but the level of compliance has steadily increased. In spite of the strong cooperative economic and cultural ties, there is considerable variation in compliance level by the oil and gas companies across the UAE member’s states. Oil and gas companies from Saudi Arabia recorded the highest level of financial reporting and compliance. Companies from Oman and Kuwait substantially improved their compliance than any other states, and this could be attributed to improved enforcement and monitoring in Oman and Kuwait.

Conclusion

The International Accounting Standards Board standards have been established for application as national standards in nations across the globe regardless of the economic development level and culture. Since extensive compulsory adoption is comparatively new, not much is known concerning the effectiveness of IASs adoption in different nations. Investigating the financial reporting and compliance by oil and gas companies within the UAE is of great interest due its distinctive characteristics for instance strong association between UAE member states, developing country statue accompanied with significant wealth and considerable cultural differences in relations to most western nations. The study shows that financial reporting and compliance of oil and gas companies within UAE is de jure as opposed to de facto, implying that IASs as implemented by law as opposed to practice, a significant noncompliance is imminent.

The financial reporting and compliance framework by oil and gas companies within the region are established on company-law regulations that are enforced by government agencies and has penalty provisions for violation for those requirements. Their framework places excessive dependence on independent auditors and feature just only limited operations by the stock exchanges as well as enforcement agencies in compliance checks and taking measures for non-compliance.

References

Ahmed, K. (2009). Disclosure policy choice and corporate characteristics: Journal of

Accounting, 3(1), 183-203.

Hussain, M., Islam, M. M., Gunasekaran, A., & Maskooki, K. (2008). Accounting standards and

practices of financial institutions in GCC member countries. Managerial Auditing Journal, 17(7), 350

International Accounting Standards Board (IASB) (2010). International Accounting Standards

and SIC interpretations. London: IASC

Financial vs economic table & linking impact to valuation technique of Namadgi National Park

Financial vs economic impacts ofNamadgi National Park

Impact Financial (money) Economic (real) Cost Labor

Land

Search and rescue service

Conserving the Natural

Environment

Conserving cultural

Heritage

Planning – controlling development

Planning – policies and communities

Recreation management and transport

Animal Welfare

Standards

Wages

Market price

Market price

Market price

Market price

Market price

Market price

Market price

Market price Time lost

Time lost

Cost effective solution

Time lost

Time lost

Time lost

Time lost

Cost effective solution

Benefits

Souvenir shop Market price Social profits

Honeysuckle Campground Market price Social profits

Water suppliesMarket priceSocial profits

Trees and Forests Market priceSocial profits

Biodiversity resourcesMarket price Social profits

Provision of recreational opportunitiesMarket priceSocial profits

Tourism expenditures Market price Social profitsCost-Benefit Analysis of the Namadgi National Park

(1991-2010)

Net Present Values in 1991. $ million

Definition Valuation Present Value

Benefits Souvenir shop Passengers can buy some souvenirs everyday The souvenirs value are average 5 dollars , 30 passengers per day . 300

Water supplies Less time spent in flight waiting for a landing slot: minutes per plane times annual landings. This cost 11 millions from 1991 to 18 millions 2010. 220

Forests and Trees

They can supply fresh air, andProtect the soil This is economic value, it can provide much value than the money provide. Biodiversity resources

Research can make a new achievement and profits Social value Provision of recreational opportunities People can do some sports here e.g. bushwalk, fishing, ridebikes. This is all for humans’ health value Costs Land Maintenance costs of land It will cost 450 millions per year for maintenance 520

Labor They can Labor fees is 420 millions per years 500

Increased aircraft movements * Prevention of animal diseases

It can make the animals safe and health. It will cost 220 millions per year 430

Search and rescue service

Recreation management and transport

This service is that when passengers miss the way or get some trouble,somebody will find you and take you to a safe place.

