Critical Analysis Of General Purpose Financial Reporting By Domino’s Pizza Enterprises Ltd

Purpose of the Framework

As discussed earlier, financial statements attain significance from their ability to show the financial strength and weakness by presenting all the relevant and material information thereby providing an insight of the performance and position of the company. Therefore the stakeholders use the financial and other information provided in the annual report for decision making. Analysis of financial reports alone can help the potential (or) existing investor to arrive at a conclusion on overall managerial performance and the efficiency with which the company operates. In order to facilitate such analysis, the company has the responsibility to provide sufficient information in a predetermined and standard format. The format should be in such a way that it should serve the financial and non-financial information requirements of different categories of stake holders simultaneously. Such a predetermined standardized format is called ‘Conceptual framework’ or ‘Financial Reporting Framework’.

As per the Framework for Preparation and Presentation of Financial Statements, the financial reporting framework assists (Framework for the Preparation and Presentation of Financial Statements, 2016) –

• Preparers of financial statements in applying Australian Accounting Standards;
• Auditors in forming an opinion as to whether the financial statements conform with Australian Accounting Standards; and
• Assist users of financial statements in interpreting information contained in the financial statements prepared in conformity with the Australian Accounting Standards.

Domino’s Pizza Enterprises Ltd (Domino’s) is the largest pizza chain in Australia in terms of both network store numbers and network sales. It is one of the largest franchisee for the Domino’s Pizza brand in the world (Dominos.com.au, n.d.).

Domino’s Pizza Enterprises extends across eight countries, with more than 2,400 stores and is a leading international Domino’s franchise. Originally incorporated in 1983 as Domino’s Pizza Australia New Zealand Limited, the company was listed in ASX on 16^th May 2005 becoming the first pizza company to have listed on a recognized stock exchange in Australia.

Australia has adopted differential financial reporting framework wherein a particular company, after determining whether or not it is required to prepare an annual report under the Corporations Act, it can then determine which financial reporting requirements it can then determine which financial reporting requirements to apply under the Accounting Standards. This makes the selection and application process of financial reporting framework a bit complicated. This report aims to analyze whether the company has adhered to all the requirements in attaining the objective of true and fair view in preparing and presenting the financial reports of the company.

In this report, the annual reports are studied to find out extent of alignment and compliance with the financial reporting requirement. In doing so, the report will explore the following areas:

1. Establishing the requirements of framework provided by AASB and Corporation Law
2. Assessing the structure of report and its sufficiency;
3. Assessing the financial performance of the annual report;
4. Comparison of financial performance of Domino’s with Collins Food Limited (CKF) (another listed company in ASX);and
5. Evaluating the User friendliness of the annual report to the stakeholders

The financial reporting framework describes the qualitative characteristics that should be reflected by the financial statements in order to provide useful information and bifurcate them into

• Fundamental qualitative characteristics; and
• Enhancing qualitative characteristics (Framework for the Preparation and Presentation of Financial Statements, 2016)

The fundamental qualitative characteristics are relevance and faithful presentation.

Relevance: Relevant financial information is that information which can make a difference in decision making of the user of the financial statement. Both Domino’s and CFL achieved this qualitative characteristic by providing information such as dividend per share, earnings per share and other profitability based figures such as EBITDA, EBIT and EAT.

Faithful representation:

Though financial statements were never designed to be perfect, in order to provide useful information, it should faithfully represent the phenomena that it purports to. To be faithful in representation, it should be complete, neutral and free from error. The faithfulness of the annual reports of both the companies were enhanced since they attached the independent auditor’s report which supports the information provided in the annual report

The Company

Further the enhancing qualitative characteristics are comparability, verifiability, timeliness and understandability.

Comparability: The financial statements should be comparable.  They should be comparable with other firms in same industry and they should also be comparable with the financial statements pertaining to preceding years of same company. Both Domino’s and CFL adopted similar framework for preparation and presentation of financial statements to increase the comparability of their financial statements with peer companies in the industry. Further both the companies provided comparative figures of previous years to facilitate the intra-firm comparison.

Verifiability: As per the Financial Reporting Framework issued by AASB, verification means that “different knowledgeable and independent observers could reach consensus”. Both Domino’s and CFL included detailed notes to the financial statements

Timeliness: It refers to making information available to decision-makers at right time which is capable of influencing their decision making. Both the companies have made the financial statements available before the annual meeting of 2017 to enable the users of financial statements to analyze the information.

Understandability: Classification, characterizing and presenting information clearly and concisely makes the financial statements understandable. Domino’s has provided financial information by strictly adhering the applicable financial reporting framework (detailed analysis of same is given in the appendix – 1).  

