Discuss About The Constructive Capitalization Operate Leases?
The main purpose of this report is to analyze two company’s financial report which belong two different industries. The companies which are selected for this report are Sirtex Medical ltd and Altech Chemical ltd. The report will also be analyzing specific areas of the financial statement and a comparison will be made between the two companies.
Sirtex Medical Limited is an Australian company which is engaged in providing medical treatment to the society. The company also provides medical services to the society and treats patients. The company specializes in radioactive treatment for inoperable liver cancer. The company has its headquarter situated in Australia and the company was established in 1997. (Sirtex.com 2018).
The other company which is selected for this assignment is Altech Chemical Ltd which has its headquarters in Australia and it is also listed in the Australian stock exchange (Altechchemicals.com, 2018). The company is engaged in providing material and supply of minerals. The company specializes in the production of alumina. The company is engaged in exploration and mining activities.
Leasing is the process of financing which is used by the companies in day to day business. In a lease agreement, the lessor gives the right to use the property of the lessor to an individual who is known as lessee for a certain rate of interest. Nowadays lease agreement are used by businesses extensively for business purposes. The application of leases are more prominently used in airline industry, retail industry and shipping industries (Schallheim, Wells and Whitby 2013). Some of the airline business are also in the business of leasing the aircraft which is used in the business. Generally leases are of two types operating leases and financial leases. Operating leases is the lease which is of a short term basis and which is used by businesses to acquire equipment on short term basis. Generally the useful life of the asset acquired in an operating lease is more than the term of use of the lease. As per the previous standard on leasing operating leases were not disclosed and represented in the balance sheet of the company. Financial leases are more frequently used in business where assets are brought by the lessor in order to finance theses to the lessee for a certain rate of interest. Financial leases are recorded in the financial reports of the business.
Company Analysis of Leases
As per the balance sheet of Sirtex Medical ltd, the terms of leases of the company are that the lease payments for operating leases, where all the risks and benefits remain with the lessor and charged as expenses in the period in which such expenses are incurred. All leases are recognized as a liability and amortised accordingly on the straight line basis as per the policy of the company. Sirtex Medical ltd has recently replaced AASB 117 with the new lease standard AASB 16 which recognizes all leases as liability and are accounted for on balance sheet, other than short term and low value leases. The new lease standard provides new effect on the definition, application, sales and back accounting of lease transactions (Cornaggia, Franzen and Simin 2012). The new standard also requires proper disclosures of the same in the annual reports of the company. As the management has implemented the new AASB 16 currently so the effect on the financial report is not ascertained completely. However the management expects the following changes will take place:
- Significant increase in the leases assets and financial liabilities in the balance sheet.
- The value of lease assets will decrease more quickly than lease liabilities due to the effect of reported equity
- EBIT as shown in the profit and loss account will be higher as former leases interest will all be part of the finance cost of the business.
The consolidated balance sheet shows that the company has leases in Sydney, Singapore, Germany and also in United States. The duration and the remaining useful life of such leases are shown in the figure below:
As per the annual report of Altech Chemical ltd for 2016, shows that the company has leases in the financial statements. As per the company’s policy such leases are recognized as operating or financial leases based on the economic substance of the lease which reflect the risk and benefits associated with that particular lease. The company policy is to recognize the leases as per the old standard of the company and apply straight line method of amortization on such leases. The company plans to introduce AASB 16 from 1st January 2019, till then the old standard will be used in order to recognize leases. As per the management of Altech Chemical ltd AASB 16 will introduce change in the management by not differentiating operating and financial leases from each other. The management of the company is of the view that the new standards implementation will be affecting the Group’s financial statement but the exact estimate of impact is not possible to predict. As per the annual reports of the company for 2016, the company holds various mineral leases which they can use for exploration. The company is in the production of minerals and production of alumina.
