Narrative Disclosures Their Relevance And Impact On The Financial Information Accounting Essay

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Bachelor of Business Administration in Business Management

Sri Lanka Institute of Information Technology

Narrative disclosures (including accounting policies): their relevance and impact on the financial information of the Thalawakelle tea estates PLC

Narrative disclosures provide insight information of an organization to the current and potential investors that financial statements would not elaborately discuss. Financial statements initially include the Income Statement, Balance Sheet, Cash flow Statement and Statement of Changes in Equity where as the narrative disclosures will inform of the strategies and methods used in developing the financial statements for a certain period.

These disclosures have gain more recognition with the requirement of complete and accurate accounting information as basic qualities of accounting information having major influences on economic decisions of groups such as individuals, families, competitors, creditors, investors and other groups involves with the business largely called as 'stakeholders' of the company.

Thalawakelle Tea Estate Plc is a leading tea manufacture in Sri Lanka and placed at the top for their price amongst the other regional tea manufacturing companies. Year 2008 was a recorded year for tea prices. Company had earned a net profit after tax of Rs. 108.0 million from a turnover of Rs. 2.2 billion in year 2008. As the cost of sale component increased due to the wage hike and the fertilizer prices estates profitability declined by 9.5% during the year specially in the low grown tea estates. In real terms tea production was 6.9 million during the year which was a increase of 0.65 million Kg. The total capital expenditure in the year was Rs. 349.3 million. The cumulative investments since privatization have reached up to Rs. 2,591 million. In the year company invested Rs. 27.4 million in hydro power projects. Dividend per share for the year was Rs. 1.25 (Thalawakelle Tea Estate PLC - 2008).

The primary vehicle that forces companies to review how they interact with their customers, and potential shareholders and the nature of published corporate information about performance is the annual report. In the report, final accounts provide only a summary about the company's performances and disclosures include more detailed and significant information's about the company so the stakeholders can get a clear idea about Thalawakelle Tea Estate Plc.

Revenue of the sales of goods is recognized to the extent that it is probable that the economic benefits will flow to the company and the revenue and associated cost incurred or to be incurred can be reliably measured. Company has main three revenues. Those are tea, rubber and other. Compare to 2007 only rubber has decline the total revenue, tea and other revenues are increased. As per the note Revenue is measured at the fair value of the money received or receivable which is the net of trade discounts and sales taxes. Whether received or not interest relevant for the year is recognized as Interest income. Rental income, other income and royalties documented on an accrual basis but royalties basis in accordance with the substance of the relevant agreement. Dividends recognized on cash basis. In year 2008 total revenue had increased in greater amount. The note will describe separately the categories of revenue and the policy used by the company in recognizing revenue. Having disclosed such information any person would be able to measure the income figure more accurately and it complies with the standard as well. (Thalawakelle Tea Estate PLC - 2008).

According to the investments in Thalawakelle tea estate there are short-term and long-term investments policies. In short-term treasury bills and other interest bearing securities held for resale to benefit in the short-term market movements accounted for at cost. Company invests in HNB securities Limited, Mercantile Investment Limited and People's Leasing Company Limited. The total of the short-term investments in year 2008 is Rs. 18,900,000. In the long term company holds 3,519,000 ordinary shares of TTEL Hydro power company (Pvt) Ltd. And 306,000 ordinary shares of TTEL Somerset Hydro power company (Pvt) Ltd. The total investments are Rs. 65,790,000 and investments are stated at cost. When disclosed about investments, it's easy for any party to get a significant idea about the company (Thalawakelle Tea Estate PLC - 2008).

Trade receivables made up with Produce debtors, Advances and Prepayments and other debtors. The total of which is in year 2008 is Rs. 84,636,978. Compare to 2007 only other debtors has increased. Allowances for bad and doubtful receivables which are estimated to realize net of allowances are stated at the trade receivables. Other receivables and dues from related parties are recognized at cost this is without the provision for bad and doubtful debts. (Thalawakelle Tea Estate PLC - 2008).

All immovable assets in these estates under finance leases have been taken into the books of the company retroactive to 22 June 1992, in terms of the ruling of the UITF of the Institute of Charted Accountants of Sri Lanka. The board has decided at its meeting on 8th march 1995 that these assets would be taken at their book value as they appear in the books of the Sri Lanka States Plantation Corporation (SLSPC) on the day immediately preceding the date of formation of the company to suite the terms of the UITF. These assets are taken into the 22nd June 1992 Balance Sheet. The amortization of these assets has being implemented in equal amounts over different periods as follows: Mature plantations/improvement to land; 30 years, Buildings; 25 years and Machinery; 15 years. Property, plant and equipment are recorded at cost less accumulated depreciation and all items of those initially recorded at cost. Leasehold property comprising of land use rights obtained on a long-term basis is started as recording its carrying values according to the No. 19 of Sri Lanka Accounting Standard. Depreciation is calculated on the cost or valuation of all property. The total of the Property, plant & equipment immovable estate assets on finance lease is Rs. 156,854,897. It's a decrease of Rs. 10,983,766 when compare to 2007. (Thalawakelle Tea Estate PLC - 2008).

