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Accounting Policies Of Annual Report

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Question:

Discuss about the Accounting Policies of Annual Report.
 
 

Answer:

Introduction

In the Summary of Accounting Policies of the Annual Report of the company, the disclosures have been given in accordance with AASB116 (Para 73) regarding the basis of measuring the carrying costs that is the building and other property, plant and equipment are recorded in the books at historical cost less depreciation and any subsequent costs towards PPE are either added to the carrying amount or shown as separate asset as per the nature of cost incurred and the divisibility of costs (Flight Centre Travel Group, 2016).

Other disclosures that has been complied with AASB 116 (Para 73) are the method of depreciation that is straight line method is being used, the disclosure of useful life of a building that is 30 years and Plant and Equipment that is 2-8 years (Flight Centre Travel Group, 2016). Further, the disclosure regarding impairment of assets is also mentioned which states that the carrying amount of the assets is impaired immediately to its recoverable amount as soon it is recognized that the carrying amount is getting more than the estimated recoverable amount.

In the notes to financial statements, there are proper reconciliations for the carrying amount at the beginning of the year and at the end and also showing the changes therein, which is compatible with the disclosure requirements of AASB116 (Para 73).

The assets have been recognized in the financial statements as their costs can be measured and these will provide economic benefits in future to the enterprise (Para 7-10). The PPE have been shown under the head Non-Current Assets in the Balance Sheet. The assets after recognition have been recorded according to Cost Model (Para 30) where the assets have been carried at cost less accumulated depreciation and impairment losses that is $.2,16,239,000 in Balance Sheet as on 30th June 2016.

The Depreciation on PPE has been shown in Consolidated Profit and Loss Account of the company for the year ending 30th June 2016 in accordance with AASB 116 (Para 48-49) and has been calculated at straight line basis as mentioned in notes to accounts which may be the best possible method according to company (Para 50-62).

Further, the impairment criteria used by the company is in compliance with the AASB 136 as mentioned in the notes to accounts of the annual report of the company (Para 2 , Para 12-14) which states that the carrying amount of the assets is impaired immediately to its recoverable amount as soon it is recognized that the carrying amount is getting more than the estimated recoverable amount (Flight Centre Travel Group, 2016).

 

Categories of intangible assets of the organization

In addition to goodwill, there are two more categories of intangible assets of this organization –

Brand Name and Customer Relationships, and

Other Intangible Assets- Software

Brand Name and Customer relationships are recognized initially at fair value. There is no defined measure to calculate the value of Brand Name of company and value of a relationship with customers. Also, the accuracy of the useful life of brand names is not easy to judge and are assumed to have an indefinite useful life. Factors that help in assessing the useful life from time to time are the trademarks protection which is renewed a number of times and such other factors (Vaitilingam, 2010).

With regard to Other Intangible Assets- Softwares, the Research and Development costs of Softwares are recognized as carrying the cost of software. The development costs are capitalized project wise where the project if feasible on technical and commercial basis, and such costs include material, labor, services, and other related overheads. Useful Life of the software is generally taken by the company as between 2.5 to 5 years depending upon various market updations and compatibility.

The Intangible assets such as brand name have indefinite useful lives and hence amortization is not possible but impairment is done on a timely basis as and when required and is done by global teams (Damodaran, 2012).

The impairment loss for all the intangible assets is calculated and recognized when the carrying amount of asset is higher than its estimated recoverable value.

The Provisions are shown under the head Current Liabilities in the Balance Sheet of the organization and its justifications and relevant information is provided in the notes to accounts also. Provisions are liabilities which are to be settled in next in coming future or next financial year. These may be non-trade liabilities also. For example Salary payable, Telephone Expenses Payable, Rent Payable etc.

The Liability for Long Service Leave is also shown in provisions as a liability and classified into current liability and non-current liability. That portion of long service leave that is not expected to be settled within 12 months are showed under the head provisions. LSL are future payments which are not expected to be settled within 12 months after the end of the period in which the employees have rendered the services. The company considers all future wages, payments, salaries, promotions, departures and average age levels of employees. Entire payments are discounted at using current market rates and national corporate bonds with terms of maturity and currency to find out discounted cash outflows.   

The Company which has proposed or declared any dividend but has not paid it at the year end should show it as a Provision in the Balance Sheet provided it is fully authorized by the board and is no longer at the discretion of the company. This shall constitute a liability till it is distributed (Parrino et. al, 2012). The reason behind it is that the company has now incurred a liability by authorizing the dividend but not yet paying it and is to be paid on any future date. It shall be a current liability because it is to be paid in coming 12 months.

