Topic: Disclosure And The Usefulness Of Financial Reports
Disclosing entities are regulated by the Corporations Act (2001), Accounting Standards and ASX requirements. The continuous disclosure requirements in ASX LR 3.1 require timely reporting to the ASX of significant events and financial information that is likely to impact the price of the entity’s securities. ASX LR 3.1 contains an overriding general requirement to disclose information that a reasonable person would expect to have a material effect on price, however the rule includes the following exceptions:
- It would breach the law to disclose information
- The information relates to an incomplete proposal or negotiation
- The information comprises matters of supposition or is insufficiently definite to warrant disclosure
- Information is generated for internal management of the company
- Information is a trade secret
- A reasonable person would not expect the information to be disclosed
- The information is confidential and ASX has not formed a view that has ceased to be confidential.
Immediate notification to the ASX is required when particular instances occur (these are listed in LR 3.1) and includes:
- The fact that the entity’s earnings will be materially different from market expectations.
Using the consolidated financial statements of Bellamy’s Australia Ltd, calculate comparing the 2015 and 2016 figures:
- The percentage increase in Gross profit.
- The percentage increase in net profit.
- Return on investment (assets) for 2015 & 16. (hint, use EBIT).
- As a financial analyst, comment (two paragraphs) on the strength of the Consolidated Statement of Profit or Loss and Other Comprehensive Income for 2016.
- As a financial analyst, comment (two paragraphs) on the strength of the Consolidated Statement of Financial Position for 2016.
- As a financial analyst, comment (two paragraphs) on the strength of the Consolidated Statement of Cash Flows for 2016.
- Based on your analysis, and BEFORE knowledge of the recent share price decline and share trading halt, would you have recommended to your clients to buy, hold or sell Bellamy’s shares? Why?
Read and analyse the three attached articles by:
- Wang Xia and Wu Min. (2011). The quality of financial reporting in China: An examination from an accounting restatement perspective. China Journal of Accounting Research, Vol. 4. pp. 167-196.
- Ghazali, N.A.M. (2010). The importance and usefulness of corporate annual reports in Malaysia. Gadjah Mada International Journal of Business, Vol. 12 No. 1, pp. 31-54.
- Alzarouni, A., Aljifri, K., Ng, C and Tahir, M, I. (2011). The usefulness of corporate financial reports: Evidence from the United Arab Emirates. Accounting & Taxation, Vol. 3 No. 2, pp. 17-37.
And answer the following research question:
Annual reports are an outdated mode of informing users regarding the activities of a company. Do you agree? Why or why not?
This part of the assignment intends to evaluate the consolidated financial statements of Bellamy’s Australia Limited. The organisation is one of the leading food and beverage firms in Australia, mainly in organic food.
Percentage Increase In Gross Profit:
|Particulars||2015 (in $000)||2016 (in $000)||Percent increase|
Table 1: Percent increase in gross profit in 2016 of Bellamy’s Australia Limited
(Source: Annualreports.com 2017)
The above table denotes that the gross profit of the organisation has increased largely by 171.14% in 2016. This is because the organisation has lowered its overall cost of production by effective monitoring of the purchasing materials and producing those products required. As a result, it has minimised the overall cost of sales, while increasing the selling price per unit slightly.
Percentage Increase In Net Profit:
|Particulars||2015 (in $000)||2016 (in $000)||Percent increase|
Table 2: Percent increase in net profit in 2016 of Bellamy’s Australia Limited
(Source: Annualreports.com 2017)
The above table denotes that the overall net income of Bellany’s Australia Limited has increased massively by 322.44%. The possible reason identified is the increase in market demand with the minimisation of operational costs by reducing the unnecessary activities from the production process.
Return On Investment (Assets) For 2015 And 2016:
|Particulars||2015 (in $000)||2016 (in $000)|
|Earnings before Interest and Tax (EBIT) (A)||12,286||54,306|
|Total Net Assets (B)||72,170||143,501|
|Return on Investment (Assets) [(A)/ (B)]||17.02%||37.84%|
Table 3: Return on investment (assets) in 2015 and 2016 of Bellamy’s Australia Limited
(Source: Annualreports.com 2017)
According to the above table, it could be stated that the overall return on investment for the organisation has increased from 17.02% in 2015 to 37.84% in 2016. This is because the operating income of the organisation has increased largely due to rise in market demand and correspondingly, the organisation has reduced its overall cost of sales and the other operating expenses, as necessary (Leuz and Wysocki 2016). Hence, it has managed to earn adequate return on investments.
