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This purpose of this report is to critically examine and comment on the financial statement of two London stock exchange companies. Financial statement is simply the summary of all transaction which has occurred over a specific period of time. This report looks at the how each company present their financial statement, the philosophical reasons behind their presentation, what relevant and how reliable the information present are and more. Financial statement or Accounting reports reveal the health of business as pulse rate and blood pressure reveal the health of a person.
I will be analysis one company which is Aggreko but also comparing it with Carillion plc, both placed in U.K. They both operate in support and alternative energy industry. Most of my attention will be on Aggreko plc.
As mention above Aggreko plc is an international British company whose main purpose is to provide electrical power and temperature control to customers who need them either for a short period of time or for an indefinite length of time. The company provides its solution worldwide over 133 locations offering 24 hours a day 7 days a week service in over a 100 countries. The items hired out include gas and diesel generators, heaters, air conditioners and few more. These items hired out are used in a variety of setting such as film studios, power stations, offshore oil platforms and other more.
Carillion plc is one of U.Ks leading support services companies. They deliver a mix of solutions for infrastructure, building and services. They operate through three divisions which are construction services, support service and public and private projects. Their construction services include all contracting and related activities, including mechanical and electrical engineering both on traditional and public private projects. Their support service comprises of rail and road infrastructure services, facilities management and support services. Public and Private partnership projects include equity returns on investment in public and private projects.
Lewis and Pendill (2006) states the objective of financial statement is to "make available information about the reporting entity's financial performance and financial positions", which is useful to wide range of users such as present and potential investors, creditors and others in accessing the stewardship of management and for making economic decisions. Therefore transparency is need in financial statement.
Transparency is often used to describe a high quality financial statement. Transparency in financial statement signifies a better disclosure which in goes further than the normal accepted accounting principles or statutory reporting requirements, where and when to provide the users and readers with the information which could help decide in making an informed decision about the company. When information appears not to be transparent, present and potential investors can never be sure about the true risk in investing in the company. For Example, a company whose growth prospect are linked to how it invests. It would thereby be complicated to access the company's investment performance if its investment is directed through holding company, therefore making them difficult to detect or completely hidden from view. Also lack of transparency could indicate that the company could well be trying to deceitful about the company's level of debt, in that case, investors cannot thereby estimate their exposure to bankruptcy risk
High profile cases such as Enron and Tyco has showed that managers who use unclear financial tactics and difficult business structure in hope of hiding unpleasant news. Thereby illustrating that lack of transparency in financial statement can only create difficulty for the company in some cases lead to bankruptcy.
Qualitative characteristics of Financial Statement
To meet the readers and users demands, it is suggested that financial statement must have certain characteristics. The Accounting Standard Board (ASB) identifies four core qualitative characteristics which should be present in financial statements. The diagram below interprets the ASB's characteristics of financial statement.
Relevant and Reliability
Relevant information is capable of influencing the decision of users by helping them evaluate past, present or future events by confirming or correcting their past evaluations Weetman (1999).
According to an article by Johnson (2005), reliability is defined as "the quality of information that assures that information is reasonable free from error or bias and faithfully represents what it is mean to represent".
Furthermore in deciding whether information is relevant and reliable, it would depend on certain traits such as
Faithful Representation - Faithful representation involves the words and as well as the numbers, it requires that the substances of transactions are recorded.
Neutrality - When information is presented in a way that would suggested it has any influence in the decision making in order to achieve predetermined outcome. In other words information would be neutral when it's free from bias.
Prudence - Prudence is the exercise of caution when dealing with uncertainties in order to ensure that the financial statement are neutral, that gains and losses are neither overstated or understated Woods ( 2007).
Comparability is needed in financial statement in order to identify trends in a company's financial position and its performance. Also it allows users to identify the differences and similarities between two set of economic phenomena. Consistency means the use of same accounting produces and policies each year. Comparability is the goal "comparability is a means to an end that helps achieve the goal".
The quality in which information enables readers and users to have a reasonable knowledge of business and economic activities and financial accounting is known as understandability. Understanbility depends on how the information is classified and reported and also importantly it depends on the capabilities of the user
Consolidated Statement of Comprehensive Income
The main reason behind the consolidated statement of comprehensive income is to show the results of a group of companies as one, a single reporting entity. IAS 1 was revised during 2008 and brought by a new standard which was effective for the periods beginning on or after 1 January 2009 Elliot and Elliot (2009). Now it is acceptable to under IAS 1 for a company to present the comprehensive income statement as one or then again present as two statements which separate the income statement from the comprehensive statement.
Observing Aggreko's financial statement, they have opted to present their information in two statements the Group Income Statement and Group Statement of Recognised Income and Expense. Combined together these statements are still the single primary statement under IAS 1, the income statement. The account was prepared in accord with International Accounting Standard known as IAS, International Financial Reporting Standard and IFRIC standards. The fact that their financial statement complies with the standards illustrates that the information provide could be relied upon. Their users and readers of comprehensive income can be sure that the information provided shows the true nature and well-being of the company.
