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In each and every company listed on the London Stock Exchange, a board of directors is appointed to act on behalf of the shareholders to run the day to day affairs of the business. These directors have a number of roles to fulfil such as holding as holding an Annual General Meeting (AGM) every year, establish a vision, goal and values, set strategy and structure, delegate work to management amongst others. However, the key role is to present an accounting report in a relevant, reliable, comparable and understandable way to all the shareholders.
Thus, an accounting report will be including financial reports as well as many other significant information about the business. Companies are required by law to write an annual accounting report at the end of each financial period and these will include crucial facts about the businesses' financial situation and investment goals (Weetman, 1999). The report are also used to document the status and progress of the company. So, it is primordial that an annual accounting report must give a true and fair representation of the business's performance and activities during the economic year as specified by the laws and accounting standards.
2.0 Aims and Objectives:
2.1) The main purpose of this work is to carry out an analytical research and critically comment on the financial reporting of a company quoted on the London Stock Exchange and also use a comparator company operating under similar industry. Thus, to serve this purpose, the primary company that has been chosen is Tullow Oil Plc and comparisons will be drawn to the secondary company Heritage Oil Plc. These two companies have been chose as they operate in the same industry which is oil and gas explorations around the world.
Furthermore, this report intends to critically analyse the following statements:
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Changes in Equity
Moreover, this report will concentrate on how the primary company meet the qualitative characteristics as imposed by law or in other words the International Accounting Standards (IAS). As such the critical comments to the reports will include qualitative characteristics of financial information such as:
Relevance- i.e. information that has the power to change economic decisions by shareholders.
Reliability-i.e. information that shows faithful representation of the company's performance.
Comparability- i.e. consistent information where similarities and differences can easily be seen.
Understandability-i.e. transparent information that can be perceived.
2.2) It will also look at whether what is presented in the Consolidated Statements and notes to the accounts meets, fails to meet or improves on what is required by law and Accounting Standards.
2.3) This report will also briefly discuss Risk Management Policies by Tullow Oil Plc.
2.4) It will also include a brief view of how much information provided is suitable for the company.
3.0 Incorporation and Basis of Accounting Preparation and Compliance:
It is worth making a note of the following about Tullow Oil Plc's (Primary company) as per the Director's and Auditor's report before continuing:
Incorporation - Tullow Oil Plc has been incorporated in the United Kingdom under the Companies Act 1985.
The Financial Statements of Tullow Oil Plc have been prepared in accordance with International Financial Reporting Standard ('IFRS') adopted by the European Union.
The financial statements have been prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. (APPENDIX 9 & 10)
4.0 Consolidated Statement of Comprehensive Income:
In order to meet aim and objectives 1 and 2 of this report, Tullow Oil Plc Group Income Statement will be analysed and critically comment using Heritage Oil Plc as a comparator company.
The revised accounting Standard (IAS 1) requires each company to show all items of income or expenditure be presented in either:
A single statement of Comprehensive Income or
A separate Group Income Statement and a Statement of Comprehensive Income. (Elliot and Elliot, 2009)
But this revised IAS 1 will only be effective as from 1st January 2009. Thus, it can be seen that Tullow Oil Plc complies with this requirement of the IAS board where an entity can prepare a Group Income Statement and a Group Statement of Recognised income and expense. (APPENDIX 2)
However there is a missing section of "other comprehensive income" which have entries like Cash Flow Hedges or Gains on Property Revaluation which will be effective for periods starting 1st January 2009, hence not applying to the set of accounts being considered in this report (Lewis and Pendril, 2000).Thus, Tullow Oil Plc Group Income Statement is prepared in way easy to grasp and understandable to non-accounting shareholders. (Wild, 2007)
However, compared to Heritage Oil Plc, Tullow Oil Plc is more in line with IAS 1 as they show "Profit from continuing activities before Tax" and Income Tax expense as required by the accounting law (IAS 12: Income Taxes). Thus, as it is providing more information, Tullow Oil makes itself more comparable to other businesses in the market. (APPENDIX 2 & 11)
Nonetheless, Tullow Oil Plc fully complies with the IAS minimum disclosure as include such as Finance Costs, Finance Revenue and the Basic and Diluted Earnings Per Share. Also, the company shows Group statement if recognised income and expense where it shows the total recognised income and expense attributable to Equity holders and Minority Interest as required by IAS 1. (Elliot and Elliot, 2009)
There are some items that should be placed under other comprehensive income section according to law (as from 1st January 2009)like:
Gain/Loss on Hedging Instruments (under IAS 39:Financial Instruments- Recognition and Measurement )
Profit or Loss on disposal of subsidiaries (under IAS 16: Property, Plant and Equipment)
Exploration Costs written off (under IAS 38: Intangible Assets).
