The Liquidity Ratio of JB-Hi Fi Limited - Essay Example

?Task Question During the financial year the current liabilities of the company JB-Hi Fi Limited has increased $93,543 thousand as comparedto the prior year ending 2011. This represents an increase of around 27% during the financial year. The major increase has been represented in the figure of Trade and other payables of the company. A brief analysis of the notes to the financial statement pertaining to the trade payable figure presents the fact that the trade payable figure also comprises of other figures such as GST payables, deferred income and other creditors and accruals. All of these items have shown significant increase over the financial year 2012, but the most significant increase is represented by the increase in the figure of trade payables which has shown an increase of about $100,371 thousand or about 38% of the prior year balance. The trade payable balance amounts to around 91% of the total ‘Trade and other payable’ line item in the balance sheet of the company. Other balances of current liabilities line items include other financial liabilities, provisions and other current liabilities which all have shown inclining movement in the current financial year. This increase is offset to a certain extent by the increase in the figure of current tax liabilities which have decreased by &7,690 thousand during the current financial year of 2012. The company might have decided to pay more in respect of its current tax liabilities in order to maintain a lower balance of payable for the current year. The liabilities which are likely to be settled within 12 months form the end of the financial year date are classified under the heading of current liabilities. The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities. The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. The current ratio of the company is 1.21 which shows that the company has great potential in order to pay off all of its current liabilities in the foreseeable future. Question 2 The total liability balance of the company JB-Hi Fi Limited amounts to $ 626,648 thousand as at financial year ended 2012. Out of this figure, $439,481 pertains to current liabilities and the other $187,161 pertains to the non-current liabilities portion of the balance sheet. At the end of the financial the first and foremost major liability that the company has is in terms of trade payables which represent around 64% of the total liability balance of the company. Trade payables represents the balance that the company has to pay to its creditors in the normal course of the business and is usually on account of the purchase of the raw material, unassembled goods and other services. Other balance which represents a significant portion of the total liabilities of the company is borrowings which represent about 24% of the total liabilities of the company. These borrowings consists of secured bank loans which is secured by ‘a fixed and floating charge over the Group’s assets, the current market value of which exceeds the value of the loan’. Other liabilities of the company include balance such as current and non-current provisions on account of defined benefit plan and leases provisions. Question 3 The balance of the provision as represented in the ‘current liabilities’ portion of the balance sheet of the company comprises of employ benefits and lease provision. The employee benefit plans usually comprises of a defined benefit plan or a defined contribution plan. These plans are usually made for the benefit of the employees of any company and the provision balance represents a liability balance that the company has to contribute towards the particular fund. On the other hand, the lease provision includes the Group’s best estimate of the amount required to return the Group’s leased premises to their original condition, taking into account the historical patterns. The provision on account of employee benefits has increased by around $ 3,635 or 15% during the financial year. The International Accounting Standard (IAS) 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ describes the accounting treatment in respect of financial provisions, contingent assets and contingent liabilities. In this context IAS 37 (2009, p 1888) describes that the entity only recognizes a provision, if the following conditions prevails which are: A present obligation has arise due to certain past event The outflow of economic resources, in order to settle that obligation, is probable; and The settlement amount can be reliably measured Further elaborating on the above mentioned points, an obligating event is the one according to which the company has a legal or constructive obligation to settle that obligation and the company does not have any other alternative to that. As further explained in the relevant provisions of IAS 37, a constructive obligation usually arises on account of past practices. In certain circumstances, it might not be certain whether the entity has a present obligation, and even if it does have a present obligation, the outflow of economic resources out of the entity is not certain. The discussed circumstances give rise to a contingent liability, which is required to be disclosed in the financial statement of the company and does not need to recognize. If the possibility of economic out flow is highly remote, then the company is not required to even disclose it in its financial statements. The amount recognized as provision should be the best estimate of the expenditure that is required to settle the present obligation at the balance sheet date. The entity, while recording the provisions, should take into account all the relevant circumstances and risk that prevails at the balance sheet date. In some situations, it would be possible that a third party agrees to agree the whole or certain part of the asset. In such situations the entity should recognize the amount receivable in the form of reimbursement as asset. The following decision tree as presented in IAS 37 (2009, Appendix B, p 1903) presents the guidelines based on which the amount are disclosed or recognized in the financial statements of the company The measurement section of IAS 37 also bring into attention of the companies that the recorded provisions should be the best estimate. The process of determining the best estimate of the provision is purely dependent on the judgment of the management which in turn is ultimately dependent upon