IFRS 16 Leases, MD&A Analysis, And IFRS 15 Impact On WSP Global Inc. Financial Statements

Part I: 2017 Financial Statements and Notes

1. In January 2016, a new Lease accounting standard (IFRS 16) was issued with an effective date of January 2019, (early adoption available).  IFRS 16 requires that lesseesreport all leases, both finance and operating (as formerly defined), on the statement of financial position (balance sheet).  The lessee company will be required to recognize a right-of-use lease asset and a lease liability equal to the present value of the lease payments (with some exceptions).  

For lessors under IFRS 16, the requirements have not substantially changed and companies will therefore apply the guidelines you studied in Intermediate Accounting for determining an operating or finance lease.

1. Review your company’s financial statements and notes with the 2017 statements. Does your company discuss IFRS 16?

Does your company have leases as a lessee, a lessor, or both? How significant are operating leases to your company as either lessee or lessor (compared to other operating expenses for example)?  How easy or difficult was it to find this information and where did you find it (give reference)?

1. Many companies primarily report operating leases due to the current accounting standards, with the concern that debt is under-reported. Financial analysts (such as Moody’s or Standard & Poor’s) make adjustments by using approximations like 6 times the annual (current year) operating lease expense in the income statement as a calculated “rule of thumb” for adjusting the balance sheet liabilities.  This estimate is then added to existing debt to provide a debt comparison to companies reporting finance leases.

Use the rule of thumb calculation (6 x operating lease expenses) to estimate the increase in debt if all operating leases were reported as finance leases this year.

If the revised section was adopted in 2017, meaning that as a lessee company, your corporation will need to report as a liability (debt) the present value of its future operating lease payments, will it significantly affect the recorded debt of your company?  Is it significant compared to other liabilities? Explain with sufficient calculations to support your explanation.

2. In 2014, a new Revenue accounting standard IFRS 15 was issued and has a final adoption date for 2018.  Does your company discuss IFRS 15?Does your company discuss any potential impact of the change in financial statements? Do you think based on your company’s industry that the impact may or may not be significant?  Explain.

1. Brieflyreview your corporation’s MD&A and any of the annual report other than financial statements from its 2017 year-end. It is long but I want you to read it briefly to get a sense of its contents and understandability. When applying this question, you may note that you reviewed the annual report other than financials instead of the specific MD&A based on your company’s reporting choices.  

Critique the MD&A compared against the six general disclosure principles as recommended by CPA Canada (see required reading MD&A Guidance on Preparation and Disclosure and also copied below). Ensure you are clear which of the principles you are discussing and focus on the usefulness of the information using the CPA guidelines as a framework.

The six principles in the guidance are consistent with Canadian Securities Administrators’ views about MD&A. MD&As should:

• enable readers to view the entity through management’s eyes;
• supplement and complement the information in the financial statements;
• be complete, fair and balanced, and provide information that is material to the decision-making needs of users;
• have a forward-looking orientation;
• focus on management’s strategy for generating value over time; and
• be understandable, relevant, and comparable.

2. Non-GAAP (Non-IFRS) measures in the MD&A or in the annual report

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20120217_52-306_non-gaap.htm

In the course we discussed the Ontario Securities Commission publication with respect to non-GAAP measurement.  Non-GAAP measures usually exclude some GAAP requirements in order to allow investors to recalculate ratios or statement line items. 

Give two or more examples of the non-GAAP measures that were included in the 2017 MD&A or anywhere else in the annual report.  Explain what specific items are excluded in the measure – why are these items excluded?    Why do you think your corporation provided these specific non-GAAP measures?  As an accountant, do you have any concerns with corporations providing these non-GAAP measures?  Explain.  

3. Subliminal Messaging in the MD&A or in the annual report

In class we discussed the article “Voluntary disclosures in corporate annual reports – More than meets the eye”. The article discussed the use of metaphors or photographs to imply a certain perspective in a company and perhaps to influence the reader’s opinion of the company.  

