Raising funds for corporate operations and liabilities, provisions, contingent liabilities and contingent assets. Measurement Basis for Assets.
Assessment task:
Collect the latest annual reports of Two (2) ASX listed companies for the last 3 financial years. Based on your collected annual reports, do the following tasks:
- Identify the different sources of fund that have been used by your selected companies.
- Examine the evolution of the sources of fund used by the company over the last three financial years with specific focus on the changes of different sources of funds.
- Identify the percentage of the fund that is internally generated and the percentage of the fund that is externally generated for each selected company.
- Explain the relative merits and shortcomings of the different sources of fund used by your selected companies.
- Critically examine different types of liabilities shown in the balance sheet of your selected companies? Identify which ones of the liabilities are interest bearing and which ones are not interest is bearing.
- Critically examine the key provisions under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets.
- Identify if your selected companies have made any reference to this particular standard (AASB 137) in their annual reports.
- Identify all different categories of assets recorded by the selected companies.
- Critically examine the measurement basis used by the company for each class of assets recoded by the selected companies.
Abstract
The paper shows an in-depth analysis of the annual reports of two companies listed in the ASX exchange for their three latest financial years. The balance sheet items, and the sources of funds and their reporting were the main focal areas on with analysis were conducted. The analysis shows the different variations in the sources of financing and borrowings and how it affects the company preferences. The evolution of this preference also changes over time, as expected in the changes in the sources of finance over time. The AASB 137 standard for provisions and contingent assets and liabilities is also discussed in detail in the report.
Introduction
This assignment is based on the reporting analysis of the two companies chosen. The selected companies are CSL Limited and Woolworths. The CSL Limited is the Australian based global specialty biotechnology technology that makes products that help in the treatment and prevention of severe human medical conditions. On the other hand, the other selected company is Woolworths which is the Australian supermarket chain and grocery stores. Both companies are completely different from each other in terms of their operations; however, these are both big and high capital companies which are enough to help in completing this paper. The paper will first focus primarily on the sources of funds and the reasons for each of the sources’ preferences and their specific merits and shortcomings. The later part of the paper is based on the analysis of the AASB 137 standard and its provisions and how it has been discussed in the annual reports of the selected companies (Dagwell et al., 2015).
i) Different Sources of Funds:
Woolworths Group:
The sources of funds for Woolworth include a variety of sources. The contributed equity holds fully paid 1294416480 ordinary shares as in 2017, which is providing the company with the funds of1294.4 Million AUD. Other than this, the company also has reserved or retained earnings of AUD 113.8 Million. Other than this, the company has been incurring some liabilities by raising funds from external sources like short time money market loans, bank loans, short term securities, finance leases, long term bank loans, long term securities, unamortized borrowings, Woolworth notes and finance leases (Woolworths, 2017, p.85).
CSL Limited:
The sources of funds for CSL are also very diverse. The contributed equity holds 452400784 ordinary shares as in 2019, providing the funds for $4634.5 Million. The retained earnings are other sources of funds for the company. Moreover, the company owns non-interest bearing borrowings and interest-bearing borrowings of bank loans at floating and fixed rates, bank overdrafts at floating rates, commercial paper programs, senior unsecured notes at floating and fixed rates and lease liabilities (CSL, 2019).
ii) Evolution of the Sources of Funds over the last three financial years
Woolworths Group:
In terms of Woolworths, the funds from the equity capital have risen in values in 2018 and then declined to somewhat near amount as in 2017. The reserves amount has gained volume significantly from $ 113 Million to $490 Million in three years as compared to 2017. Even though the short term money market loans have declined in 2019, the borrowings from external sources show that the company current borrowings have increased. The current bank loans have increased significantly from $ 83 million to $235 million, while there is no a finance lease or short term securities in 2019. The non-current borrowings show that the bank loans have increased to $678 million in 2019 while the securities have declined. The finance leases have increased in 2019 as well (Woolworths, 2019).
