Loopholes in National Legal System - Case Study Example

? How do Bad Debts Affect the Profits of Bahrain Duty Free? Introduction Background information I have decided to write my commentary on the problemsof bad debt affecting the profits of the company Bahrain Duty Free. But before moving into the discussion of the problem a brief about the company can be mentioned. Bahrain Duty Free is basically a joint stock company which operates under the legal purview of the Bahrain Commercial law of 2001. The company backs an 80% shareholder in the Bahrain International Retail Development Centre WLL established in the month of July 2000 (Annual Report, Bahrain Duty Free, 2010, 4). The company is one of the greatest retail companies situated in the airport of Bahrain and it is worth for every individual to come and spend some time in this award winning duty free outlet. The company has been acclaimed internationally among the airport retail industry backed with an array of awards for the purpose of executing outstanding performance within the retail duty free industry. The company being located centrally between gates 14 and 15 on the departure concourse of the airport the duty free shopping in Bahrain duty free provides an extravagant shopping experience to the customers with international brands, prestigious brands and world class retail section highly known for its diverse types of products and also deemed as one of the finest airport facilities shopping all over the globe (Shopping and Eating, Bahrain International Airport). But despite of this reputed stature the company faces huge losses and one of the major reasons can be attributed to the bad debts affecting the profit margins of the Bahrain Duty Free Complex. I have concentrated on secondary resources for providing relevant answers to the question. However the resources on the bad debt affecting the profitability of the company is limited although I have made a rigorous search for answering the questions by taking proxies of bad debts as outstanding loans, non performing loans, losses, fall in accounts receivables and several other key words for relating the same and answering the question. Procedure I have decided to write the topic on the basis of different secondary sources which are given in the following tabular representation. Annual Report 2011, Bahrain Duty Free Annual Report 2010, Bahrain Duty Free Article- UAE’s non-performing loans to peak in 2012 Article- UAE’s non-performing loans to peak in 2012 Book- Internal Revenue Service Tax Information Publications, The Service, Volumes 1-2; Volume 20001 Loopholes in national legal system Now I will move into the discussion of the paper. A business bad debt is a form of loss which generates from the worthlessness of a debt primarily from two main areas. Firstly it comes from creation or acquiring within the trade or business or secondly is closely related with the trade or business when it becomes partly or totally worthless. The bad debt of a corporation is always business bad debts. A debt is related closely to the trade or business if the primary motive for the purpose of incurring debt is a business reason (Taxpayer Information Publications, 342). Bahrain Duty Free (Duty Free) played dominantly in the market within the time span of 1991 to around 2000. Then the company encountered a massive drop in the year 2001 with a drop of around 20.9% in the net earnings post 9/11 attacks. Sales declined with an increase in the operating expenses. The company encountered a massive decline of around 8.1% in the net profit in comparison with the previous years. The second half of the year has also not been different for the Bahrain Duty Free. With the outbreak of 9/11 attacks the global aviation industry became crumbled and the Middle East have been no exception. With the declining number of passengers as well as jeopardized global economic conditions which has been exacerbated by the attacks of 9/11 pushed heavily on the line of growth of the company. There has also been a drop of 20.9% drop in the net earnings to around a value of 5 million BDI with the 9/11 attacks hitting hard on the retail market. The company encountered a massive increase in its operating expenses with massively declining sales as customer loan defaults (Bahrain Duty Free Company, 2). The most challenging year for the Bahrain has been 2011. But the company continued towards maintaining its dependability as a premium travel retail operator at the International Airport at Bahrain. The workforce was dedicated as well as talented.. The sales at the Port shops also encountered reduction in the cruise liners visiting Bahrain. With the fall in the number of passengers as well as sales in 2011 the management also minimized the levels of inventory by around 40% with decline in the operating expenses by 2.2 percent as compared to the previous year that is 2010. The retail strategy concentrated on key performance indicators like that of increasing both the number of passengers spending in the Duty Free and average The challenges which were encountered in the month of February and March possessed a spillover effect adversely affecting the remainder of 2011. The passenger traffic was reduced by a margin of 15%. There was also cancellation of F1 grand prixsale value to each of the customers. The amount of consolidated sales rounded about to an amount of BD 26784553 which signaled a decline of around 14.5 % over the last year. There has been decline in the gross profits by a percentage of 12.2 on subsequent years but the margins remained steady and increased by .6 per cent which directed towards a better efficiency in efficiencies and decline in the stock loss provisions (Annual Report 2011, Bahrain Duty Free Company, 6-7). The shopping group has devised certain processes and provisions for the