Some event or functions held, and need some people management or bus to pick up

This will cost 48millions per year in national areas

Time lost 443

Net benefit

Financial Reporting Disclosure in Australian Corporate Sector

Name of Student

Institution

Financial Reporting Disclosure in Australian Corporate Sector

Introduction

Within Corporate sectors and some small and medium enterprises, financial statements and reports for documentary purposes which they consolidate to track and evaluate how much finances in respect to profits or losses the investment operations are making. The purpose of financial reports is to pass on this information to the stakeholders and the investors of the company (Deegan 2010). Thus, financial statements and reports is component of the critical contract between the external investors and the business because they have the right to be informed and to know if the fiscal investment is being spent shrewdly and at a significant return. The objective of this assignment is to develop a report based on two chosen corporate Australian groups. The report entails evaluating the yearly reports of the identified corporate groups focusing on their accounting practices and operational management.

The two companies being analyzed are Endeavour International Inc and Firefax Media Limited. The subsidiaries of Endeavor International are 8, while Firefax has five subsidiaries and it’s the major player in the media industry.

The goodwill methods:

Both the two companies have deployed business combination as a method of goodwill. In this case, the transactions and proceedings in which two or more subsidiaries or entities of an organization group are assigned to a common control as one accounting body. The accounting practices are observed by both companies for their investment amalgamation, regardless of whether equity assets or other resources are acquired (Deegan 2010). The regulation for the attainment of a controlled entity entails incurred liabilities; relocate assets and the equity interest offered.

For both Endeavor International and Fairfax, the goodwill reflects the surplus of cost of acquisition beyond the logical price of the share of the Group for the ultimate reasonable assets of the purchased entity at the acquisition time. Hence, the two corporate groups integrate goodwill on the acquisition of subsidiaries in indefinable assets. In view of the goodwill linked to the associates, it’s incorporated in business in associates. It is stretched to the reportage section for the purposes of impairment testing. For example, the investment impairment in associate for Fairfax group is $ (1,060) million while for Endeavor International Plc the sum is $98.8 million. Fairfax didn’t have a significant investment in acquisitions or associates for the financial year because it reflected nil figures in its financial consolidated statement.

Endeavor International on its side recorded some significant acquisition of the topical financial year, the Group managed to end the fiscal year with $2.1M investment from the intangible assets. Thus, the goodwill is rather retained to harm assessment in yearly basis as oppose to paying it off. This assessment could also be carried out more routinely when the variations is in scenario that is indicating some signals of impairment, and can be handled at a cost less accrued losses in damage.

It is also imperative to emphasize that, losses or additions towards the clearance of entity comprises of the haulage amount of goodwill subjected to the disposed entity.

On the grounds of impairment evaluation, assets are huddled on the lowest points where there are detached specific cash flows which are mainly independent of the cash inflows from the rest of assets. In assessing the in use value, the projected cash flows are discounted to the present value by way of post tax positioned down rate so as to reflect the present market approximations.

These companies assess at the end of every fiscal year period whether there is determined substantiation that a fiscal assets are damaged or not. As a result the Endeavor International and Fairfax, there fiscal asset is impaired and the relevant losses are sustained subject to injury indication (Endeavor International Plc 2010 financial report).

Impairment being the outcome of supplementary events which transpired after the initial recognition of the assets; that the loss events influence the projected position cash flows of the monetary assets which can be constantly anticipated. In respect to the equity investment grouped as available for sale, a protracted or considerable fall in the fair value a security below its cost is considered to the pointer of which the assets are impaired.

Concerning the acquisition by acquisition framework, the Endeavor International differentiates any non controlling interest (NCI) in the acquisition at costs reasonable or at the NCIs’ share balanced of the entity’s net limited assets. The addition of the deliberation transferred, the amount of any NCI in the subsidiary and the fair price tagged on the acquisition date of any pre equity venture in the subsidiary beyond the reasonable cost of the Endeavor’s share’s of the net tangible assets bought is indicated as goodwill in the fiscal statement. For example in the consolidated financial statement, Endeavor group reflected $12.5M in NCI. This result is the amount of Endeavor’s generated equity and sustained income of $10M and $2.5M respectively which is desirable compared to the performance of the previous year.