However, even though Tullow Oil Plc fails to show these items under other comprehensive income, it does show them in its Group Income Statement making most of the information provided very relevant and reliable. Thus, the information provided by Tullow Oil Plc meets the what is required by law and accounting standards.
5.0 Consolidated Statement of Financial Position:
The Consolidated Statement of Financial Position or Group Balance Sheet of Tullow Oil Plc consists of different headings. The Non-current assets and Equity part of the assignment will be analysed more in depth later on this report. Hence, this segment will concentrate on the other main points concerning Statement of Financial Position other than those two.
The first and main accounting standard that the Group Balance Sheet has to comply with is IAS 1- Presentation of Financial Statements (ELLIOT & ELLIOT, 2009) (Not revised one as the set of accounts of Tullow Oil Plc ends 31st December 2008) and rightly does so. Tullow Oil Plc presents its data and information about the company in an understandable, relevant and comparable way as they are organised under the right headings and sub headings. It meets the minimum requirement of the law by providing reliable information to shareholders on what the company owns (assets) and what the company owes (liabilities) (WOOD, 2007). It also clearly specifies which of the liabilities are due to pay within one year ( Current Liabilities) and which ones after one year. (Non Current Liabilities). (APPENDIX 3)
Inventories creates a lot of controversy when estimating the right value and it has a major effect on not only profit but the valuation of assets. As such, it is vital to any company to get the calculation of the inventories(stock) right. It is also imperative that the method used to value is consistent throughout the years for comparison purposes over accounting periods as well as between companies. The law governing the calculation of inventories is IAS 2-Inventories. Tullow Oil Plc was in accordance with the law as the Inventories were taken at lower of net realisable value or cost, hence providing the shareholders with reliable and comparable information as it reflects the true and fair value of the firm's inventories value.
(ELLIOT & ELLIOT, 2009) (APPENDIX 8)
Changes in Accounting Rules can prove to be very harmful to a company non-current liabilities. For example looming loan losses of creditors cam be masked under changes in accounting standards (APPENDIX 20). Another item under the Non-Current Assets, Current Assets and Current Liabilities of Tullow Oil Plc is Derivative Financial Instruments. It can be seen that Tullow Oil Plc meets most of the accounting standards as it clearly specified its derivative financial instruments in its Group Financial Statement as per accounting standards IFRS 7 providing reliable information once again. (ELLIOT & ELLIOT, 2009) (APPENDIX 7)
Furthermore, the Group Balance Sheet of Tullow Oil Plc clearly shows Deferred Tax liabilities as required by IAS 12- Income Taxes and also Provisions as required by IAS 37- Provisions, Contingent Liabilities and Contingent Assets. This shows that Tullow Oils Plc follows accounting concepts such as Prudence. (APPENDIX 8 B) (Elliot and Elliot, 2009) Therefore, the company prepares for the worst case scenario and provides the shareholders with relevant and reliable information of their calculations. In a nutshell, the Group balance sheet of Tullow Oil Plc meets and builds over the minimum requirement as stated by law when preparing the financial accounts.
6.0 Consolidated Statement of Changes in Equity:
There used to be circumstances where items of other comprehensive income have been presented as separate items in the Statement of Changes in Equity- however that presentation is no longer acceptable by the laws.
The main change that has occurred during past recent years in the IAS is that non-owner movements have to be presented in the Consolidated Income Statement under the headings of other comprehensive income and can no longer be presented as separate items in the statement of changes in equity. Moreover, businesses do no longer have the right to present transactions with owners in their capacity as owners in the notes, hence the statement of changes in equity has to be presented as a separate financial statement as per IAS 1. It can be seen that Tullow Oil Plc meets with this requirement as they provide a statement of reconciliation of changes in equity in note 21 of their account (APPENDIX 5 B). (Wild, 2007)
There is also a new requirement to present a financial statement known as the Consolidated Statement of Changes in Equity as per revised standards and the new IAS requirements. However, this document has to be produced for period starting on 1st January 2009 and onwards. (ELLIOT & ELLIOT, 2009) Thus, it can be seen that the Tullow Oil Plc meets the minimum requirements of the law and accounting standards as its accounting period ends on 31st December 2008 and it did not have to prepare a Consolidated Statement of Changes in Equity. It also to be noted that Tullow Oil Plc has provided more relevant and comparable information than Heritage Oil Plc in this section as they, at least, provided a reconciliation of changes in equity whereas the comparator company has provided only vague information about its changes in equity. (APPENDIX 5 B, 15 A & 15 B).