Requirements vs available information in the annual report:

The following table compares the requirements as per applicable financial reporting framework and the information available in the annual report of Domino’s (Legislation.gov.au, n.d.)

Name of the Statement	Proforma as per	Whether included
Financial Statements	AASB 101	P
Notes to Financial Statements	AASB 101	P
Directors’ Declaration  on Financial Statements and Notes	AASB 101	P
Director’s Report	AASB 101	P
Remuneration Report	AASB 101	P
Declaration of Auditor’s Independence	AASB 101	P
Audit Report	AASB 101	P
Statement of compliance of ASX principles	ASX Principles	P

Assets:

• The company Domino’s have more fixed assets base than CFL
• Both the companies have substantial portion of amount invested in intangible assets. While the intangible assets of Domino’s consisted of Capitalized Developments, Licenses and Franchise Networks, CFL has Goodwill, Franchise Rights and Brands in intangible assets.
• Both the companies saw increase in their non-current assets and current assets when compared to their previous year figures.

• The Current liabilities of Domino’s decreased from $266,250,000 in 2016 to $230,146,000 in 2017. Further the Non-Current liabilities increased from $467,237,000 to $487,583,000 during the same period.
• The Current liabilities of CFL increased from $68,433,000 in 2016 to $73,582,000 in 2017. Further the Non-current liabilities increased from $238,613,000 to $261,386,000 during the same period.

Both the companies registered increase in equity during the year. While Domino’s increased its equity from $394,546,000 in 2016 to $415,064,000 in 2017, CFL has increased its equity from $189,697,000 to $266,793,000.

Earnings:

It can be observed from the above diagram that while Domino’s has increased its net profit steadily, the net profit of CFL was just recovered from losses in 2016 and again shown a slight decline in 2017.

The Earnings per share also displayed same trend as the net profits. In other words, EPS is said to be correlated to the Earnings after tax.

While the dividend payout displayed a positive correlation with EPS in case of Domino’s, CFL paid dividend in 2015 irrespective of losses incurred and increased dividend per share in 2017 even though there was decline in profits which shows the commitment of company towards payment of dividend.

Ratio Analysis:

		2017	2016
1	Current Assets	$   187,825	$   184,235
2	Current Liabilities	$   230,146	$   266,250
3	Cash generated by Operating Activities	$   132,869	$   128,472
4	Operating profits	$   230,900	$   180,000
5	Cash and Cash Equivalents	$     50,454	$     60,334
6	Current Ratio = (1) / (2)	0.82	0.69
7	Cash Conversion Ratio = (3) / (4)	0.58	0.71
8	Operating Cash flow Ratio = (3) / (2)	0.58	0.48
9	Cash Ratio = (5) / (2)	0.22	0.23

		2017	2016
1	Current Assets	$   114,068	$     65,870
2	Current Liabilities	$     73,852	$     68,433
3	Cash generated by Operating Activities	$     60,563	$     49,688
4	Operating profits	$     78,100	$     74,300
5	Cash and Cash Equivalents	$   104,751	$     52,464
6	Current Ratio = (1) / (2)	1.54	0.96
7	Cash Conversion Ratio = (3) / (4)	0.78	0.67
8	Operating Cash flow Ratio = (3) / (2)	0.82	0.73
9	Cash Ratio = (5) / (2)	1.42	0.77

From the above financial ratio analysis (concentrating on cash flow ratios), we can observe that CFL is better in terms of liquidity than Domino’s. CFL has outsmarted Domino’s in every ratio computed above. Therefore Domino’s is affected by the problem – liquidity. Due to this problem, the company may end up in a position where it cannot discharge the immediate financial obligations.

Conclusion:

Domino’s Pizza Enterprises Ltd., has adhered to all the major requirements of the applicable financial reporting framework. The company has achieved in providing relevant and reliable information to the users of financial statements using which the users can arrive at meaningful conclusions. The descriptive analysis included amidst of notes to financial statements enhanced the overall understandability of the financial statements. The systematic approach with clear referencing of relevant notes to the financial statement items.  Hence we can safely conclude that the efforts put forth by the company in meeting the conceptual framework of accounting were effective and sufficient.  Further Domino’s has provided more comprehensive information than CFL as the notes provided by CFL is not as substantial as Domino’s. However Domino’s is facing problem of liquidity and hence it is suggested to the company to maintain sufficient working capital gap. On a whole, Domino’s score better than CFL having lost to it only in case of liquidity, Therefore  Domino’s deserves to be in ASX and it’s worth our money.

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Authentical Fresh Annual Report | 2017. (2018). Albion, Australia: Domino’s Pizza Enterprises Ltd, pp.44-57.

Framework for the Preparation and Presentation of Financial Statements. (2016). West Victoria: Australian Accounting Standards Board, p.9.

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