As per studies show that as per the old standard on leases there are two types of leases which are recognized. One is the capital leases or finance lease which is shown in the financial statements and another is off balance sheet leases which are operating leases which are not recorded in the balance sheet of the company (Altamuro et al. 2014). In an article it is shown that a large number of business uses off balance sheet leases or operating leases in order to strengthen their balance sheet as the level of debts are not shown in such a balance sheet. Various time series data show such similar results (Cornaggia, Franzen and Simin 2012). Another study which was conducted on Hong Kong fast food industry shows the problem of implementation of the new standard of leasing. The lease was introduced by IASB in order to tackle the problems which the previous standard faced. The other aim was to ensure that the financial statements reflect true economic reality of the company (Tai 2013). A recent study shows that a research was conducted on how much amount of operating leases companies uses in order to finance their activities. The research was conducted on the top 40 JSE listed companies. The aim of the research is to show how the new standard on leases will impact such companies (De Villiers and Middelberg 2013). An investigation was undertaken to the effect of capitalizing operating leases on firm’s immediacy to
their debt covenant violations. The results of analysis show that the US companies uses such leases as instruments for generating capitalization in the companies (Lee, Paik and Yoon 2014).
As per the analysis of the above area on the lease of both the companies the following recommendations can be suggested which are given below:
- Sirtex Medical Limited has implemented the new standard AASB 16 which records all kinds of leases, however Altech Chemical has not yet implemented the new standard and therefore the company should implement the new standard as soon as possible earlier than 2019.
- The operating leases of Sirtex limited is much more as compared to Altech limited which can be reduced as with the implementation of the new standard the cost of the company will also be increasing.
- Both company uses straight line of amortization of such leases
Earning per share is that portion of profit which can be attributed to each and every issued share capital of the company. In other words Earning per share(EPS) is the amount of profit per share which the investors of the company receives as dividends. As per the formula EPS is calculated by dividing Profit after tax (PAT) by the total number of shareholders of the company. a company which has high EPS is capable to provide dividends to the public or it can use this profits as retained earnings and reinvest in the business for the further growth of the business (Zeitun and Tian 2014). This is also a measure for profitability of the company. many investors use this EPS of a company to marketing decisions whether to invest, retain or sell the shares of the company. The EPS of the company is shown in the financial report of the company. EPS is shown in two parts Basic EPS and Diluted EPS. Basic EPS is the amount of profit which is available for the common shareholders of the company during a reporting period whereas Diluted EPS considers the convertible shares also. These convertible shares of the company consist of preferred shares, convertible debentures, stock options.
Measures and Findings
As per the analysis of the Sirtex Medical Limited’s financial report, the company has a growing EPS. The company has been targeting the earing per shares growth as the target of the company. The growing rate of Earning per share of the company will definitely be improving the performance of the group. Increasing earning per shares reflect that the company has increasing returns on the capital which was contributed by the shareholders. The basic earning per share of the company is 93.7 cents which has increased from the previous year eps which was 71.4 which shows the growth of the company in terms of EPS.
As per the balance sheet of Altech Chemical ltd, the EPS of the company is subdivided in basic and diluted EPS. The basic earning per shares is calculated by dividing net loss by the weighted average number of shares of the company. The diluted earning per share is calculated by dividing net loss by weighted average number of shares and also dilutive potential shares. The basic EPS of the company is in negative figure .0008 which has slightly improved from the previous year figure.
While analyzing the EPS of both the companies it is easily depicted that the EPS of the Sirtex ltd is much better than the EPS of Altech ltd. The basic reason for this is the Altech ltd has incurred a loss in the year 2016 as well as 2015, thus the EPS depicts a negative figure.
The Eps of any company is a performance indicator of the company which the investors consider in the business. It is also an indicator for the investors whether to invest in the stocks or not. Thus investors and stock brokers consider the Eps of the company which has a growing Eps rate in order to invest in them (Sumangala 2012). Earning per share of any company is considered to be an important factor in order to determine the share price and value of the firm. Recent studies show that most of the investors take their decisions about investing in a stock on the basis of the EPS which the company has acquired (Islam et al. 2014). Any company is required to show the Eps of the company in the financial statements. The earning per share is divided into basic Eps and Diluted Eps (Jorgensen, Lee and Rock 2014). Earning per share is that portion of profit which can be attributed to each and every issued share capital of the company. In other words Earning per share(EPS) is the amount of profit per share which the investors of the company receives as dividends. As per the formula EPS is calculated by dividing Profit after tax (PAT) by the total number of shareholders of the company (Bonaimé 2012).