7.0 Non-current assets:
The non-current assets part in Tullow Oil Plc Group Balance Sheet were prepared under the requirements of the law (IAS 1) and basic accounting principles such as the materiality, going concern, consistency and accruals concepts. As the auditors and directors of the company states that the financial accounts were presented in accordance with IFRS which means that the information is prudent and free from material errors. ( Weetman, 1999)
The first item under the non-current assets in the Tullow Oil Plc Group Balance Sheet is Intangible exploration and evaluation assets where it has been calculated in accordance with IAS 36- Impairment of Assets. This is clearly stated in note 9 (APPENDIX 6 A) of the Group Accounts and is therefore in compliance with the law. It can be seen that Tullow Oil Plc has also complied with IFRS 3- Business Combinations (ELLIOT & ELLIOT, 2009) which treats goodwill as an indefinite assets and reviews it every year for impairment. The impairment value will be shown in the Consolidated Income Statement as per law which has been followed by Tullow Oil Plc. (APPENDIX 6 A) This information is comparable with Heritage Oil Plc where the information provided in the latter company is not as explicit, relevant and reliable as that of Tullow Oil Plc. This is because Heritage Oil Plc does not say how much is the impairment costs is and fails to meet IAS 36 and IFRS 3. (APPENDIX 15 C)
Another item of Non-current assets is Property, Plant and Equipment where very useful, reliable, relevant, comparable and understandable has been provided under the clearly stated headings such as acquisitions, additions, disposals, depreciation, impairment loss and net book values. It can be seen that Tullow Oil Plc follows IAS 16 - Property, Plant and Equipment(PPE) (ELLIOT & ELLIOT, 2009) as it clearly states that it values its assets at fair value as stated in note 10 of its accounts (APPENDIX 6 B). This shows that Tullow Oil Plc's account is reliable and relevant as in an active market like Oil and Gas Exploration, fair value is much more transparent and appropriate that historical costs measurements.
8.0 Risk Management Policies:
The primary company analysed here-Tullow Oil Plc - is worldwide organisations which has to measure its risks and returns of their investment in different countries and companies before actually investing. Therefore, this work will analyse how much information is provided to shareholders concerning their risk in investment. Also, the massive investment's undertaken by Tullow Oil Plc is a controversial issue as it might be favourable or really adverse given the nature of the company as it is a risky oil and gas exploration business. Providing relevant and reliable information on investments is vital to the company as this will either encourage potential or existing shareholders to invest more or less in the company. However, Tullow Oil Plc provided quality information concerning risk factors spreading it into Strategic, Financial, Operational or External risk factors and the company explains how they are mitigating and planning to reduce these risks, therefore reassuring the shareholders that their investment is in safe hands. (APPENDIX 19 A, 19 B & 19 C)
9.0 A Brief view of how much information provided is suitable for the company:
There is always the issue to every company of how much information is needed. This issue has often been discussed by numerous accountants as to how much information is too much. If a company( for example Tullow Oil Plc) provides too much information to the shareholders and general public, their competitors (For example Heritage Oil Plc) might use this information to their own benefit and gain a competitive or absolute advantage over them in some markets. Thus, the company has to be very diligent on how much information it is providing in its report as a single mistake or too much information might prove to be very harmful to the company as a whole. However, there is also a costs of litigation (court proceedings) if the company is sued for not providing enough information. It may even be considered as an attempt to masquerade fraud and other illegal business by the company. Thus, the quantity of information provided is as much a concern to the business as quality of information.
In the light of the above arguments in this report, it can be observed that most information provided by Tullow Oil Plc under the different consolidated statements is comparable, relevant, reliable and understandable and also complies or builds over most accounting laws and standards. Moreover, Tullow Oil Plc outweighs Heritage Oil Plc in terms of qualitative financial information in a number of instances.
However, it has to be pointed out that the laws and international accounting standards, such as IAS 1, keep changing very often and hence making comparison over the years and between companies in different sectors very difficult. The qualitative characteristics of financial information is as important as the quantity of information provided.
It is important to note that an accounting report is prepared for the shareholders mainly, but also for the general public. Thus, in a nutshell an accounting report hence it has to be understandable, relevant, reliable and comparable and yet not too revealing as potential competitors might be interested to join the market or existing ones might gain a competitive or absolute advantage.