Give an example of a message that your corporation may be sending in its MD&A or in the annual report through the use of photographs, colour usage, metaphors or other examples.  Why do you think the corporation made that choice?  What message do you think the corporation is trying to send the readers? 

Remember that if there are no photographs or colour choices, likely there are some distinct wording choices so look for those.

If colour choices or metaphors are not apparent in the annual report why do you think that company made that choice?  What message do you think the corporation is trying to send to the users?

1. Since the time of the release of the 2017 financial statements to now, brieflyreview the information that has been released by your company and review what has happened to your company’s stock price.  You may want to use Googlefinance, Globeinvestor, or other relevant stock websites.  What are your key findings?  

2. As specified by the finance underpinnings of accounting, investors are interested in the beta risk of the company.  From your review of the company’s notes as well as its stock performance, do you think your company has a high or low beta risk? Investor sites will often provide a specific beta calculation for the company. Explain or interpret the beta.  

3. In your review of the subsequent information as well as the 2017 MD&A, annual report and financial statements, did you identify any signals by your company (other than as discussed in Part 1 above)?  If so, give an example and explain why you think it is a signal.  If not, explain why you think your company chose not to signal.  

4. Investors want to be able to use financial statements to predict future performance. Do you think the financial statements from the 2017 annual report used in assignment #1 would have helped investors in predicting the financial and stock performance that occurred subsequently?  Explain.  

5. Now that you have reviewed the financial statements and notes, as well as the MD&A, for 2017, as an unbiased evaluation, which would you prefer as a use as investor for assessing the company – the annual report including the MD&A section or the statements and notes only without the MD&A and discussion?Explain your view.  

6. Lastly, the investor that you have been helping in assignment #1 and #2 has asked you whether you think the current share price for the company is a buy, sell, or hold.  What would you recommend and why? 
7. Did the MD&A influence a change in your decision as compared to your assessment of the financial statements alone?

Part I: 2017 Financial Statements and Notes

WSP Global Inc is a Canadian organisation involved in providing management and consultancy services to the developed and natural environment. The organisation is listed on the stock exchange of Toronto having 36,000 staffs approximately in 500 offices serving in 40 nations (WSP, 2018).

Requirement a:

In accordance with “Page 80 of the annual report of WSP” in 2017, information about IFRS 16 Leases could be found. Since the organisation has contractual obligations as operating leases, material increase is bound to occur to both assets and liabilities upon the enforcement of IFRS 16.  

As found from the annual report of the organisation, it leases several equipment and office premises under non-cancellable agreements of operating lease. The lease terms differ from six months to ten years and the maximum lease agreements could be renewed in accordance with the market rates, as could be observed from “Page 156 of the annual report of WSP”. In this case, WSP acts as the lessee. The lease payments under these agreements are depicted as follows:

WSP acts as the lessor as well, as it has mentioned about finance leases, in which the finance expenses are incurred to the earnings statement over the agreement period. This could be found from “Page 119 of the annual report of WSP”.

With the help of operating leases, WSP could cope up with the technological advancements in the industry by maintaining tight cash flows. Another advantage that is associated with operating lease is the significant tax advantages, in which payments could be subtracted as operating expenses during the payment period. All the above information could be accumulated easily from the annual report of WSP (WSP 2017 Annual Report, 2018).

In accordance with “Page 82 of the Annual Report of WSP” in 2017, the present value of the future operating lease payments is provided as $1,142.80. According to the rule of thumb calculation, the estimated increase in debt could be computed by multiplying operating lease expenses with 6 (Pwc.com, 2018). Therefore, the debt value would be increased by $6,856.80 ($1,142.80 x 6). On the other hand, the interest expense would increase to depict the conversion of operating leases in the form of debt. In order to balance this effect on the balance sheet statement, operating lease asset of $6,856.80 and operating lease liability of $6,856.80 would be reported in the balance sheet section under assets and liabilities sections respectively. This amount would be recorded in the form of off-balance sheet liability in contrast to the other liabilities, as mandated by IFRS 16.