the report of the experts or the experience gained from similar transitions. The company usually calculates a midpoint value based on the weight ages of different probabilities. For example the possibility of recorded a provision is 60%, 70% and 90% and each percentage is associated to a different set of risk, then the management of the entity will recorded the provision based on the weight age of different risks level. In addition, the standards also requires that the future events that are likely to affect the provision in the future period should be assessed at the reporting date at the affects of that must be reflected in the amount of provision recorded. Thus it would be most prudent for the company to expected cost reduction in the provision recorded pursuant to the fact that the expected cost will decrease by applying technology. Furthermore the standard also requires that a provision must only be used for the expenditures for which the provision was originally recognized. An analysis of the notes to the financial statements presents the fact that both the items included in the provision balance has satisfied the recognition criteria as mentioned in the IAS 37. Question 4 In the financial year ending 2011, the cash inflow on account of borrowing amounted to $163,334 thousand which can be traced from the cash flow statement of the company. If the cash flow statement of the current financial year is analyzed, it is represented that the amount of loan that has been repaid during the current financial year amounts to $ 84,174 thousand. The above amount can also be corroborated by comparing the figures from the balance sheet of the company. Question 5 As mentioned in the Note 24 of the financial statement of the company, the borrowings of the company in the form of bank loans is secured by a fixed and floating charge over the Group’s assets, the current market value of which exceeds the value of the loan. Question 6 In order to determine the time of the repayment of the long term loans, the maturity note in the financial statement of the company must be reviewed. The following table presents the timing of the payments of the note. Duration Amount is $ '000 Less than 6 months 4,973 6-12 months 4,973 Between 1 and 2 years 157,460 Between 2 and 5 years  - Over 5 years - Total 167,406 Question 7 The non-current provision represents provision on account of employment benefit plans, lease provisions and other provisions. The nature of these provisions is the same as of that mentioned in the current liability portion of these provisions. The provision on account of employment benefit plans represents the contribution that the company has to make on account of a defined provident fund or a gratuity fund for the benefit of the employees working for it. That particular portion of the provision represent that the provision will be settled after more than 12 months from the balance sheet date for it to be classified as a non-current liability. The lease provision includes the Group’s best estimate of the amount required to return the Group’s leased premises to their original condition, taking into account the historical patterns. Whereas, the other provision figure, which is quite insignificant, might include provision for other items such as obsolete stocks etc. Task #2 Question No.1 There are several matters on the agenda of IASB when it comes to improving and revising the International financial reporting standard (IFRS). The first and foremost project pertains to the IFRS 9 ‘Financial instrument’ which is replacing the International Accounting Standard 39 of the same title. The board is currently collaborating on how to resolve the issues pertaining to the classification and measurement of the financial assets and financial liabilities. In addition, issues pertaining to the impairment and hedge accounting are also on the review table of the board. It is envisaged that these matters will be resolved by the end of the financial year 2012, whereas the guidelines on the accounting of macro hedges is expected to be completed by second quarter of 2013. Other important accounting standards and conventions which are on the agenda of the board is IAS 17 ‘leases’ and IAS 18 ‘Revenue Recognition’. The board is also striving to improve and clarify the accounting conventions on the insurance contracts and consolidation of the investment entities. As per the latest development of the Australian Accounting Standard board (AASB), The AASB has issued ED 227 Proposed Amendments to AASB 1049 – Extension of Transitional Relief for the Adoption of Amendments to the ABS GFS Manual relating to Defence Weapons Platforms. In addition to that, the board is also working on projects such as the Intangible asset project, GAAP/GFS harmonization project, insurance projects and differential reporting project update etc. Question No.2 In a joint collaboration between IASB and AASB in order to revise the conceptual framework, several issues are discussion. The first and foremost issue under discussion between the two boards is the convergence of AASB 9 and IFRS 9 both of which pertains to the accounting of financial instruments in the financial statement of a company. Other major issue which has been raised pertains to the accounting treatment of the consolidated financial statement. The discussion particularly highlights the differences between the accounting conventions of the two frameworks and how they can be converged as one. References [1] Deloitte, IAS 37 — Provisions, Contingent Liabilities and Contingent Assets, viewed 5th April. 2012. < http://www.iasplus.com/en/standards/standard36> [2] International Accounting Standards Board, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, International Financial Reporting Standards, IASC Foundation Publication Department, United Kingdom [3] International Accounting Standards Board, IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, International Financial Reporting Standards, IASC Foundation Publication Department, United Kingdom [4] Deloitt, Financial Reporting Alert 11-1, SEC's Focus on Compliance With Loss Contingency Disclosures, viewed 5th April. 2012. [5] IFRS Foundation, Liabilities - amendments to IAS 37 (Paused), viewed 5th April. 2012. [6] JB Hi Fi Limited ,Annual Report 2012 viewed 5th April. 2012. [7] IFRS, Work plan - projected targets viewed 5th April. 2012. [8] Deloitte, What's new in the December 2011 financial reporting cycle viewed 5th April. 2012. Read More