As Deegan (2010) puts it, when the amounts are under the reasonable value of the definitive tangible assets of the entity acquired and the level of all sums have been evaluated, the variation is recognized openly in the profit or loss as price cut on the investment consortium. In situation where any component of cash deliberation is in arrears, the sums that are supposed to be paid in the future are discounted to their present cost at the acquisition date.

Similar trend is also evident at the Fairfax Group whereby the deliberation is arrived at through acquisition by acquisition framework and they recorded $2,082M. The impairment losses were receptively nil figured of which is a desirable scenario for the Fairfax group. Nonetheless, this simply came to be true not very long ago since under the earlier guiding standards, the NCI was at every time recognized at its share of the entity’s sum assets. The fiscal year balance stood at $1,833M which indicates that no substantial acquisitions or investments were realized within that specific financial year.

By critically assessing the financial statements and the whole annual reports of the two groups, it is correct that they were prepared with keen compliance to the Australian Accounting Standard Boards, AASB 3 and the AASB 27 (AASB3 and AASB 127). This is true since at the preliminary sections of the financial statements there is a clear indication that the company directors issued a declaration that the financial statements have been done in accordance to the stated regulatory accounting standards. In view of the AASB 127, did not consider the accounting systems for investment amalgamations and their effects on consolidation, also the goodwill cropping up from investment grouping. The principle requires that the mother company will deliver the consolidated financial reports in which it combines or merges its investment in entities or associates in accordance with the AASB 127 standards. According to the financial reports of the two companies, they have entirely consolidated their financial operations of the entities under one fiscal statement for the given financial year (AASB3 and AASB 127).

AASB 3 checks the acquisition modality where every event or transaction is an investment transaction, and for every case the appropriate subsidiary is to account for each within their fiscal reports. All the subsidiaries are also projected to apply acquisition procedure in to account for each investment amalgamation. In the financial statements delivered by the two companies, it is mostly indicated that all the activities or transactions of the mother with the entities were investment combination.

The two corporate groups have shown that every entity makes their individual financial statements prior to the consolidation. Nonetheless, certain disparities were observed from these disclosures. For example the Endeavor International Plc in their disclosure highlighted the other segments of investment in their operations; wearers Fairfax did disclose a consolidated statement which is general. When comparing the 2 financial consolidated statements, it appears that Fairfax group didn’t conduct meaningful investment or acquisition in other entities and associates in comparison to Endeavor International which did disclose significant investment and acquisition is associates.

References

Deegan, C. (2010). Australian financial accounting/Craig Deegan,6th ed, Australia: McGraw-hill.

Fairfax Media Limited Annual Report 31st December 2010, Retrieved from : HYPERLINK “http://www.fxj.com.au/shareholders/AnnualReport_FXJ_100921.pdf” http://www.fxj.com.au/shareholders/AnnualReport_FXJ_100921.pdf

Endeavor International Plc. Group Annual Report 30th June 2011, retrived from:

APPENDIX:

  Jun-10 Jun-09

(i) Carrying amount of investment in associates  $M  $M

Balance at the beginning of the financial year 14, 819 14,764

Investments in associates acquired during the year 0 477

Adjustment for foreign exchange revaluation 8 20

Share of associates’ net profit/(loss) after income tax expense 685 55

Dividends received/receivable from associates -350 -387

Impairment of investment in associate 1060 0

From Fairfax consolidated Financial statement Intangible Assets.

(A) Asset revaluation reserve  $M  $M

Balance at beginning of the financial year 32 801

Revaluation of available for sale investments 2082 1358

Impairment losses transferred to net profit 0 2191

Tax effect on available for sale investments 281 0

Balance at end of the financial year 1833 32

From Fairfax consolidated financial statement, NCI p. 96

2011  

Management rights — indefinite life 32

Goodwill 69.4

Other intangible assets 2.1

Balance 30 June 2011 74.4

2010  

Management rights — indefinite life 10.5

Goodwill 44.4

Balance 30 June 2010 3 54.9

From Endeavor International Inc. consolidated financial statement.