CSL Limited:
The equity capital of the company CSL has increased from $4213 million to $4634 in three financial years. The reserves funds of the company have however declined from $294 million to $242 million. In terms of the current borrowings, the bank overdrafts have declined from $1.5 million to none in three years. The bank borrowings have moved from $17.9 million to $85.6 million. The commercial paper is added in 2019 which was not present in the previous years. The senior unsecured loans were $100 million in 2017 which are $150 million after three years. The lease liability has remained the same at $3.1 million. In terms of non-current interest-bearing borrowings, the bank loans and lease liabilities have declined while the senior unsecured notes have increased in value (CSL, 2019).
iii) Funds Generated Inherently and Externally
Woolworths Group:
The funds that are generated from within the company are the reserves or the retained earnings and the equity capital. Other than this, the borrowings including the short term bank loans, short time money market loans, bank loans, short term securities, finance leases, long term bank loans, long term securities, unamortized borrowings, Woolworth notes and finance leases are all externally generated funds (Woolworths, 2017, p.85). The company equity accounts for 45% of the total assets which shows that the company has been generated from within the company. The remaining 55% is externally generated funds (Morningstar, 2019).
CSL Limited:
As mentioned above, the inherently generated funds are the reserves or the retained earnings and the equity capital. Other than this, all the non-interest bearing borrowings and interest-bearing borrowings of bank loans at floating and fixed rates, bank overdrafts at floating rates, commercial paper programs, senior unsecured notes at floating and fixed rates and lease liabilities are externally generated funds. The company has a debt ratio of 88%, which shows that its equity is less than 12% showing that most of the funds are externally generated (Investing.com, 2019).
iv) Merits and Shortcomings of the sources of funds used
Woolworths Group:
In terms of the merits and shortcomings of the funds and their sources, equity capital is the most widely used source of capital used by companies all over the world. The merits include fewer burdens as it does not need to be repaid, and it does not require many credit issues as well. The entitlement is divided which lowers the liability. However, the demerit is that the gains are divided as well. The money that is expected to be paid to partners can be higher than the interest in borrowings. Moreover, it also comes with the cost of loss of some control over the company. On the contrary, the banks loans allow for more control and are also temporary unlike equity source while the shortcoming is its high standards for qualification in the eyes of the creditors and the high costs of interests. Securities offer the advantage of portfolio management, risk reduction, fair pricing and dividend reinvestment, while it has high sales charges and expense ratios while it is also prone to tax inefficiency and management abuses. The money market loans have the limitations of regular monthly payment requirement, while it offers of being insured and secured source of financing and ease of access. Lease finance has the merit of tax advantage while it is also cheaper than other funding options. However, it may cost higher than an equivalent loan as the loan is based on paying for a depreciating asset (Weert, 2011).
CSL Limited:
The fund’s sources that CSL is using, which are different from Woolworths, include the commercial paper, the unsecured senior notes, and the bank overdrafts. Bank overdrafts provide the benefit that it handles the mismatch of the timings between the cash flows of the funds and also allows for timely payments and less paperwork. It is also helpful in keeping good track records and is a more flexible option than bank loans. Its disadvantage is that it cannot be used for large borrowings and its interests are usually higher than bank loans as well. For these, the limits include the risk of the reduction in the limit and the risk of seizing. The commercial paper has the benefit that it is in a free, transferable nature and is thus highly liquid. The con is that it is only available to a few companies and is often a hurdle to get more loans from banks. The unsecured notes have the advantage of having no collateral to offer and are often easier to access. This has, however, high rates of interest and is thus most difficult to afford.
v) Liabilities listed on the balance sheet
Woolworths Group:
The liabilities that are listed on the balance sheet of the company include the current liabilities of; trade and other payables, borrowings, other financial liabilities, provisions, current tax payables, liabilities held for sale. In terms of the non-current liabilities, the company has listed borrowings, provisions, other financial liabilities, and other non-current liabilities in the balance sheet statement (Woolworths, 2019; Woolworths, 2017; Woolworths, 2018). All of the current liabilities are non-interest-bearing liabilities. On the other hand, the interest-bearing liabilities include the borrowings, other financial liabilities, and other noncurrent liabilities.