Carillion plc has also adopted the same standard according to their group note. Their company's published consolidated financial statement for year ended 31 December 2008 was prepared in accordance with IFRS as adopted with the European Union, except for some accounting standard (listed in notes on page 16)which became effective as from January 2009. This makes comparisons between the two companies easy and also adds an element of ease for user's understandability.
Consolidated Statement of Financial Position
Statement of financial position provides details of economic resources which are controlled by the entity and the use of them. It most also provide most importantly a detail of an entity's risk profile and risk management approach to evaluate its current performance, financial adaptability and ability to generate cash in the future. The statement of Financial Position of Aggreko shows that items existed at the time of presentation; thereby this proves that the information provided could be relied upon.
Items such as Goodwill in non-current asset for understandability purpose have been clearly explained in the notes to the group accounts. It fundamentally helps readers and users of financial to gain better understanding of the financial statement. Furthermore items classified as assets and liabilities are set out for users to gain the knowledge of how much resources the company has and its obligations.
The standard in which the statement has been prepared is with the historical cost convention, which was also the same that was used in Carillion plc which makes it easier and convenient for users to make comparisons.
Inventory is vital to any company, therefore getting the calculation right is essential. It also necessary that the method used is consistent throughout the years in order for comparison reasons. The law governing the inventories is IAS2. The calculation in Aggreko and Carillion both comply with IAS2, thereby it provides investors with reliable information as it reflects the true and fair value of the firms inventory value. Also further information such as deferred tax liabilities and provisions were taken into account suggesting that Aggreko plc complied with the minimum requirement required by IAS 12.
Consolidated Statement of Changes in Equity
Changes in Equity are used to show all changes in the owners' equity for a set period of time. Changes in Equity according to IAS1 must be shown as a separate component of the financial statements. The income statement sums up the revenues and expenses for an accounting period. The statement of changes in financial position shows the condition of accounts at the end of a particular period, but the statement of changes in owners' equity does a bit of each. IAS 1 requires that an entity to present a statement of changes in equity as a separate component of financial statements. Unfortunately neither Aggreko nor Carillion have prepared a statement of changes in equity as a separate statement due to fact that the amendment which was made in other to produce it has a separate statement took effect as at January 2009 before this accounts were published. The target in which IAS 1 aims with the amendment it is to make it easier for users and mostly investors to understand how much they could possible earn if they were to invest in the company. This would also enhance the relevance financial statements.
Non-current assets consist of Tangible assets and Non Tangible. Tangible assets have a physical existence whereby Non Tangible assets cannot be seen, touched or physically measured. Goodwill as mentioned be has been clearly explained in the notes to the group accounts.
Intangible in non-current asset have been prepared at fair value at the date of acquisition. Valuing assets using fair value is more realistic and makes it more relevant. Intangible assets do not have to be physical assets in value of a factory or equipment but they can prove to be very valuable to a firm and also be critical to a company's success or failure. For example, a company such Coca-Cola would not be a successful today if it wasn't for the high value it obtained through it brands name. Although brand recognition is not a physical asset, it positive effects on bottom line profits can prove extremely valuable to a company such as Coca-Cola, whose brand name strength helps drives it sales globally year after year. Intangible asset include in Aggreko financial statement will help increase the value of firm. Intangible assets from Aggreko plc are clear explained in the accounting policies. Carillion plc also clearly states how it intangible asset are calculated. Both companies calculate their intangible assets using fair value. This therefore proves relevant to readers of financial statement as they have evidence on how the figures were arrived at.
Aggreko plc annual report and account for the year ending 2008 is 124 pages long. Is there a limit whereby there is just too much unnecessary information in the report or is everything produced for the good?
Could the level of information produce in the account overcomplicate the financial statement thereby reducing it transparency. Some would argue that the level of information provided is necessary in order to better understand the treatment of such item as inventories in order to fully understand fully the appropriate application of the classified principle. On other hand most would argue that too much information would increase the complexity of statement and therefore make key performance indicators less obvious and also potentially less easily comparable with other companies. Unfortunately when too much information is provide, them their competitor or rival could use this information to gain an advantage over them; therefore the company must be very careful about the level of information which is put out there. On the other hand, when less information is produced the company could be accused of attempting to conceal any illegal dealings. Therefore the company could pay the cost litigation.
Both companies did provide enough information show calculation on how certain figure were arrived at. In doing so, companies would hope that the information is both enough and clear in other to enhance the users' understandbility of the statement. To the investors, it would be relevant as they could recognize the financial health of the business. This would only enhance the qualitative characteristic of financial statement.