As per the analysis of the above area on the earning per share of both the companies the following recommendations which can be provided are for Altech Chemical ltd. The company needs to improve their earning per share as this is an important indicator of how the company is performing. In addition to this the company needs strategies which can result in growth rates of Eps like Sirtex ltd.
The liabilities of the company include the current and non current liabilities as per the balance sheet. The current liabilities consist of all the liabilities which have to be paid off with in a period of one year or even less such as trade payables and the non current liabilities includes liabilities which are of long term nature such as long term debts. Trade payables or the creditors which gives money or supplies to the company for credit (Kapan and Minoiu 2013). Long term debts on the other hand are also credits which the business takes for a longer period say 4 to 5 years or even longer.
As per the financial statement of Sirtex Medical Limited, the company has current liabilities which includes trade payables and others, current tax liabilities and provisions. The total of trade payables and others show a figure of $28090000 for the year 2016. The break up of trade payable is $16296000 and the other payable as shown in the notes of accounts is $11794000. Then comes the current tax liabilities of the business which refers to the liabilities which relates to income tax of the company. The current tax liability of the company as per the financial statement of 2016 shows $7239000. The provision refers to the amount which is kept aisde keeping in mind for some future loss or expenses which the company might have to incur in near future. The provisions are both of short term nature and long term nature. The short term provisions of the company includes provisions for long service leaves, provision for clinical studies, provision for legal settlements and miscellaneous provisions. The figure of the provision show a figure of $7009000 which is the total of the above mentioned provisions. The long term provisions of the company shows that the provisions amount is $1153000 as shown in the notes to accounts of the company.
As per the balance sheet of Altech Chemical ltd, the liabilities section of the balance sheet shows that the company has only current liabilities in the balance sheet. The current liabilities of the company consist of trade and other payables, loan which is short term in nature and provisions. The current payables of the company show an amount of $348326 which is almost twice of the figure which was shown as trade and other payables in previous year. Trade and other payables is a combination of trade creditors, PAYG payables and other creditors of the company. The figure of provisions which is made up of provision for annual leave is shown at the amount of $62672 in the notes to accounts. The loan of the company which was $815000 which was at 8.15% interest rate in 2015 has been converted into fully paid ordinary shares of the company resulting in the issue of 13813565 shares of the company.
Liabilities are shown in the balance sheet of the company which will always match with the asset side total of the balance sheet as per the double entry system. In a recent study it is shown how banks effectively maintain and manage their liabilities (Kreicher, McCauley and McGuire 2013). A study shows the impact of the 2008 financial crisis on company’s trade payables. The impact of a financial crisis on the company performance was significant. In such a situation the availability to get credit from business becomes more and more difficult. The financial crisis had a negative impact on the performance of the company. However this impact was lower for firms which had trade payables in the balance sheet during the pre crisis period (Kestens, Van Cauwenberge and Bauwhede 2012). Another journal on banking and finance states that some of the business uses trade payables and trade receivables strategically in business to gain a competitive advantage for the business. If proper control on trade payable and trade receivables are maintained than the business can attain growth by the use of such resources (Ferrando and Mulier 2013). A study shows that the bank sectors during a sample were subjected to different accounting rules with respect to provision less loans (Bushman and Williams 2012). Another journal shows the accounting for financial instruments which are used by businesses in respect to loan. As per the FAS these accounting for loans are done with the help of this standard (Ryan 2012).
As per the analysis of the balance sheet of both the companies the following measures can be suggested to the both the companies. Sirtex Medical Limited has both current liabilities and non current liabilities. The company has recorded various types of provisions in the balance sheet which relates to the activities of the business. The company has long term loans in the business. Then comes the current tax liabilities of the business which refers to the liabilities which relates to income tax of the company. The company needs to control the trade payables of the business and ensure these does not exceeds benefits associated with it.
