CFR Analysis Burberry Group - Essay Example

? CFR Analysis Report Table of Contents Part A 4 Introduction 4 Investment 4 Regulatory framework 5 Part B 5 Cash generation units 5 Impairment of assets 6 IAS 36 Impairment of assets 6 Financial instruments 7 Managing risks 7 Principal risk and effects 8 Hedge Accounting 9 Post employment obligations 10 Scheme assets 11 Part C 12 Conclusion 12 References 14 Part A Introduction Burberry Group plc and its subsidiaries, the “Group” is a British luxury fashion house which distributes fashion accessories and clothing and licensing fragrances. It is mostly famous for its trench coat which was designed by its founder Thomas Burberry. The company has branded franchises and stores around the world and it sells in third party stores through concessions. The company has its listing in London Stock Exchange and is a constituent of FTSE 100 Index. The Group licenses third parties for manufacturing and distribution of products using the trademark “Burberry”. All companies which comprise the Group are directly or indirectly controlled by Burberry Group plc (Burberry, 2012). Investment Burberry has its investment in mainland China. There are total 68 stores in 35 cities. The investment is clustered around provincial capitals and flagship markets for ensuring appropriate brand representation. Burberry has its investment in real estate and retail productivity in the high growth emerging markets. It also has its investment in wholesale shop-in-shops and in retail capital. Burberry is making investment in smaller markets of future. It has its store in regional headquarters in Brazil, Latin and Central America, India and the region of Middle East. Subsidiaries The principal subsidiaries of Burberry Group Plc are as follows: Company Country of incorporation Burberry Limited UK Burberry France SASU France Burberry Ireland Limited Ireland Burberry Limited USA Burberry Korea Limited Republic Burberry Japan K.K. Japan Regulatory framework The consolidated financial statements of Group are prepared complying with EU endorsed International Financial Reporting Standards (IFRSs), IFRS Interpretations Committee (IFRS IC) and part of Companies Act 2006 as applied to companies who are reporting under IFRS. The preparation of consolidated financial statements is made as per the convention of historical cost other than the modification through revaluation of financial assets and liabilities at fair value by means of profit or loss (Burberry, 2012). Part B Cash generation units The cash generation units of the company comprise of short term deposits and cash held with liquidity funds and banks which have three months original maturity date or less. It also comprises of bank overdraft which are recorded under current liabilities. In relation to the assets of company, the future cash flow is assessed by the management of the company in terms of cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. The adjusted operating profit from continuing and discontinuing operation is assessed and the net cash inflow from operations is adjusted for capital expenditure. Impairment of assets For the purpose of assessing impairment, the assets are grouped at lowest levels for which there are separately identifiable income generating or cash flows units. Goodwill is tested for impairment by the Group annually or where there is an indication that goodwill might be impaired. The recoverable amount of all cash generating units has been determined on the basis of value in use. This method requires estimation of future cash flows arising from continuing operation of cash generating unit and choice of suitable discount rate for calculating present value. Impairment losses recognised on goodwill are not reversed in future periods. The company does not have historical impairment losses without any tendency to delay. IAS 36 Impairment of assets Assessment of assets for impairment should be made at the end of each reporting period. An impairment test should be carried out if there are indications of impairment. Such test should be carried out for goodwill acquired in a business combination and for an intangible asset unavailable for use or with an indefinite life (Higson, 2003, p.15). An impairment loss reduces carrying value to recoverable amount if the carrying value of an asset is exceeded by its recoverable amount. Cash generation units should be tested for impairment if it is impossible to calculate the recoverable amount of individual assets. Any impairment loss is required to be recognised in profit or loss except to the extent it reverses the gain on previous revaluation on the same asset (Burberry, 2012). So far as the company’s impairment policy are concerned, for the purpose of assessing impairment, the assets are grouped at lowest levels for which there are separately identifiable income generating or cash flows units. Goodwill of the company is tested for impairment by the Group annually or where there is an indication that goodwill might be impaired. The recoverable amount of all cash generating units has been determined on the basis of value in use. Financial instruments The financial instruments are classified by the Group in following categories: financial assets at fair value through loans and receivables and profit or loss. Loans and receivables include cash and cash equivalents and trade and other receivables. Derivatives are classified as held for trading and are held at fair value, unless in a hedging relationship. The primary categories of financial instruments of the Group as reported in financial statements are: cash and cash equivalents, trade and other receivables, trade and other payables, borrowings, put option liabilities