protection of impairment of the accounts receivables when the group sees that there is objective evidence where the group will not be able to collect all the amounts due to reasons of the original terms of receivables. When there are significant financial difficulties of the debtor then the probability that the debtor will enter into bankruptcy or that of financial reorganization, default or delinquency are generally considered as indicators which indicates that there is impairment in accounts receivable. But despite devising such strategies there has been deep impact on the profit margin of the company (Annual Report 2011, Bahrain Duty Free Company, 8). There has been analysis made by the analysts that the banking sector of UAE will be witnessing the increase in non-performing loans in the current situation with dynamic fall in the future. This analysis has been made by Moody’s Investor Service. Moody’s Investor Service also states that there will be an increase in the non- performing loans in UAE which has been and will be driven by various impairments by the government related issues and legacy real estate exposures. Moody’s analysis states that the outlook for the UAE banking system will be remaining negative. The analysts attribute this to a large extent to the legacy asset quality issues which are related to the restructuring of various corporate houses as well as government related entities. Analyst of well known Stock market indices, the Standard and Poor (S & P) has stated that the domain of credit risk in the United Arab Emirates (UAE) owing to the debt overhang of some of the Dubai-based government related entities which has forced the banks in the countries in adopting a conservative stance. The regulators of UAE recently has tightened various limits on the GREs as well as the local government which will be further restricting the growth rate of lending (Das). I think that the legislative forefront of Bahrain can be attributed to affect in the profit margins of the company. Apart from that proper policy lack can and proper implementation can also be attributed to decline in the profit margins of the company which will be discussed in the next segment. Implementation crunch Owing to the increase in the bad debt and impaired return there has been adoption of various legal parameters by the national government but the company failed in implementing the same which can be regarded as an internal failure of the company. The revised standard of 2008 required that the effects of all the transactions with various non controlling interests will have to be recorded in the side of the equity if there is no change in control and these transactions will be no longer resulting in goodwill or gains or that of losses. The specification of the standard also specifies the accounting when there is loss in control any of the remaining interest in the entity is again reevaluated to fair values with a gain or loss recognized in the domain of profit or loss. The IFR (International financial Recording) IC 17 2008 targeted the way in which the non cash dividends distributed to the shareholders are subject to measurement. There is recognition of a dividend obligation at the time when the dividend being authorized by the appropriate entity and are not restricted at the discretion of the entity. There has been a talk towards application of IAS 27 revised to the transactions associated with non controlling interests and also for the transactions which results in the loss of control. There have also been developments to IFRS issued in the month of April 2009 with spontaneous amendments to IFRS (International Financial Recording Standards). The developments to IFRS include amendments which directs towards changes in presentation, recognition or that of various measurement purposes associated with a wide array of individual IFRS standards. The amendments were effective for the annual periods starting from January 1, 2010 with frequent adoption being permitted. There were no material changes contributed towards the current accounting policies of the Group as a consequence of these amendments. The standards as well as that of the interpretations have been issued and are being expected to be relevant to the Group but it has not been effective till the year ended 31 December in the year 2010 (Annual Report 2010, Bahrain Duty Free , 14-15) . I think that proper implementation of these policies would be fruitful for the company in minimizing the bad debt and declining profit margin of the company. I think that the company must also focus on strict policies towards restricting the loans paid to customers of low potential. Conclusion I comment that after analyzing the operations of the Bahrain Duty Free Company it can be stated that it has a great potential of dominating in the retail market as it has done in the previous years. But due to problems in the national banking system have affected the debt recovery mechanism of the company. Further analysis also directs that the company although being well acquainted with the International Financial Record services did not employ effectively till 2010. I have also seen that the workforce and motivation of the company is manifold and although after facing great challenges in the year 2011, it has strived quite well and gives potential threat to its competitors. Works Cited Annual Report 2011, Bahrain Duty Free, from: http://www.bdutyfree.com/pdf/BDF%202011%20Annual%20Report%20LR.pdf Annual Report 2010, Bahrain Duty Free, from: http://www.bdutyfree.com/pdf/BarainDutyFree2010AR.pdf Das Babu, UAE’s non-performing loans to peak in 2012, from: http://gulfnews.com/business/banking/uae-s-non-performing-loans-to-peak-in-2012-1.1100656 Internal Revenue Service Tax Information Publications, The Service , Volumes 1-2; Volume 20001, Issue 1 Read More