As per the balance sheet of the Altech Chemicals ltd, the company does not have any non current liabilities which is quite understandable as the company is trying to avoid risks which non current liabilities of the company bring into the equations. The current liabilities of the company consist of trade payables and provisions. A loan which was taken by the company in the year 2015 of $815000 was converted into equity share capital by the business. The company is trying to avoid the risks and getting into profit ways again as the business has been earning losses from two years that is 2016 and 2015. The company needs to control of the trade Intangible assets refer to the fictitious assets of the company which are shown in the balance sheet of the business. In other words the assets of the company which are intangible in nature are known as intangible assets. These types of assets of the company includes Goodwill, trademarks, patents and copyrights. Goodwill refers to the investments which the business undertakes in order to get some future benefits of the company. Goodwill are of two types internal goodwill and purchased goodwill which the companies purchases. Patents refers to the technological know how which the business may possess. The trade marks and copyrights refer to the business marks and product rights which the company has acquired for the business or developed the same.
As per the analysis of the Sirtex Medical ltd, the company has certain intangible assets already in the balance sheet. the company during the year has generated internal intangible assets which is expenditure on a research phase of the project which are capitalized by the company. Development costs and certain clinical trial costs have been capitalised to the extent they satisfy the recognition criteria for internally generated intangible assets. The Group uses its judgment in continually assessing whether development expenditure meet the recognition criteria of an intangible asset. The company consist of the following intangible assets which are intellectual property, internally generated asset, software and assets work in progress. The following intangible assets are also subjected to amortization. The intangible assets of the company consist of software which is shown at cost which is subjected to amortization which will give the net figure of $2399000. The internally generated intangibles is valued at $76153000 in 2016 and the company shows its intellectual property at $151000. The total intangibles assets of the company is shown at $68027000 and there has been certain additions which were made to intangible assets and a certain part of the intangible assets were amortised which gave a net figure of intangible assets of $82821000.
As per the balance sheet of Altech Chemical ltd, the company does not have any intangible assets in the balance sheet of the company. The balance sheet of the company does not show any intangible assets.
on critical value drivers, taking into consideration their impact on competitive advantage and the cumulative investments made on them. As investment of the company increase there is a high probability that the company’s reputation and goodwill of the company will also increase (Greco, Cricelli, and Grimaldi 2013). Another article shows how effective management of intangible assets can help leading Russian food retail business to gain competitive advantage in the business. If the intangible assets of the company are used in an effective manner than the company make a brand name and also earn goodwill for the business as shown in the case of the Russian leading food retail business (Ivanov and Mayorova 2015). Intangible assets refer to the fictitious assets of the company which are shown in the balance sheet of the business. In other words the assets of the company which are intangible in nature are known as intangible assets. These types of assets of the company includes Goodwill, trademarks, patents and copyrights (Andrews and De Serres 2012). A study shows the value and effects of changes in goodwill accounting in a European environment. International Financial Reporting Standard (IFRS) 3 substituted accounting rules that emphasized goodwill amortization which will then be keeping the balances of the goodwill low. Goodwill accounting under IFRS 3 largely relies on manager fair value estimates of acquired company. Using data of Sweden, we show that goodwill amortizations were not value-relevant prior to the adoption of IFRS 3. However, impairments reported in addition to amortization were significantly related to stock returns during that period (Hamberg and Beisland 2014).
As per the analysis of the financial reports of both the countries, Sirtex Medical Ltd has intangible assets in the balance sheet which are either internally generated or purchased by the company. The company consist of the following intangible assets which are intellectual property, internally generated asset, software and assets work in progress. Development costs and certain clinical trial costs have been capitalised to the extent they satisfy the recognition criteria for internally generated intangible assets and such has been developed by the business as internally generated goodwill of the company. in comparison to this the company Altech Chemical Limited doe not have any intangible assets as the balance sheet of the company does not show any such assets. The company Altech ltd needs to generate a goodwill for the business as this is also an indicator whether the firm is looking from a future perspective or not.
The report considers the annual financial reports of two companies which are Sirtex Medical ltd and Altech Chemical ltd. As per the findings from analyzing the four areas of the business of both companies which were Leases, Earning per shares, Liabilities of the company and intangible assets of the company, Sritex Medical Limited is better placed in comparison to Altech Chemical ltd. Sritex company has growth in EPS which is a sound financial indicator of the business whereas Altech ltd does not have such sound indicators and has incurred losses for the past two years.
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