over non-controlling interest and derivative instruments (Burberry, 2012). Managing risks Effective management of risks is essential to the execution of strategic themes of Group, achieving sustainable shareholder value, meeting the requirements of corporate governance and protection of Brand. The Board is entitled with the responsibility to ensure the effective management of risk by the Group. The Board has delegated the responsibility to the Audit Committee to review the effectiveness of internal control and methodology of risk management of the Group. The Group has an integrated approach to risk management and internal controls for ensuring that its review of risk is used for informing the internal audit process and design of internal controls. A detailed three year strategic plan and process of annual budget provides the principal metrics against which the performance of Group is measured (Stolowy and Lebas, 2002, p.25). The budget and strategic plan are agreed with Board along with risks to delivery and defined performance targets. The principal risks and plan for delivering strategy are a part of annual review of Board’s Group strategy. A key role is also played by the Audit Committee by reviewing the effectiveness of internal controls of Group and risk management. Principal risk and effects The principal risks identified by the company and its effect on the financial position of company are as follows: Economic downturn The performance of Group will remain strong. But a reduction in the wealth of consumer due to adverse economic conditions could lead to reduction in demand, disruption in supply chain, and increase in bad debts which can impact both profitability and sales (Chatov, 1975) (Pounder, 2009). The inability to retain and attract key employees or loss of key management The loss of key individuals and the ability of recruiting and retaining individuals with relevant experience and talent could disrupt the business operation and can badly impact the ability of Group in delivering its strategies (Fiolleau and Hoang, 2010, p.35) Over reliance on key vendors The Group relies on small number of vendors in the categories of key product and for specialist IT and digital services. Failure in any of these businesses in delivering services or product can have a significant impact on the operation of business (Brownlee, Ferris and Haskins, 2001, p.30). Failure of Group or third parties associated to comply with environmental and ethical standards A failure to comply appropriately could lead to penalties, reputational damage and adverse coverage of press resulting with a drop in profit and sales. Pressure on both external and internal resources due to pace of change and significant growth within business Failure in effectively managing the pace of change can adversely impact the operation of Group and return on investment (Hawkins, 1986, p.40) (Hawkins, 1977, p.35). The company does not have any material sensitivity to changes in financial risks. There are no provisions for impairment of financial instruments. The measurement bases used to recognise financial instruments on financial statements are IFRS 9. The financial position and performance of the company is assessed as per IFRS guidelines which are in line with the practice of industry. Hedge Accounting The company applies hedge accounting. When hedge accounting is applied, the relationship between hedging items and hedging instruments and the objectives of risk management and strategy are considered in various hedging transactions. The Group also let its assessment documented both at the inception of hedge and on an ongoing basis, if the hedging instruments used are highly efficient in hedging transaction for offsetting the changes in cash flows of hedged items or in fair values. Derivatives are designated as a hedging instrument by the Group in the following manner: hedges of fair value of recognised liabilities and assets or a commitment of firm (hedge at fair value), hedges of forecast transactions (hedges of cash flow), classified as held for trading. The effective changes in the portion of fair value of derivatives designated and qualified as cash flow hedges is delayed in other wide-ranging income. The loss or gain in relation to the futile portion of gain or loss is immediately recognised in Income Statement. When the hedged item affects the Income Statement, amounts deferred in other comprehensive income are recycled in the Income Statement in those periods. When a hedging instrument is sold or expires or when the criteria is no longer met by a hedge in case of hedge accounting, the cumulative loss or gain existing in equity at the time remains in equity. It is recognised when the anticipated transaction is recognised ultimately in the Income Statement. If a derivative instrument is not designated as a hedge, the subsequent change to the fair value is recognised within operating expenses or interest depending on the nature of instrument in Income Statement. When the net investment is hedged by the Group in foreign operations by means of borrowings in foreign currency, the recognition of losses or gains on retranslation of borrowings are made in other comprehensive income and will be reclassified to the Income Statement on the disposal of hedged foreign operation. The hedging policy of the company is in line with the industry practice. Post employment obligations Pension costs Defined contribution scheme The participation is made by eligible employees in defined contribution pension schemes, whose principal one is in UK with its assets held in an independently administered fund. The cost of providing these benefits to the participating employees is recognised in Income