Corporate and Financial Accounting HA 2032: Individual Assignment T2 2019
Purpose:
This assignment aims at developing a clear understanding of students on the different sources a company can use to raise its funds. Students will perform a comparative analysis of sources of funds used by two selected companies for a three-year period. They will identify the movement in the sources of funds used by the two companies. Students will also need to demonstrate a clear understanding of different classifications of entities for reporting purposes.
Assessment task:
Part A
Select the latest annual report of two ASX listed companies for the last three years period. Please read the balance sheet carefully and complete the following tasks:
- What items have been recorded under owners’ equity section? Clearly explain your understanding of each item recorded under the owner equity section.
- Explain the movement in each item recorded under the owner equity section with the reason
- What items have been recorded under the liabilities section? Clearly explain your understanding of each item.
- Explain the movement in each item recorded under liabilities section with reason.
- Briefly explain the relative advantages or disadvantages of each source of fund each of
your selected companies are using.
Part B
Do your own research and critically examine the concepts of small proprietary company, large proprietary company, and reporting entity. What are the implications of being classified as either one of these three types of companies in terms of compliance or reporting requirements?
Abstract
The report discusses the different types of sources of companies may use and their implications for the entity. A comparative analysis of two entities has been done that are listed on the Australian stock exchange. It has been demonstrated how there was a movement in sources of funding during the three years. Further, different classification of companies and their reporting aspects have also been discussed in this report.
Introduction
The main aim of this report is to develop understanding by using different sources a company can use to raise its funds. The companies which are selected are listed on the Australian Securities Exchange (ASX). The names of companies which are selected are Pro Medicus Ltd and CSL Ltd. In the first part, the three-year annual reports of both companies are evaluated in order to evaluate the movement of owner’s equity. Moreover, the liabilities items are also listed and explained as in accordance with both companies. The advantages and disadvantages of sources of funds are also a part of this report. The second part is linked to the critical examination of concepts related to the small proprietary company and large proprietary company. Each company is classified as per the requirements of compliance.
PART A
1-Owner’s equity section
Owner’s equity is the difference between assets and liabilities of the entity. In other words, it is the book value of the company. Owner’s equity is the term used for sole proprietors while it is termed as stockholders’ equity for corporations. Components of equity may include common stock, preferred stock, retained earnings, etc.
The stockholder’s equity in CSL Ltd consists of retained earnings, unrealized gains and losses and other appropriate reserves. The retained earnings are income reserves that the entity retains instead of paying it as dividends. These reserves are intended to be used for future operations and expansion needs of the company. Moreover, a minor impact of currency rates fluctuation can also be seen in the equity portion of CSL Ltd. This means that the company is involved in an operation that is denominated in foreign currency. These transactions may give a loss or profit at different points in time.
It can be seen from the statement of financial position of CSL Ltd
2-Movement of owner’s equity over 3-year period
Usually, the statement of owner’s equity changes for a specific period of time, usually at the year-end. The movement of owner’s equity over a three-year period for both companies is explained below.
| CSL Ltd | Pro Medicus Ltd | |||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |
| Assets | 17,548 | 14,583 | 11,893 | 84,278 | 61,043 | 47,206 |
| Liabilities | 10,016 | 9,010 | 7,722 | 34,990 | 25,974 | 12,372 |
| Owners’ Equity | 7,532 | 5,573 | 4,171 | 49,288 | 35,069 | 34,834 |
From the above table, it can be seen that the value of owners’ equity is enhancing from 2017 to 2019 for both companies CSL Ltd and Pro Medicus Ltd. The increase in the owner’s equity or company earnings results in the overall increase in the stockholder equity balance of the company. The shareholders’ equity may enhance from selling shares of stock, raising the revenue of an organization, and understanding their operating expenses. The main reason for the enhancement in the owners’ equity of both companies is that both companies have issued shares of common and preferred stock, which has enhanced shareholder equity by the issue price of the shares. Both companies have raised their shareholders’ equity by issuing shares of capital in order to pay out their interest costs and debts. Moreover, it can be seen that the net income of both organizations has resulted in an increase in the equity account which is known as retained earnings. A component of stockholders’ equity and retained earnings include the factor of net income which an organization has earned till date. This excludes the distribution of profits made to shareholders. Moreover, both companies have raised their products’ prices, understated their management personnel, and imposed a strict operating budget on all their employees.
