Discuss about the Analysis Of The Annual Report – Asx Listed Company.
Fairfax Media Limited is the company listed in the Australian Stock Exchange. It is operating number of businesses around the assets of entertainment and the information. It has its operations in the Australia as well as New Zealand. For the purpose of this Essay the annual report for the year ending 25th of June 2017 have been analysed and all the eight requirements have been detailed and discussed.
Note number 13 and note number 22 of the annual report of the company has prescribed the details of the provisions and the contingencies (Company Official Website, 2017).
In case of the provisions, the company has divided the provisions into current and noncurrent provisions. Under the head of the current provisions, four sub heads are there. These are:
As per the accounting policies adopted by the company, the provisions are recognized when the group has the lawful obligation to make sacrifice of the economic benefits in the future as a result of the transactions that has been occurred in the past (Company Official Website, 2017).
In case of the contingencies, two heads have been created. One is the Guarantees and the other one is the defamation. No amount has been shown under the head of the contingencies. The main reason for showing the nil amount of guarantee is that no deficiency has been countered by the company. Similarly for the defamation form of contingency no suit has been received by the company from any of the party to the company.
Provisions – The provisions are valued and calculated using the discounted cash flow technique. The discounted cash flow technique is applied to the expenditure which is calculated and identified by the management using their best judgment. The discount rate which has been used by the company is equivalent to the risk free rate of government or corporate bond rate. The company has used the discount rate which is pre tax if the time value of money is important (AASB, 2010). A provision for the dividend has not been calculated because of the fact that dividend shall be recognized only when it is declared and informed to the Public and that too if it is before the reporting date of the particular year.
Contingencies – There are two forms of contingencies. These are guarantees and defamation. In case of the guarantees, it will be recognized only when the company and their controlled entities face any class order for which the company is facing the deficiencies and defamation is mentioned only when the group of the company or any single entity is sued in the ordinary course of the business.
The main argument in favor of the disclosing contingency items and amount and its nature is that it helps in assessing the amount that the company would be liable to pay in case the contingent situations that have been mentioned in actual occurs. In the given case, if the company receives that one sister company has faced the situation where the company is liable to pay the guaranteed amount to the financial institution due to the default on the part of the sister company then this contingent liability which is show off the balance sheet will then be shown under the head of the liabilities in the balance sheet and accordingly the payment will be done.
The argument which is in against of the inclusion of the contingency item is of the defamation. It is because; the defamation costs and the related expenditure cannot be identified as true and correct. It is because of the nature of the item so disclosed as the contingency item. There are the more chances only when the company is having the bad reputation of services but in the given case the company has the good reputation in the market of Australia and New Zealand and thus inclusion of the defamation in the contingent heads is not feasible.
As per note number 21 of the annual report of the company for the Financial year ending 25th of June 2017, it is mentioned that under the major head of the Commitments, the company has mentioned disclosed the operating lease as Lessor and Lessee.
Under both the options, the company has provided the amount under three subheads namely:
The company has shown the lease revenue under the head of the income in the statement of the profit and loss. Also the leasehold improvements under the head of Property Plant and Equipment as per the note number 14 of the annual report of the company (Company Official Website, 2017).
The company has classified and presented the lease item in accordance with Australian accounting standards. The company has not adopted the provisions of the new accounting standard 116 on leases. It is because the company will apply the same for the Financial year ending 31st December 2019 or 25th of June 2020 due to kits application from the financial year starting from 1st of January 2019 (Company Official Website, 2017).
The company has presented the lease revenue and the operating lease rentals in the statement of the profit and loss and has shown the leasehold improvements as property under the assets side and is charging the depreciation on the leasehold improvements in the statement of the profit and loss (Arrozio, 2016). Also the company has shown the finance lease but the amount related to that in the current financial year is zero.
Reclassification occurs only when the terms and conditions of the particular arrangement gets changed with the change in the use and application of the assets or related income generation mode. In the given case the lease has been classified as the operating lease. In the annual report it is mentioned that the leases have been classified as the operating lease because the all the risks and the related ownership of the particular asset is transferred to the lessor and retains by him. Currently the rental payments are charged to the statement of the profit and loss account on straight line basis over the period of lease (Ely, 2015).
Therefore, if this item is reclassified and now its status will be of finance lease then the accounting treatment will be different as the lease rentals will now not be charged to the statement of the profit and loss as operating lease but will be classified as finance lease and no depreciation will charged to the profit of the company. Depending upon the requirements of new accounting standard, this item needs to be reclassified (Ma, 2011).
Under the head of Noncurrent asset, the item Property Plant and Equipment has been selected. As per note number 14 of the annual report of the company, the property plant and equipment is valued at the cost less the amount of the accumulated depreciation or the amount of impairment if any. Land has not been depreciated and the other assets have been depreciated in accordance with the straight line method which allocates the amount over the useful life of the asset (AASB, 2010).
The alternative method of valuation that can be adopted for the property plant and equipment is the written down value method (AASB, 2011). Under this method the assets will be depreciated using the specific rate as defined in the particular laws if any and charging the depreciation on the written down value of the asset.
Conclusion
Financial statements shall give the true and fair view of the financial position and the financial performance of the company. It shall be prepared in accordance with the provisions of the accounting standards as applicable to the company. In this report, the main focus has been on the recognition of the provisions, contingencies and the leased assets. Then the valuation of the property plant and equipment has been discussed. In order to conclude the report, the accounting standards shall be applied in the letter and spirit.
References
Arrozio, M.M, (2016). “Changes in the financial ratios of the wholesale and retail sector companies arising from the new accounting of the operating lease”. Revista Eniac Pesquisa, 5(2), pp.139-159.
Australian Accounting Standard Board (AASB), (2010),”AASB 116 Property, Plant and Equipments” available from https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07 -09.pdf accessed on 25-04-2018
Australian Accounting Standard Board (AASB), (2010),”AASB 137 Provisions, Contingent Liabilities and Contingent Assets” available from
https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf accessed on 25-04-2018
Australian Accounting Standard Board (AASB), (2011),”AASB 108 Accounting Policies, Changes in Accounting Estimates andErrors” Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB108_07 -04_COMPmay11_07-11.pdf accessed on 25-04-2018
Company Official Website, (2017), “Annual Report 2017”, available on https://www.fairfaxmedia.com.au/Company/Corporate-Profile/corporate-profile accessed on 25/04/2018.
Ely, K.M., (2015), “Operating lease accounting and the market’s assessment of equity risk”. Journal of Accounting Research, pp.397-415
Ma W, (2011), “Impact on Financial Statements of New Accounting model for leases” available at https://digitalcommons.uconn.edu/cgi/viewcontent.cgi?article=1194&context=srhonors_theses accessed on 25-04-2018
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