Part II: Annual Report, Management Discussion and Analysis, Non-GAAP or Non-IFRS

As issued by IASB in 2014, IFRS 15 is introduced with the intent to substitute the past revenue recognition standards mentioned in IAS 18. WSP has evaluated the impact of adopting IFRS 15 on its financial statements and they have concluded that there would be no effect of this standard on the financial statements, as evident from “Page 80 of the Annual Report”. However, as WSB operates in the service sector, the potential effects of IFRS 15 could be listed down as follows:

• Modification in contracts due to changes in scope and prices
• Profits available for distribution
• Bonus plans and compensation
• Conformance to loan covenants (Tong, 2014)

1:

In order to assess MD&A of WSP, it has been compared with six general disclosure principles, which are enumerated as follows:

Through the eyes of management:

It is necessary for the Canadian business organisations to reveal information in its MD&A, which would enable the readers to foresee the management perspective. WSP has included relevant information in its MD&A about the details and procedures used in preparing its financial statements, as evident from “Page 54 of the Annual Report”. 

Integration with the financial statements:

MD&A helps in supplementing the financial statements by including information regarding financial performance and position, while they are complemented by disclosing additional prospective and non-textual information. WSP has included supplementary information by providing financial highlights which could be found from “Page 5 of the Annual Report” and the financial statements are complemented by summary of significant accounting policies, which could be found from “Page 112 of the Annual Report”.

Completeness and materiality:

Completeness denotes the steps taken by the management in identifying, addressing and communicating quantitative as well as qualitative information crucial for users to assess the business, strategy, financial condition, performance, prospects and risks (Cpacanada.ca, 2018). Information is considered to be material, if omission of any information would influence the decision-making process of the investors. In terms of completeness, the management of WSP has included a section of corporate review in its MD&A containing quantitative and qualitative information, as laid out in “Page 54 of the Annual Report”. Moreover, it has disclosed all the performance metrics belonging to growth, profitability and liquidity, as could be seen from “Page 57 of the Annual Report”.

Forward-looking orientation:

The MD&A of any Canadian business organisation needs a brief description of the strategy of the management probable to affect future prospects materially. All the management strategies of WSP and its material impact on future prospects are disclosed in its notes to the financial statements or significant accounting policies.

Part III: Subsequent Financial Performance

Strategic perspective:

MD&A should include the strategy of the management in accomplishing short-term as well as long-term goals. According to the latest annual report of WSP, the short-term objectives are the targets set out for 2018 evident from “Page 9 of the Annual Report”. The long-term objective of the organisation is to be the leading player in all the operating geographical regions, as found in “Page 11 of the Annual Report”.

Useful:

For assuring that the information provided is useful, it needs to be relevant, comparable, timely, understandable and reliable (Lee, 2018). WSP has presented all the necessary information in a simple language, which could be understood easily by the readers. In addition, it has conformed to all the relevant IFRS standards for representing its financial information in order to ensure reliability. The financial information for the year 2016 has been attached in 2016 so that comparison could be made with the current year. Finally, the organisation publishes its annual report on 1^st January, which is the reporting date for all the Canadian business entities.

2:

The two non-IFRS measures that are included in the 2017 annual report of WSP include the following:

Acquisition and integration costs:

These costs include profits made on disposal of equity investments in associates. The costs of acquisition and integration are financial performance items, which the organisation believes need to be excluded to gain an insight of the operational financial performance.

Adjusted net earnings:

Adjusted net earnings are defined as the earnings, which could be attributed to the shareholders. However, they do not consider acquisition and integration costs along with income tax effects, as the earnings are made in significant business combinations (Luo & Shalev, 2015). 

These two measures could be found from “Page 100 of the Annual Report” and the main reason that these two non-IFRS measures are included so that the decision-making process of the investors could be enhanced further. Thus, providing such additional information would add further value to the financial statements.