3-Items recorded under Liabilities
The items which have been recorded under the liability section of both companies are listed below:
| CSL Ltd | Pro Medicus Ltd |
| Accounts Payable | Accounts Payable |
| Income Tax Payable | Income Tax Payable |
| Other Current Liabilities | Other Current Liabilities |
| Accrued Payroll | Accrued Payroll |
| Deferred Taxes | Deferred Taxes |
The above table reflects some of the common items which are reflected in the balance sheet of both companies. The role of accounts payable is to complete payment and control expenses by receiving payments from third parties. Accounts payable is used to reflect the day-to-day management of the payment cycle of an organization. The income tax payable account is compiled of taxes due to the government within a single year. Calculation of Income Tax is done as per the prevailing tax law. Other current liabilities are used to reflect those current liabilities which are not assigned to common liabilities such as accounts payable and other debt obligations. The accrued payroll includes all wages, salaries, bonuses, and other related expenses that have been earned by an employee of an organization but have not yet been paid or recorded in the general ledger accounts of an organization. The total current liabilities are those line items which are used to reflect liability of a company which they have to pay within a one-year time frame. The value of the current ratio and quick ratio is used to reflect the relationship among the current asset and current liabilities of an organization. It reflects whether the current assets of an organization are enough to meet their current liabilities’ obligations. The cash ratio is used to measure the ability of an organization to pay out their current liabilities with the help of cash equivalents. The deferred tax is an asset of an organization which is used to understate the taxable income of an organization. It reflects a situation where a company has overpaid taxes or advance taxes paid on its balance sheet.
4-Movement of liabilities over a 3-year period
The movement of accounts payable for CSL Ltd has shown a change of 6% and 8% in the financial year 18-19 and 17-18 respectively. Similarly, the movement of accounts payable for Pro Medicus Ltd has shown a change of 20% and 21% in the financial year 18-19 and 17-18 respectively. The reason for the enhancement of accounts payable is that both companies have purchased inventory in all three financial years, and they have paid their short-term credit through accounts payable method.
The movement of income tax payable for CSL Ltd has shown a change of -45% and 21% in the financial year 18-19 and 17-18 respectively. Similarly, the movement of income tax payable for Pro Medicus Ltd has shown a change of -9% and -135% in the financial year 18-19 and 17-18 respectively. The decrease in the value of income tax payable reflects that both organizations have paid cash for income tax liability more than the income tax expense.
The movement of accrued payroll for CSL Ltd has shown a change of 14% and 84% in the financial year 18-19 and 17-18 respectively. Similarly, the movement of accrued payroll for Pro Medicus Ltd has shown a change of 6% and 1% in the financial year 18-19 and 17-18 respectively. The increase in the value of accrued payroll for both companies is due to the accumulation of salaries of employees, which they will get in the upcoming period.
The movement of the current ratio for CSL Ltd has shown a change of -3% and -9% in the financial year 18-19 and 17-18 respectively. Similarly, the movement of the current ratio for Pro Medicus Ltd has shown a change of 8% and -20% in the financial year 18-19 and 17-18 respectively. The mixed trend in the value of current and quick ratio reflects that both companies’ current assets are not enough to payout current liabilities obligation.
The movement of deferred taxes for CSL Ltd has shown a change of 6% and -66% in the financial year 18-19 and 17-18, respectively. Similarly, the movement of deferred taxes for Pro Medicus Ltd has shown a change of 75% and 354% in the financial year 18-19 and 17-18 respectively. This is due to the accelerated tax depreciation which is greater than the decelerating depreciation of older assets. The purchases of new assets have resulted in an increase in deferred tax value.