27 NCI 2011 2010

Interest in:  $M  $M

Contributed equity 10 8.2

Retained earnings 2.5 2.8

Total 12.5 11

From Endeavor International Consolidated financial statement, Non Consolidated Interest:



Financing and Expansion

Student’s Name

Institution

Financing and Expansion

1.I have been running a hair salon business which is now successful, and my focus is to buy a competitor (privately owned hair salon) as part of expansion plans for my business. There are various business valuation methods that one can use to estimate the value of a business in terms of the present value and the business economic future potential. In calculating the present values, we look at all aspects of the business such as capital structure, market value, future earnings prospects and even the management of the company. All these are important to potential investors like me in making the right investment decisions. The methods of valuation are;

( i) Discounted Cash Flow Method

(ii) Market Valuation

(iii) Multiples Method

(iv) Comparable Transaction Method

Discounted Cash Flow Method

Under this method there are two approaches that can be used namely; Adjusted Present Value (APV) and Weighted Average Cost of Capital (WACC)

For example, assuming that the competitor is financed fully by equity then the appropriate valuation technique that I will use is the net present value (NPV) method.

For instance, if the competitor streams of cash flows say for period 0,1, 2, &3 are; $(20000 ) $10000, $8000, $15000 respectively and compounding interest rate is 10%. Then, its net present value would be determined as follows:

( FCF0/1+rd)0+ (FCF1/1+rd)1+ (FCF2/1+rd) 2+ (FCF3/1+rd)3=NPV

(20000)/1.10+ 10000/1.11+8000/1.12+15000/1.13= $6,972.2

Competitor NPV= $ 6972.2

The sum of all Present Value of cash flow is equal $6972.2, which is greater than zero hence the project is profitable and should be considered for purchase.

Based on the assumptions above, the competitor’s net worth would be $6972. It can, therefore, be assumed that to purchase this hair salon business I need to invest an amount not less than or equivalent to $6972.2 for my planned business expansion.

2. Some of the financial tools that I can use in this case may include a balance sheet, income statement, statement of cash flow, and financial leverage ratios such as debt ratio and debt-equity ratio.

a) Statement of Financial Position

I would need critically to analyze my business balance sheet in order to know what I currently own and owes, as well as the amount invested by other shareholders in my salon business. This will enable me to know my business net worth as at the time of purchase; therefore, it will indicate to me whether I can purchase the competitor through cash or borrowing.

b) Income Statement

The income statement of a company reveals a lot about its revenue and expenses during a given period. This information about the competitor’s performance will help me project the growth of my salon, the expected market share, and the overall profitability of my business after the competitor’s purchase, therefore, I will be able to know my affordability level to buy the company.

c) Financial leverage ratios

These will provide me with the information on my capabilities in meeting the long term debt payments without becoming insolvent or spending more than the business I can raise in revenue.

A debt ratio of less than 1 will show that my business has more assets than debt, while a debt ratio of more than 1, indicate that the business has more debts than asset, therefore, it will not be wise to purchase it if the latter is true.

d) Cash Flow Statement

As an analytical tool, statement of cash flow is very useful in determining the viability of a company to pay its long-term debts as it shows the liquidity and solvency of a firm.