CSL Limited:
The liabilities which are listed on the balance sheet of CSL include the current tax liabilities, the interest-bearing current liabilities, trade and other payables, the current provisions, the deferred government grants. The non-current section of the liabilities shows the deferred government grants, the deferred tax liabilities, the provisions, the retirement benefit liabilities, the interest-bearing liabilities, and the other non-current liabilities (CSL, 2019). All of the current liabilities are non-interest-bearing liabilities. Conversely, the interest-bearing liabilities include the borrowings, other financial liabilities, and other noncurrent liabilities.
vi) Key provisions under AASB 137
This standard aims to make sure that the basis for the recognition and the measurement are implemented to the contingent assets, liabilities, and the provisions consistently to make the users capable enough to comprehend the true nature, timing and the amount of these items. Examples of these items include refund policies and warranties for provisions, for contingent liabilities, include the example of the cases of the court where the payment is needed however the care is not clear, and in terms of the contingent assets, the example would be of the court cases in which the entity can be the beneficiary however the case is not clear. This could be the case of the exploratory drillings or the activities which include the evaluation of the commercial feasibility or technical feasibility. As per this standard, the definition of the “provision” says that it is a liability of uncertain sum or timing. On the other hand, a “contingent liability” is a possible duty that is only payable on the event, which is not wholly in the control of the entity or any present duty which is not considered currently applicable to be not measurable or probable with enough reliability. On the other hand, the contingent asset is the probable asset whose presence is reliable on the future event which is not completely in the control of the company (Dagwell et al., 2015).
As per this standard, the key requirements are.
- The recognition of the contingent liability is based on the basis that 1) the company has a current duty which is arising from a past event 2) it is expected that cash outflow is going to happen to settle for the obligation and 3) the obligation is reliably measured as well.
- Also, this standard requires that the contingent assets and liabilities are not recognized and are only disclosed.
- The provisions are measured at the end of the reporting period at the best estimates made for the expenses which are needed to make even the current obligation arising. This is also done by taking account of the current unpredictability and risks and the present valuation of the duty if required, and of any probable future events which may have an influence on the provisions except the disposal of the assets.
- These provisions can be offset by any probable future reimbursement by a third party only when it is certain, and these are only used for their purpose of reporting and need to be reviewed at every reporting period ending. These provisions also do not cover any onerous attacks, future losses from operations, or restructuring process.
- Disclosures for each class of the provisions in terms of their opening and closing balances and the reasons for the changes in these balances and the nature of these duties and the causes of the uncertain events or any other expected future events or reimbursements are needed to be made. Similarly, the disclosures for the contingent assets and liabilities in terms of the estimates of their financial effects, the indication of the unpredictability and expected future reimbursement need to be made as well (Aasb.gov.au, 2018).
vii) Reference of AASB 137
Woolworths Group:
The company has reported contingent rentals while other contingent liabilities, which had the likelihood of non-probable payment of which disclosures have been provided in terms of the reporting and inclusion of the provision for the self-insured risks amounting to $596 million in the statement. In terms of provisions, the company has reported $2514 million of current and non-current provisions in 2019. These are in relation to restructuring, employee benefits, self-insured risks, store exit costs, onerous contracts. The AASB 137 requirements of reporting and disclosures have been fulfilled. The company has reported the changes in the opening and closing balances of the provisions. However, no reference to AASB 137 is mentioned in the report (Woolworths, 2018).
CSL Limited:
Similar to Woolworths, no mention of AASB 137, however, the requirements of disclosures for provisions, contingent assets and liabilities, and its reporting have been fulfilled.
viii) Different Categories of Assets
Woolworths Group:
In terms of the assets, the Woolworths company balance sheet shows both current as well as non-current assets. The company has current assets in the form of cash and cash equivalents, trade and other receivables, inventories, and some other financial assets. Other than this, the assets held for sale are also included in the current assets account in the balance sheet of Woolworths. The non-current or long-term assets which have a maturity period of more than one year include a variety of assets classes as well. These include deferred tax assets, intangible assets, trade and other receivables, other financial assets and property, plant and equipment (Woolworths, 2019).