5-Advantages and disadvantages of sources of funds of both companies
Some of the funds used by the company along with their advantages and disadvantages are tabulated below:
| SOURCE OF FUND | ADVANTAGES | DISADVANTAGES |
| Bank Loan | Purchases can be done without any sort of liquidity.
Bank loans are a major source of growth drives. Companies can use it to purchase fixed assets. It provides capital for day-to-day operational activities of both companies. It is more flexible and can offer cash discounts. It also provides advantages in tax formations. |
It adds an additional burden on the cost of goods.
It requires heavy securities and creditworthiness’s to avail bank loan. Partial funding is required to avail bank loan. Companies have to pay prepayment penalties and charges. The interest rate risk can sometimes be a hurdle for companies. |
| Share issue | Sudden cash will enhance the growth of both companies.
There is no debt repayment in issuing shares. There is no dilution of control in issuing shares. |
It gives away ownership of both companies.
Companies have to pay dividend payments to shareholders. |
PART B
Concept of small proprietary company
A small proprietary company is defined as a business where the business does not offer business shares. However, a proprietary company is supposed to be a separate legal entity which has its aspects of tax liability (Bill Lo, 2019).
The threshold which has been set by the Corporations Act 2001 states that a company will be stated as a small proprietary company if it satisfies at least two of the three requirements which are mentioned below.
- There should be a revenue of about $25 million in the consolidated revenue
- The consolidated gross assets should be less than $12.5 million
- The company has less than 50 employees.
However, this threshold level was set at a low level that can effectively attract companies so that they can become significant. There have been some major changes that were incorporated since 1 July 2019. The changes incorporated are stated below
- The consolidated revenue should be less than $50 million
- The consolidated gross assets should be less than 25 million
- There should be less than 100 employees.
The small proprietary companies are not required to maintain appropriate financial records. In the same way, there is no need for the preparation of the audited financial reports. However, it can be made if being instructed by the shareholders who are having a minimum of the 5% of the voting power.
Concept of large proprietary company
The threshold that has been set for the large Proprietary Companies is identified to be as follows
- The consolidated revenue is $25 million or more.
- The consolidated gross assets are supposed to be $12.5 million or more.
- There are 50 or more employees in the company.
Just like the Small Proprietary companies, there has been a doubling in the level of the threshold which was incorporated since 1 July 2019. In order to qualify for the large company, it is essential that the company should satisfy at least two of the following aspects (Bill Lo, 2019). The changes are stated below
- The consolidated revenue is more than $50 million or more.
- The consolidated gross assets should be $25 million or more.
- There should be 100 or more employees.
The Corporations Act requires larger companies to prepare audited accounts in which there must be the lodging of the director’s report and the financial report. In the same way the companies are required to implement the policies of whistleblowing, which are in accordance with the Corporations Act (Lawyers, 2016).
Reporting entity
Reporting entity refers to the entities where it is supposed to be reasonable that the users are dependent on the General-Purpose Financial Reporting (GPFR). This is done to obtain an understanding of the performance and the financial performance of the entities. In this way, the decisions are dependent on financial information and present the data in the financial reporting. This could assist the users of the financial statements. The users can be shareholders, members, employees, creditors, and investors. The reporting entities are required to make GPFR. According to this, there is the condition that Australian Accounting Standards are required to be applied for the preparations of the financial reporting. However, in the case of non-reporting entities, there is only the need for the preparation of the special financial reporting. In such a situation there is no need to make compliance with the Australian Accounting Standards. In such a situation there is only the need of following special purpose financial reporting, which follows the application of the measurement and the recognition of the Standards-based on the Australian Accounting Standards along with a restricted disclosure (Mullins, 2019).
In this context, the factors which indicate the dependent users cover the separation between the owners and the managers, economic and political influence. It also covers the financial characteristics which are strongly related to size and indebtedness. In the same way, the size will also be an essential factor which will be determining the number of employees, customers, or suppliers (Wilcox, 2019).