3. Debt Market- also known as bond market

In this market, business can rely on borrowed funds to finance their investments plans for future growth, e.g. to buy a competitor, it can happen through the following ways:

i)Issue corporate bonds to public

Under this option, my company can decide to issue corporate bond to the public investors. In order raise the additional amount in debt though it will require me to make regular interest payments to the bondholders, until the maturity date upon which I will be obligated to pay back the full amount borrowed.

ii)Notes Payable

This is a written promissory note, under this agreement I can decide to borrow the $ 100 million from a willing lender with a promise to refund the full amount including the agreeable interest over a given period.

iii)Securitization through Asset Backed Securities

Under this alternative, my company can enter a contractual agreement with a competitor by issuing them with asset backed securities such as home equity loans, credit cards and auto loans to finance the $ 100 million deficit.

iv)Acquire bank loan

Another way that I can use to fund the deficit is through taking a bank loan worth $ 100 million and repays the amount plus interest over an agreed period.

Recommendation

Under this market the best alternative that I would recommend to use is to issue corporate bond because:

a)It does not dilute the value of the existing shareholders

b)Bonds offer a way of stabilizing company finances through having debts on fixed-rate interest.

c)It will enable my business to retain more cash since the bond’s redemption date can take many years.

4. Equity Market- this is a market where equity instruments are traded. Options include.

(ii) Issuance of Preference shares that are a special class of shares whose features and characteristics are not possessed by common stock.

(iii) To issue ordinary shares worth $ 100 million to the public or as an offer to the competitor company.

Recommendation

As a result of my analysis and further investigations, the best alternative here is to finance the deficit by issuing the ordinary shares worth ($100 million) to the public. Offering the competitor shares will mean that the competitor will claim part of ownership in my business and may want to have a position such as that of director, so as to have impact on the decision making process of my business which may not be a better decision.

5. Due to many challenges accompanying the issuance of corporate bonds such as regular interest payments determine whether the business make a profit or loss. A potential decline in business share value whenever there is a reduction in profits, having to fulfill various listing regulation in order to improve the tradability of the bond in the stock market also plays a paramount role. Then, the best alternative that I will use to raise this funding is by issuing of new shares to the potential public investors, through the approval of existing shareholders. By doing this my business will be able to raise enough funds for the expansion plan, attracts new investors who will work hard to ensure that the business become profitable so as to get higher returns for their investment in the form of dividends.

Financial Reporting Disclosures in Australian Corporate Sector

Student’s Name

Institution

Introduction

According to (Deegan, 2009), corporate entities, financial statements are documentary reports which they prepare to track and evaluate the amount of money in regards to profit or loss an organization is realizing from the investment operations. Financial statements and reports are intended to express this information piece to the shareholders and investors of an organization. As a result, financial report is a critical contract between the investment and the outside (external) investors because they have right to be sufficiently informed if their fiscal investment is being utilized perceptively and at a significant return.

This paper purposes to establish a report of 2 identified Australian companies. The paper provides disclosures analysis established in the two selected companies financial reports in view of the following subjects 1) the Joint venture investments; 2) related party disclosures and transactions and 3) reportable segments.

The two companies that are being analyzed are Mirvac Group and Fairfax Media Ltd. Mirvac deals in real estate investment, investment management and hotel operations, while Fairfax on the other hand deals in media industry.

The financial statements of both Mirvac group and Fairfax Media Ltd. have been developed in compliance to the policies and practices of accounting adopted by the previous annual fiscal statement, for the periods ending December 31, 201, though did not integrate the adoption of AASBs 2010 developments. The AASBs 2010 established various trivial developments to the AASBs. The improvements that were significant and the effect of the current or earlier financial periods are illustrated.

The financial periods of the two Companies ending 31 December 2011, have been developed in conformity with the procedures of the Corporations Act 2001 and Australian Accounting Standards AASB 134: The disclosure of the financial reports as stipulate in the AASB 134 ensures that the fiscal statements and notes also abide by the International Financial Reporting Standards.

AASB 101 improvements in financial statement production

The improvements does provide an option in developing the reconciliation of every element of other comprehensive proceeds, such could either be done by way of notes of the fiscal reports or in the reports of alterations of equity (Deegan, 2009). Both the corporate groups “consolidated statements” have opted to retain reconciliation within their consolidated statements in equity as earlier disclosed, hence no significant discrepancy regarding their accounting procedures.

