Conceptual Framework of Investment Analysis - Case Study Example

Conceptual framework of An Investment Analysis Part Discuss the purpose of a conceptual framework for financial reporting. The conceptual frame work for financial reporting has been adopted by the International Accounting Standards Board on April 2001 to provide standard guidelines of value measurements and impairments in financial statement reports. The framework of an FS should have an objective, must have the qualitative characteristics to make the information useful to the intended user. The FS should be understandable, relevant, reliable, timely, and comparable. The framework must be the basis of a general purpose of FS that could be presented to a wide range of users such as tax authorities, government regulatory authorities, prospective capitalists, suppliers and other trade creditors as basis of decisions. and as a guide to the enterprise itself. Framework also provides general information of the capital needs of the company and shows its ability to generate cash and cash equivalent and cash flows. * The preparations of the FS are the responsibility of the enterprise and is done annually. The Objective of Financial Statements A Financial statement is a management tool of communicating information about the financial position of the company, its performances and changes in financial position. It is presented in income statements, balance sheets and cash flows. Part B. Review the 2008 annual report of British Airways plc and evaluate the relevance, reliability, comparability and understandability of the information to you as a potential investor (use examples to justify your answers) * On the basis of relevance. The information presented in the financial statements is relevant as it is presented in two years, 2007 and 2008. This information can help users of the Financial Statement to evaluate past and present events of the company. On the basis of past events, evidences could be gathered for confirming or correcting past evaluations made. * On the basis of reliability. Financial statements of British Airways have to be audited in accordance with IASB and should comply with the requirements in the financial market audit. A financial statement becomes unreliable when it is purposely done to influence users’ decision such understatement or overstatement of assets, income and liabilities. Disclosures from part of the financial report in claiming estimates in its preparation so that the FS will appear neutral. The study has been limited and could not interpret any understatement or overstatement of assets and liabilities. However, following the trend of the 2 year Balance sheet, changes in asset structure is not very significant to cause an alarm. * On the basis of comparability. The Financial Statement of BA provided sufficient data for comparability over time. This is done on a 2 year comparison of its own yearly performance. This allows users to study trend in performances in all aspects of its operations and pinpoint weaknesses and strength. Changes in the revenue and costs are related to economic concerns of operations such as high cost of gasoline and oil. The study is limited to BA’s own trend and is not able to compare it with other enterprise. Disclosures of accounting policies used has also been followed by BA. * Understandability On the basis of understandability. The BA Financial Statement is presented in a clear and easy to understand format that investors or interested user can follow without much difficulty and coaching BA Annual Report fr year ended March 2009       Group � million Note 2008 2007 Traffic revenue       Passenger   7,541 7,263 Cargo   616 598     8,157 7,861 Other revenue   596 631 Revenue 3 8,753 8,492 Employee costs 7 2,166 2,277 Depreciation, amortisation and impairment 4 692 714 Aircraft operating lease costs   68 81 Fuel and oil costs   2,055 1,931 Engineering and other aircraft costs   451 414 Landing fees and en route charges   528 517 Handling charges, catering and other operating costs   977 930 Selling costs   359 436 Currency differences   6 18 Accommodation, ground equipment and IT costs   576 618 Total expenditure on operations before non-recurring items   7,878 7,936 Operating profit before non-recurring items   875 556 Credit arising on changes to pension scheme 35 – 396 Provision for settlement of competition investigations 29 – (350) Operating profit 4 875 602 Fuel derivative gains/(losses)   12 (12) Finance costs 8 (175) (168) Finance income 8 111 129 Net financing income/(expense) relating to pensions 8 34 (19) Retranslation (charges)/credits