Implications of standards on the companies
According to the Corporations Act 2001, there is an imposition of a number of reporting obligations on the large proprietary companies which also includes the preparation of the financial reporting, director’s report, and the auditor’s report, etc. However, in the case of the small proprietary companies, they are obliged to maintain an appropriate level of financial records. However, there can be an increased level of requirements which might be required to follow if the shareholders ask for it. In this way, it can be stated that the changes which are required to maintain a level of the threshold requirements will surely be relaxing the conditions of the reporting requirements. According to the Treasury estimates of Australia, there are around 2200 proprietary companies which are not required to follow the strict rules and regulations of the reporting as imposed on the larger companies. In this way, the companies can effectively save around $8.13 million yearly as per the regulatory costs (Fermanis, 2017).
The presence of accounting standards allows that there are a relevant and significant level of reliability in the financial statements. However, it might be possible that the information depicted in the financial statement may not be according to the standards of certain entities. It is highly likely to be observed in those companies that are not operating in the capital market, which is not seeking any type of investment from the public.
The reporting requirements are different for small and large proprietary companies. The small proprietary companies are not required to prepare audited financial statements as per the standards. This relieves them from making any type of disclosures as well. However, there are few exemptions in this regard like controlling the foreign enterprise or on the will of the directors. In contrast to this, large companies are required to prepare audited financial statements according to the standards. In this way, there will be a presentation of the disclosures as well, which will promote the reliability and relevance of the financial statements. There are a few exceptions in the case when there is a wholly owned subsidiary or if the company is a member of a closed group (Milnay, 2018).
The non-reporting entities are permitted to make certain criteria related to the measurement and the recognition of the standards. The non-reporting entities are free from making disclosures which are related to the assumptions made for the calculations. In such a situation, there are probable chances of misleading information for the other stakeholders like employees and the creditors. It is because such type of reporting may give measurements based on the unrealized profits and the assets which can also be inflated. However, in the case of reporting entities, this is not the case as these entities are required to make complete disclosures about the assumptions made in the measurements (Hughes, 2006).
Conclusion
In conclusion, we can say that on the one hand where none reporting entities are free from the hassle of following standards, its reporting may not be very much reliable as of a reporting entity. However, reporting entities have a lot of disclosure to be made which may be time taking and resource consuming.
References
Bill Lo, A.&. E.C., 2019. Small and large proprietary companies redefined. [Online] Available at: https://www.swaab.com.au/publication/small-and-large-proprietary-companies-redefined [Accessed 21 September 2019].
Fermanis, S., 2017. The Concept of a Reporting and Non-Reporting Entity. [Online] Available at: https://www.pkf.com.au/blog/2017/the-concept-of-a-reporting-and-non-reporting-entity/ [Accessed 21 September 2019].
Hughes, D.A., 2006. Financial Reporting for Proprietary Companies – Problems & Pitfalls. [Online] Available at: http://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=http://www.tved.net.au/
PublicPapers/September_2006,_Corporate_Education_Channel,_Financial_Reporting_for_
Proprietary_Companies___Problems___Pitfalls.html [Accessed 21 September 2019].
Lawyers, M.W., 2016. Audit relief for small proprietary companies controlled by a foreign company. [Online] Available at: https://www.lexology.com/library/detail.aspx?g=aed79ad3-94c2-458e-a772-4403060b2088 [Accessed 21 September 2019].
Milnay, G., 2018. Changes to financial reporting for large proprietary companies. [Online] Available at: https://www.holdingredlich.com/changes-to-financial-reporting-for-large-proprieta [Accessed 21 September 2019].
Mullins, N.R.a.G., 2019. Changes to “large proprietary company” thresholds to commence 1 July. [Online] Available at: https://www.hopgoodganim.com.au/page/knowledge-centre/blog/changes-to-%E2%80%9Clarge-proprietary-company%E2%80%9D-thresholds-to-commence-1-july [Accessed 21 September 2019].
Wilcox, H.a., 2019. Large proprietary companies: Significant changes to financial reporting thresholds. [Online] Available at: https://www.lexology.com/library/detail.aspx?g=1b2b758f-4456-4724-b210-96d1bfe5494e [Accessed 21 September 2019].