Statement which comprises the amount of contribution payable to the schemes in respect of the year. Defined benefit scheme Participation is made by the eligible employees of Group in defined benefit schemes in Taiwan and France. The liability recognised in Balance Sheet in respect of defined benefit schemes represents the share of present value of the Group of defined benefit obligation at balance sheet date reduced by the fair value of plan assets, combined with the adjustments for unrecognised costs of past service. The independent actuaries calculate the defined benefit obligation annually through Projected Unit Credit method (Burberry, 2012). Actuarial losses or gains arising out of experience adjustment and changes in actuarial assumption are directly recognised in other comprehensive income. The post employment obligations are realistic and there are no post employment obligations. Scheme assets Share schemes The cost of share based incentives received by employees including executive directors is measured with reference to the fair value of equity instruments awarded at the date of grant. The Black-Scholes option pricing model is used for determining the fair value of award made. The impact of performance conditions is not considered in the determination of fair value on the date of grant, except the conditions linked with the share price of Burberry Group Plc i.e. market conditions. Vesting conditions relating to non market conditions are allowed in the assumptions used for number of options which are expected to vest. An estimation of the number of options which are expected to vest is revisited at each balance sheet date (Burberry, 2012). The cost of share based incentives is identified as an expense over the vesting period of awards following with an increase in equity. The proceeds out of the exercise of awarded equity instruments which is a net of transaction costs attributable directly are credited to share premium and share capital. The scheme assets are realistic and they are in line with economic indicators. Part C Conclusion IFRS and IASB International Financial Reporting Standards (IFRS) has been designed as a common global language for the affairs of business so that the accounts of company can be understood clearly and can be compared across international boundaries. They are a consequence of trade and growing international shareholding and are important for companies who are dealing in several countries. They replace different national accounting standards. IFRS began with harmonising accounting across European Union. They were known by the name of International Accounting Standards (IAS). The Board of the International Accounting Standards Committee (IASC) has issued it between 1973 and 2001. The responsibility of setting International Accounting Standards was taken over by the new International Accounting Standards Board from IASC on 1st April, 2001. The Standing Interpretations Committee Standards (SICs) and existing IAS were adopted by the new Board during its first meeting. The new standards were developed by IASB which was called International Financial Reporting Standards (IFRS) (Lee, 2007, p.45). Review of company’s disclosure The prepared financial statements of the Group provide a true and fair view of the state of affairs of the Group as on 31st March 2012 and its cash flows and profit for the year end. The financial statements have been prepared properly in accordance with the requirements of Companies Act 2006 and Article 4 of IAS Regulation. The information incorporated in the Director’s Report for the financial year for which the financial statements of the Group have been prepared is consistent with the financial statements of the Group. The following things have been reviewed under the Listing Rules: statement of directors with respect to going concern, elements of report to shareholders on remuneration of directors by Board, part of the Statement of Corporate Governance relating to compliance of company with nine provisions of Corporate Governance Code of UK. The disclosures in financial statements provide reasonable assurance that the financial statements are free from misstatement in material caused due to error or fraud. The accounting policies have been adequately disclosed and consistently applied and are appropriate to the circumstances of Group. The overall presentation of the disclosures made in the financial statements of company is fair. References Higson, A., 2003. Corporate Financial Reporting: Theory and Practice. United States: SAGE. Stolowy, H. and Lebas, M., 2002. Corporate financial reporting: a global perspective. USA: Thomson Learning. Chatov, R., 1975. Corporate financial reporting: public or private control? New York: Free Press. Pounder, B., 2009. Convergence Guidebook for Corporate Financial Reporting. New Jersey: John Wiley & Sons Fiolleau, K. and Hoang, K., 2010. A Director's Guide to Corporate Financial Reporting. USA: Business Expert Press. Brownlee, E., Ferris, K. and Haskins, M., 2001. Corporate financial reporting. United States: McGraw-Hill Higher Education. Hawkins, D., 1986. Corporate financial reporting and analysis. 2nd edition. New York: Dow Jones-Irwin. Hawkins, D., 1977. Corporate financial reporting: text and cases. Michigan: R.D.Irwin. Lee, T., 2007. Financial Reporting and Corporate Governance. New Jersey: John Wiley & Sons. American Institute of Certified Public Accountants, 1969. Corporate financial reporting: conflicts and challenges: a symposium. USA: AICPA. Burberry, 2012. Annual Report 2011-12. Available from http://www.burberryplc.com/documents/full_annual_report/burberry_ar_final_web_with-urls_indexed.pdf. [Accessed on April, 26, 2013]. Read More