The cost of the new plants and replanting at the time of harvesting the crop are categorized as the Immature/Mature plantations. General charges are applied for the labours based on the labour days spend on new planting and replanting. The remaining portion of the general charges is expensed in the accounting time period in which it is incurred. In the year 2008, immature plantations are Rs. 413,396,431 and mature plantations are Rs. 923,483,804. When compare to 2007 both immature and mature plantations are increased. These are investments in mature and immature since the formations of the company (Thalawakelle Tea Estate PLC - 2008).

Retiring benefit obligations are defined as a measure used to identify the liability of on asset that occurs during the life of the asset (Vitez Osmond - 2009). Company gives gratuity on retiring and as per SLAS 16 retirement benefit costs it measures the gratuity based on the present value of its benefits which is a unique contribution plan for every two years using Projected Unit Credit (PUC). This is also as part of the retirement of Payment of Gratuity Act No. 12 of 1983 and also the Indian Repatriate Act No. 34 of 1978 to eligible employees. As the note continues company's Actual valuations are carried out by the Messers Actuarial and Management consultants (Pvt) Limited.

The actuarial valuation is carried out once in every two years and few key assumptions are used by the company. Rate of interest is 10% and the rate of salary increase 11% from workers (every two years) and from staff 7.5%. Actual gains and losses consider as income or expenses. This item is grouped in balance sheet under none current liabilities and deferred income. (Thalawakelle Tea Estate PLC - 2008).

There are three inventories in Thalawakelle tea estates. Those are growing crop - nurseries, Harvested crop and Input stocks, consumables & spares. In the year 2008 inventories show that harvested crops which is 291,474,025 is higher than growing crop nurseries and input stocks, consumables and spares. At the end of the year the total inventories show the total amount as Rs. 359,947,539. In valuing the inventories other than produced stocks are valued at the lower cost of cost and realizable value; this is after allowing for obsolete and slow moving items. After allowing for the estimated cost of completion/conversion to bring to a saleable condition, Net realizable value is the price at which inventories can be sold in the ordinary course of business after allowing for the cost of completion. (Thalawakelle Tea Estate PLC - 2008).

When inventories bringing into its present location and condition for the costs incurred are as follows; (Thalawakelle Tea Estate PLC - 2008).

Input Material - At average cost.

Growing Crop - Nurseries; At the cost of direct materials, direct labour and an appropriate proportion of directly attributable overheads, less provision for over grown plants.

Produce Stocks - Valued at estimated selling prices or since realized prices.

Spares & Consumables and Packing Materials; at actual cost.

Earnings per share calculate based on the profit after tax and divide by the weighted number of ordinary shares. Company has issued 23,750,001 ordinary shares. Company profit after tax is increased in year 2008, so the earnings per share increased from 44 cents. ; (Thalawakelle Tea Estate PLC - 2008).

Leases have been executed for all estates for a period of 53 years. And also these leases are retroactive to 22 June 1992 which is the date of the formation of the company. In terms of the ruling obtained from the Urgent Issue Task Force (UITF) of the Institute of Charted Accountants of Sri Lanka, all these lands have been taken into the books of the company on the date of the formation of the company which is 22 June 1992. Subsequently on 8th march 1995 the board has decided that bare land would be revalued at the value established for this purpose by the valuation specialist MR D.R Wickreamasinghe just prior to the formation of the company. Leasehold right to bare land comprising of land use rights obtained on a long-term basis is re-classified as leasehold property and stated at the recorded carrying values as at the effective date of Sri Lanka Accounting Standard No. 19 - Leases, in line with revised Ruling of the Urgent Issues Task Force of the Institute of Chartered Accountants of Sri Lanka. Such lands which have been re classified and their value amongst are amortized over the remaining leased term or useful life of the lease property, whichever is shorter. (Thalawakelle Tea Estate PLC - 2008).

The leasehold right to land is disclosed under non-current assets under leasehold property.

The revised UITF ruling does not permit further revaluation of leasehold property.

The leasehold property is being amortised by equal amounts over a 53-year period and the unexpired period of the lease as at the Balance Sheet date is 36 years. Revaluation amount is arrived at after adjusting for assets handed over to Tea Smallholdings Development Authority. (Thalawakelle Tea Estate PLC - 2008).

There are three main components of the income tax expense. Those are current income tax charges, deferred taxation charge and reversal of provision. In year 2007 total tax expense was 14,237,278 but in the year 2008 it decrease up to 1,795,095 because of the reversal of provision. In 2004/05 the income tax was provided based on Inland Revenue Act No. 38 of 2000. The provision for income and tax based on the elements of income and expenditure as reported in final statements. Using the liability method deferred income tax is provided also deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year (Thalawakelle Tea Estate PLC - 2008).

When considering the analysis done based on the financial reports for the years of 2007 and 2008 Thalawakelle Tea Estates Plc Company, it is evident that the company has a high quality financial reporting agenda which is becoming more and more innovative in presenting disclosures. Narrative disclosures are important for the potential investors and other stakeholders. Profit/loss account and Balance sheet shows only a summary of the Thalawakelle Tea Estate's financial performances. Notes and other disclosures are fully described in detail so to get a significant idea about company's financial position and performance disclosures are needed. Thalawakelle Tea Estate Plc is a listed company so accounts must be in fully adequate and transparent. According to the Sri Lanka Accounting Standards company must include company's all disclosers in their annual report.