Strength Of The Consolidated Statement Of Profit Or Loss And Other Comprehensive Income For 2016:
In order to analyse the strength of the consolidated income statement of Bellany’s Australia Limited, the trend analysis has been conducted for the years 2015 and 2016 to show the percentage increase or decrease in each item of the statement (Refer to Appendices, Appendix 1). It has been found that the revenue margin of the organisation has increased by 95.19% in 2016 due to greater demand in the market. As a result, the overall gross income has increased largely by 171.14% in the same year. Even though there is increase in the overall operating costs, the greater realisation of gross profit has lead to overall increase in EBIT to 342.02% (Loughran and McDonald 2014). Finally, the net income of the organisation has increased by 322.44% due to the overall increase in revenue base of the organisation.
Strength Of The Consolidated Statement Of Financial Position For 2016:
In order to analyse the strength of the consolidated balance sheet statement of Bellany’s Australia Limited, the trend analysis has been conducted for the years 2015 and 2016 to show the percentage increase or decrease in each item of the statement (Refer to Appendices, Appendix 2). The current assets of the organisation have increased by 96.95% in 2016 due to considerable increase in receivables, amount of inventory and other assets. The similar trend is observed in case of non-current assets, which has increased by 188.03%, due to rise in intangible assets and deferred tax assets. As a result, the total asset base has increased by 98.84% in 2016. Although the overall liabilities have risen by 159.17%; however, there is increase in net assets by 70.15% in 2016. This denotes that the organisation has adequate capability to meet its debt burden with the available asset base (Lawrence 2013).
Strength Of The Consolidated Statement Of Cash Flows For 2016:
In order to analyse the strength of the consolidated cash flow statement of Bellany’s Australia Limited, the trend analysis has been conducted for the years 2015 and 2016 to show the percentage increase or decrease in each item of the statement (Refer to Appendices, Appendix 3). It has been observed that the cash inflows from operating activities have increased by 87.66% in 2015. However, the cash outflow from investing activities has increased by 520.67%; however, from financing activities, there been fall in cash outflow in financing activities by -126.80% in 2016. As a result, there has been minute increase in cash balance by 0.81% in 2016.
Recommendation To The Clients Regarding Whether To Buy Or Sell Bellamy’s Shares:
In order to evaluate the valuation of the organisation, the price/earnings ratio of the organisation has been computed to provide recommendation to the investors.
|Market value per share (A)||13.82||4.23|
|Earnings per share (B)||0.10||0.40|
|Price/earnings ratio (A)/(B)||141.02||10.63|
Table 4: Price/earnings ratio in 2015 and 2016 of Bellamy’s Australia Limited
(Source: Annualreports.com 2017)
According to the above table, the price/earnings ratio of the organisation has fallen from 141.02 in 2015 to 10.63 in 2016. This denotes that the organisation is highly overvalued in 2015; however, it has regained a balance in 2016. Therefore, it is advised to the investors to invest in the shares of the organisation (buy option), as it is expected to maximise their return on investment (Balakrishnan et al. 2014).
Discussion of whether annual reports are an outdated mode of informing users regarding the activities of a company:
The objective of forming an annual report is to convey information from an organisation to its intended users (Wang and Wu 2011). The primary factors include the nature of the users and the material, which is to be presented. The degree of technical knowledge of the user varies significantly from the customers and stockholders to the professional analysts. With the help of annual reports, the users of a specific organisation could obtain certain information about its activities, which are briefly described as follows:
Providing financial information:
With the help of annual report, the users could obtain information about the accounting year of the organisation. Sometimes, the organisations use graphs or charts in their annual reports for presenting complex information to increase the understanding ability of the users (Ghazali 2010). The annual reports comprise of income statement, balance sheet statement, cash flow statement, and financial summary. The financial notes are included to describe the methods of accounting, which the organisations use for reporting and recording the transactions. Such notes include the provide details about the organisations in relation to depreciation of equipment and compensation of stock option (Alzarouni et al. 2011). Thus, the users could ascertain the assets and liabilities of the organisations, the method of financing operations and growth and the way the organisation is making money for the shareholders.
Depiction of achievements:
The annual reports help in depicting information on the mission and history of the organisations along with summarisation of their accomplishments in the previous year. Such accomplishments take into account the financial accomplishments along with other accomplishments like market share gains, research advances and honours awarded to the organisations or the staffs. The section of accomplishment comprises of information on things like increase in sales or new machinery for enhancing profitability and productivity (Dhaliwal et al. 2014). The intention of such accomplishments is to ensure that all the stakeholders are satisfied regarding the investments or engagements in the organisations.