Joint venture Investment

Joint venture is an agreement through a contract between two or more companies (or parties) where they consent to undertake an investment which is operated through joint control. AASB 128 describes the requisites for the investment disclosure in joint ventures or associates. The joint venture or associate incorporates IAS 28, established by the International Accounting Standards Board (IASB). The guideline has describes the accounting procedures in joint venture and outlines the particulars for the equity-based approach to be applied in associated or joint investment. The procedure is used on entities that have joint control of investment or have important impact over the investees. The guideline requires that the below factors be considered when making public the financial statement;

Acknowledgement of liabilities incurred and assets controlled, and share of revenue gotten alongside expenses obtained by a venture in a joint controlled investment.

Acknowledgement of shares of liabilities incurred, assets jointly controlled, collectively incurred share of liabilities, sales revenue and all other expenses realized as a result of joint venture interest.

Describing all the investment interest in collectively controlled entities by the application of equity method, cost method or fair value approach.

Mirvac group financial report indicates its joint venture in Mirvac property trust and Mirvac Limited. Their joint investment was arrived at in March 2011. In their financial statement for the period ending 31 Dec 2011, they have indicated that $1.2 billion expenditure is projected on Mirvac property trust and Mirvac Limited joint venture investment. The report did not cover the particulars of AASB 128, for instance, the liabilities incurred and the assets controlled have not been acknowledged. In addition, the share of assets jointly controlled was not outlined. This may be so because they have not implemented the AASB 128 since the projected venture operations will materialize in course of 2012 financial year.

In respect to Fairfax, they gave disclosed their operations in joint investment venture in their financial year ended 31 Dec 2011. The joint venture is referred to as Fairfax Digital Media. Within joint venture, Fairfax holds 70% interest and has realized a margin of $87.8 million in the year ended 2011 (Fairfax Media Limited Annual Repor 2011).

In a similar operation to Marvic ltd, Fairfax financial report did not disclose information concerning the liabilities incurred and jointly controlled assets in their joint investment.

Reportable Segments

AASB 8 outlines the requirements of reportable segments, which requires corporate organizations to disclose materials that will enhance the users of financial reports to examine the fiscal effects and position of investment activities which they are engaged in and the economic setting of the operations.

In addition, this principle requires investment entities to separately report information concerning each of their business segments. The reportable segments have to be the geographical and business segments whereby a considerable portion of the corporation’s income earned from, particularly the sales from the external customers.

The financial statement of Mirvac indicates that this standard has been applied, for instance; the segment information has been outlined in their page 62 of their financial statement. Marvic illustrates two of its investment entities in Northern Territory and Western Australia. The profits, costs and revenue for their segments have been illustrated in conformity with the AASB 8 according Mirvac Group Annual Report, (2011).

Fairfax on the other had outlined the information concerning its business segments in form of notes on the financial statement. Fairfax has three reportable segments namely; Australian Radio, Independent Newspaper limited and Fairfax Digital (Fairfax Media Limited Annual Report, 2011). The fiscal information of the segments which comprises; financing costs, segment revenue, profits, liabilities and assets has been illustrated. Both the two companies have disclosed information pertaining to their segment liabilities and assets, and their financial statements have omitted the investment value in joint ventures within their segments.

3. Related Party Transactions and Disclosures

The related party transactions are obligations, resources transfer which occurs between related parties not considering if a price has been charged or not. A look at the Marvic’s financial statements indicates that the related party’s particulars have adequately been disclosed (Mirvac Group Annual Report, 2011). They have been disclosed within the financial statements notes particularly the ones linked to the interests in associates, financial guarantees of the parent company and joint venture interest.

Similarly, Fairfax has also disclosed particulars linked to interests in associates, financial guarantees of the parent company and joint venture interest (Fairfax Media Limited Annual Report, 2011).

References:

Deegan, C. (2009). Australian International Merketing (6th ed.). Spring Hill, QLD: Irwin/McGraw Hill.