CSL Limited:
The balance sheet includes current assets of cash and cash equivalents, receivables and contract assets, current tax assets, inventories, and other financial assets. The non-current assets include the retirement benefit assets, the deferred tax assets, the intangible assets, the property plant and equipment, other receivables, and other financial assets.
ix) Examination of the Measurement Basis used for the recording of the assets
Woolworths Group:
The cash and cash equivalents are computed as the ones with an original maturity of here months or less. The assets held for sale are measured on the basis of the criteria that if the carrying amount will be recovered principally by sale then its continued usage and the sale are highly expected. The measurement is done based on the lower of the carrying amount and of the fair value minus the costs to sell. An impairment loss is recognized to fair value less the costs of selling, and gain is realized when there is an increment in fair value less the selling costs. Trade and other receivables are recognized at first at their fair value and later on at the amortized costs by using the effective interest method of which the loss allowance is deducted. These have terms of 30 days or less (Woolworths, 2018). Other financial assets include derivatives, listed equity securities and investments in associates. Listed equity securities are measured at fair value by using other comprehensive income nets of the transaction costs initially and later at the fair value with any expenses realized in the comprehensive income. The investment in associates is recognized initially at costs and is accounted for by using the equity method. Property plant and equipment is measured at costs less amortization, depreciation and impairment losses. The straight-line basis is used for depreciation. Goodwill is the excess of the cost of the acquisition over its fair value. Goodwill is recognized afterward a so less depreciation and impairment loss. Other intangible assets are measured at costs less depreciation and impairment losses (Woolworths, 2019).
CSL Limited:
Inventories are measured at lower cost or the net realizable value. The costs of inventories include direct labor, material and overheads. Overhead is computed based on normal operating capacity. The intangible assets are measured in a similar manner as Woolworths, except the goodwill is not amortized. The plant property and equipment are computed at historical costs less the amortization and depreciation. CSL also uses the straight-line method. Deferred government grants are realized at their fair value.
Conclusion:
To conclude, it can be said that both of the selected companies showed similar reporting methods with slight differences which were mostly dependent on the nature of the business. The classification and analysis of the assets, sources of funds and the liabilities helped in understanding the different options available to the businesses and how they can use it in a better manner to get the maximum benefits. The evolution of the fund’s sources showed how the preference of funds changes over time to more secure, and reliable and thus high interest-bearing options for successful and profit earning companies. The analysis of the AASB 137 was also conducted which showed the requirements underlined in this standard and how these are implemented to some extent (as per the nature of the business) to the selected companies.
List of References:
Aasb.gov.au, 2018. Provisions, Contingent Liabilities and Contingent Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf [Accessed 25 January 2020].
CSL, 2019. CSL Annual Report. [Online] Available at: https://www.csl.com/investors/financial-results-and-information/annual-reports#archive [Accessed 25 January 2020].
Dagwell, R., Wines, G. & Lambert, C., 2015. Corporate Accounting in Australia. Pearson Higher Education AU.
Investing.com, 2019. CSL Ltd (CSL). [Online] Available at: https://www.investing.com/equities/csl-limited-ratios [Accessed 23 January 2020].
Morningstar, 2019. Key Ratios. [Online] Available at: https://financials.morningstar.com/ratios/r.html?t=0P00006X26&culture=en&platform=sal [Accessed 25 January 2020].
Weert, F.d., 2011. Bank and Insurance Capital Management. john wiley & Sons.
Woolworths, 2017. Woolworths Annual Report 2017. [Online] Available at: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports [Accessed 25 January 2020].
Woolworths, 2018. Woolworths. [Online] Available at: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports [Accessed 25 January 2020].
Woolworths, 2019. Annual Report 2019. [Online] Available at: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports [Accessed 25 January 2020].