Promotion of the organisation:
Along with providing financial information, the annual reports act as a tool of marketing for the organisations (Robinson and Schmidt 2013). The organisations often make use of particular themes like past milestone or concentration on enhancing lives with the help of technology in their annual reports. The incorporation of positive stories from the customers and staffs or major moments in the history of the organisations throughout the report could raise the readership of the report and appeal to the potential customers and investors (Coates 2014). The sophisticated design and techniques of layout are a significant consideration when the annual reports are used as marketing tools. In addition, some companies use different kinds of formats like electronic annual reports for increasing the appeal to the readers.
The annual reports of the organisations provide information regarding the board of directors and major personnel to the stakeholders, shareholders and the public. The initial page of the annual report provides a letter to the shareholders of the organisation. This represents information of specific interest like a positive overview of profits, effective marketing strategies, changing business conditions, campaigns and information regarding the plans for future years. The highest member of the administration of the organisation writes this letter like the board chairperson or the chief executive officer for setting a positive tone for the annual report.
Performance evaluation and comparison:
The most important benefit of the annual reports is that they deliver crucial information to the investors and management critical to the decision-making process of the organisations. Such reports help in identifying the major areas of strength and weakness in the management of the organisations, running record of the business performance and guidance for the strategic priorities of the organisations (Lee and Parker 2014). Thus, with the help of the financial statements in the annual report, the users could contrast their performance with the rivals or past timeframes, both of which are crucial to secure and maintain growth.
However, there are certain limitations associated with the annual reports of the organisations. This is because such reports have various limitations, when such reports are valuable for management. In addition, there is sufficient cost of money and time in developing reports having the potential to restrict the financial and logistic ability of the business for investing in diversification or operations. Some reports are not adequate to provide a rightful overview of the overall business or the financial conditions where they operate. In addition, the annual reports might not be contrasted as they occur, since variations in the methods of accounting could develop difficulty. Finally, the quality of information restricts the reports available and competence of developing them. Hence, the users might find it difficult to obtain meaningful data.
The financial statements are restricted to certain aspects of the business for quantitative reporting, although the business might enjoy considerable assets coupled with greater qualitative measures. For instance, a business that has recruited effectively qualified and motivated individuals would not account for doing on the financial statements, although the asset might overweigh the temporary financial drawbacks of the businesses (Bratten, Choudhary and Schipper 2013).
Hence, from the above discussion, it could be stated that annual report is an important constituent for the users to obtain important information about the activities of the organisations. However, it is to be borne in mind that annual reports have certain limitations; still they are not outdated in the current era.
Alzarouni, A., Aljifri, K., Ng, C and Tahir, M. I., 2011. The usefulness of corporate financial reports: Evidence from the United Arab Emirates. Accounting & Taxation, 3(2), pp. 17-37.
Annualreports.com. (2017). [online] Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_BAL_2016.pdfhttps://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_BAL_2016.pdf [Accessed 26 May 2017].
Balakrishnan, K., Billings, M.B., Kelly, B. and Ljungqvist, A., 2014. Shaping liquidity: On the causal effects of voluntary disclosure. the Journal of Finance, 69(5), pp.2237-2278.
Bratten, B., Choudhary, P. and Schipper, K., 2013. Evidence that market participants assess recognized and disclosed items similarly when reliability is not an issue. The Accounting Review, 88(4), pp.1179-1210.
Coates IV, J.C., 2014. Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications. Yale LJ, 124, p.882.
Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G., 2014. Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), pp.328-355.
Ghazali, N.A.M., 2010. The importance and usefulness of corporate annual reports in Malaysia. Gadjah Mada International Journal of Business, 12(1), pp. 31-54.
Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.
Lee, T.A. and Parker, R.H., 2014. Evolution of Corporate Financial Reporting (RLE Accounting). Routledge.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.
Loughran, T. and McDonald, B., 2014. Measuring readability in financial disclosures. The Journal of Finance, 69(4), pp.1643-1671.
Robinson, L.A. and Schmidt, A.P., 2013. Firm and investor responses to uncertain tax benefit disclosure requirements. The Journal of the American Taxation Association, 35(2), pp.85-120.
Wang, Xia and Wu, Min., 2011. The quality of financial reporting in China: An examination from an accounting restatement perspective. China Journal of Accounting Research, 4, pp. 167-196.