A message that WSP has included in its MD&A in 2017 is depicted as follows:

(Source: WSP 2017 Annual Report, 2018, p. 61)

The above table is presented so that the users could gain information about the achievements of the targets made by the company and the targets that are over-achieved. The table format is chosen so that the attention of the users could be drawn easily, as presenting in text format might result the users to overlook such information. Therefore, by representing this table, WSP intends to show the efficiency of its management in achieving the set targets.

The above figure mainly helps in representing the stock performance of WSP in contrast to the stock performance of the index S&P/TSX on monthly basis. On 1^st January 2017, the stock price of WSP stands at $45.78, which has increased to $73.56 in June 2018. A similar trend could be observed in the index as well and this denotes that the investors are prone to investing in various stocks listed in the index. The increase in stock price is due to the rise in dividend payments and increased earnings per share and such rise has motivated the shareholders to invest in the stocks of the organisation (Kim & Zhang, 2016).

It has been found that the beta of WSP is provided as 1.03. A beta above 1 is considered risky even though greater returns could be earned in future. In other words, it could be said that the stock of WSP is 3% more volatile than S&P/TSX. Hence, as per the beta value of the organisation, the stock is expected to underperform by 3% in down markets and by 3% in up markets (Wang, 2014).

After careful evaluation of the 2017 annual report of WSP, it could be stated that the organisation has not provided any signal, since it has managed to achieve all its set targets for 2017. In addition, it has over performed in certain areas and positive growth is expected to be continued in future.

WSP has prepared its financial statements in such a manner that all the necessary information could be obtained adequately regarding its financial position and performance. A brief explanation of the items included in the financial statements is provided in details and accordingly, it has helped the investors in undertaking investment decisions.

The annual report along with MD&A is more preferred instead of annual report only. This is because MD&A provides an overview of the operations of the past year and the way the organisation has performed financially (Filip, Labelle & Rousseau, 2015). In other words, it provides the opinions and perspectives of the management of WSP along with an estimation of future operations. Thus, by combining the performance of the present year through annual report and MD&A future operations, sound knowledge of the financial condition of WSP is obtained.

Based on the provided information, it could be said that the stock price of the organisation has increased with the passage of time and it has positive correlation with the index. Hence, buying the stock would be a sound option for the investors; however, they need to form a portfolio of stock, since greater risk is involved in this stock.

By evaluating the MD&A, certain financial indicators are evaluated, which are not considered as a part of IFRS. As all these indicators have shown positive signals, which are supplemented by positive financial growth, the decision-making process is enhanced.

References:

Cpacanada.ca. (2018).  Retrieved 19 June 2018, from https://www.cpacanada.ca/en/business-and-accounting-resources/financial-and-non-financial-reporting/mdanda-and-other-financial-reporting/publications/mda-preparation-and-disclosure-summary-guidance

Filip, A., Labelle, R., & Rousseau, S. (2015). Legal regime and financial reporting quality. Contemporary Accounting Research, 32(1), 280-307.

Kim, J. B., & Zhang, L. (2016). Accounting conservatism and stock price crash risk: Firm?level evidence. Contemporary Accounting Research, 33(1), 412-441.

Lee, A. S. (2018). Exploring the History and Trends of Accounting in Canada and the United States.

Luo, J. R., & Shalev, R. (2015). MICHAEL (MINYE) TANG. Accounting, Organizations and Society, 42, 48-66.

Pwc.com. (2018). Retrieved 20 June 2018, from https://www.pwc.com/gx/en/transportation-logistics/pdf/leasing-brochure-global-research-study.pdf

Tong, T. L. (2014). A Review of IFRS 15 Revenue from Contracts with Customers.

Wang, C. (2014). Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer. Journal of Accounting Research, 52(4), 955-992.

WSP 2017 Annual Report. (2018). WSPglobal. Retrieved 19 June 2018, from https://www.wsp.com/en-GL/campaigns/ar-2017

WSP. (2018).  Retrieved 19 June 2018, from https://www.wsp.com/en-CA