 

Contingent Liabilities

These are those liabilities which may or may not arise as an event on a reporting date but the occurrence of which could be very dangerous to the company’s future. These may arise out of events which may become a permanent liability on happening of any event which cannot be predicted. However, the ignorance of this shall be against the principle of prudence because a sudden rise of any liability which is not foreseen may badly affect company’s profit and reputation. For example- a Court case filed by any competitor for breach of trademark or patent which is pending for trial for years and not yet decided at balance sheet date. These are not recognized in the financial statements but are to be fully disclosed with the likely amount to be paid in the notes to accounts of the company.

This disclosure helps the stakeholder to fully understand the extent of the liability and allows the company to prepare itself from this unforeseen liability.

The contingencies of the organization as seen from above are the case filed by ACCC against FLT as on reporting date which is challenged by FLT in the higher courts. The decision may or may not come in the favor of FLT, hence it is shown as contingent liabilities at the balance sheet date. The disclosures have also been made in the company’s notes to accounts regarding other general probable contingencies (Needles & Powers, 2013).

On the other hand, a contingent asset may arise due to an event which results in a favorable position for the company but the company does not disclose this matter in the notes to accounts because this may mislead the stakeholders against the wrong anticipation of future profits (Choi & Meek, 2011). For example- winning a court case against the insurance company for insurance claim which is likely to be won by the company but shall only be recognized as a contingent asset when the claim is ordered by the court or received by the company or the evidence of which is fully known.

Contingent assets are not shown anywhere because any gain or profits are recorded only after they occur actually (Berk et. al, 2015).

This is in accordance with the Accounting Standards and principles.

Using the financial statements calculate, and comment on, the following ratios: Current ratio, the rate of return on total assets, times interest earned, the debt ratio and the P/E ratio. The market price of the ordinary shares at the close of business on 30th June 2016 for your company was $31.58. (15 marks)

 

Ratio Computation

Ratios for the year ending 30th June 2016

Current Assets = $ 2,26,32,33,000

Current Liabilities= $ 1,56,67,24,000

Current Ratio = 1.44 times

This ratio of 1.44 times denotes a perfect combination among current assets and current liabilities were current assets fully cover the current liabilities and are also not excessively involving company’s funds. Current Assets should not only cover the current liabilities but should also be in liquid form so as to cover any contingencies (Berk et. al, 2015).

Rate of Return on Total Assets= Net Profit after taxes/ Total Tangible Assets

Net Profit after Taxes=   $ 24,67,00,000

Total Tangible Assets = $ 2,55,56,28,000

Return on Total Assets = 9.65 %

This ratio denotes earning made by the company against tangible assets utilized in the company. The ratio is just appropriate and shows that company shall be able to cover assets cost at this pace in next 10 years.

Times Interest Earned= EBIT / Interest Expense

EBIT= $ 34,78,09,000

Interest Expense= $ 2,80,51,000

Times Interest Earned = 12.40 times

 


This ratio denotes the number of times the interest paid covers the EBIT .This shows the interest paying capacity of the company (Arnold, 2010). The company is well placed in terms of interest to be paid . Also it denotes the borrowing capacity of the company.

Total Debts= $ 7,68,45,000

Shareholders Equity = $ 1,34,59,45,000

Debt Ratio= 5.71 %

This ratio denotes that the percentage of debt to total equity is in the favor of higher equity utilized in the company against the debt. The ratio also says that the interest bearing debt is lower and equity is on a higher side which also suggests that dividend payments shall be higher (Arnold, 2010).

P/E Ratio = Price Earnings Ratio = Market Price per Share/ Earnings Per Share

Market Price per Share = $ 31.58

Earnings Per Share = 242.4 Cents or $ 2.424

P/E Ratio = 13.03

The higher P/E Ratio denotes the higher market price of the company. A Higher ratio suggests that the investors can expect a higher rate of return on their shares.

 

References

Arnold, G 2010,  The Financial Times Guide to Investing,  Prentice Hall.

Berk, J, DeMarzo, P. & Stangeland, D 2015,  Corporate Finance,  Canadian Toronto: Pearson Canada.

Bodie, Z., Kane, A. & Marcus, A. J 2014, Investments,  McGraw Hill

Choi, R.D. & Meek, G.K 2011,  International accounting. Pearson Press .

Damodaran, A 2012,  Investment Valuation,  New York: John Wiley & Sons.

Flight Centre Travel Group 2016, Flight Centre Travel Group Annual Report & Accounts 2016, viewed 12 May 2017 https://www.fctgl.com/sites/fctgl.com/files/01%20FLT%20FY16%20Annual%20Report.pdf

Needles, B.E. &  Powers, M 2013, Principles of Financial Accounting, Financial Accounting Series: Cengage Learning.

Northington, S 2011, Finance, New York, NY: Ferguson's.

Parrino, R., Kidwell, D. and Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Vaitilingam, R 2010,  The Financial Times Guide to Using the Financial Pages, London: FT Prentice Hall.

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