on currency borrowings 8 (11) 13 Profit on sale of property, plant and equipment and investments 9 14 47 Share of post-tax profits in associates accounted for using the equity method 19 26 5 (Charges)/income relating to financial assets 10 (3) 14 Profit before tax   883 611 Tax 11 (187) (173) Profit after tax from continuing operations   696 438 Loss from discontinued operations (after tax) 5 (2) (134) Profit after tax   694 304 Attributable to:       Equity holders of the parent   680 290 Minority interest   14 14     694 304 Earnings/(loss) per share       Continuing operations:       Basic 12 59.2p 37.2p Diluted 12 58.8p 36.8p Discontinued operations:       Basic 12 (0.2)p (11.7)p Diluted 12 (0.2)p (11.7)p Total:       Basic 12 59.0p 25.5p Diluted 12 58.6p 25.2p http://www.bashares.com/phoenix.zhtml?c=69499&p=IROL-index bashares.com - Investor Relations BA Cash Flow Statement for year ended March, 2008 million Note 2008 2007 2008 2007 Cash flows from operating activities           Operating profit   875 602 855 607 Operating loss from discontinued operations   (2) (122) – – Credit arising on changes to pension scheme   – (396) – (396) Depreciation, amortisation and impairment   692 834 672 695 (Group includes �120 million from discontinued operations in 2007)           Operating cash flow before working capital changes   1,565 918 1,527 906 Decrease/(increase) in inventories, trade and other receivables   96 61 89 (136) Decrease in trade and other payables and provisions   (354) (15) (351) (18) Cash payment to NAPS pension scheme 35 (610) (240) (610) (240) Provision for settlement of competition investigations   – 350 – 350 Payment to DOJ in settlement of competition investigations 29 (149) – (149) – Other non-cash movements   3 (2) (32) (2) Cash generated from operations   551 1,072 474 860 Interest paid   (182) (188) (169) (170) Taxation   (66) (128) (56) (127) Net cash flow from operating activities   303 756 249 563 Cash flows from investing activities           Purchase of property, plant and equipment 14 (596) (331) (592) (326) Purchase of intangible assets 17 (33) (36) (32) (36) Purchase of interest in associate 19 (54) – – – Purchase of subsidiary undertaking 19 – – (1,016) (13) Purchase of minority interest   – (13) – – Proceeds from sale of associated companies   – 3 – – Proceeds from sale of other investments   – 52 – 52 Proceeds from sale of property, plant and equipment   11 7 11 7 Insurance recoveries from write-off of Boeing 777 aircraft   51 – 51 – Cash inflow/(outflow) from disposal of subsidiary company   1 (149) – – Interest received   117 113 123 112 Dividends received   3 1 4 20 Decrease in interest-bearing deposits   458 389 1,238 390 Net cash flow from investing activities   (42) 36 (213) 206 Cash flows from financing activities           Proceeds from long-term borrowings   172 – 172 – Repayments of borrowings   (68) (97) (57) (77) Payment of finance lease liabilities   (356) (388) (355) (383) Exercise of share options   4 50 4 50 Purchase of own shares   – (12) – (12) Distributions made to holders of perpetual securities   (14) (14) – – Net cash flow from financing activities   (262) (461) (236) (422) Net (decrease)/increase in cash and cash equivalents   (1) 331 (200) 347 Net foreign exchange difference   (29) (16) (29) (11) Cash and cash equivalents at April 1   713 398 662 326 Cash and cash equivalents at March 31 24 683 713 433 662 Source: British Airways Investor Relations BA Balance sheet for year ended March 2008. £million Note 2008 2007 2008 2007 Non-current assets           Property, plant and equipment: 14         Fleet   5,976 6,153 5,794 5,957 Property   977 932 924 876 Equipment   310 272 301 266     7,263 7,357 7,019 7,099 Goodwill 17 40 40 – – Landing rights 17 159 139 159 139 Software 17 22 33 22 34     221 212 181 173 Investments in subsidiaries 19 – – 2,207 1,185 Investments in associates 19 227 125 – – Available-for-sale financial assets 20 80 107 24 41 Employee benefit assets 35 85 116 85 116 Derivative financial instruments 31 80 8 80 8 Prepayments and accrued income   19 20 9 10 Total non-current assets   7,975 7,945 9,605 8,632 Non-current assets held for sale 16 – 8 – 8 Current assets and receivables           Inventories 21 112 76 109 74 Trade receivables 22 586 654 574 635 Other current assets 23 308 268 371 336 Derivative financial instruments 31 278 78 278 78 Other current interest-bearing deposits 24 1,181 1,642 399 1,639 Cash and cash equivalents 24 683 713 433 662     1,864 2,355 832 2,301 Total current assets and receivables   3,148 3,431 2,164 3,424 Total assets   11,123 11,384 11,769 12,064 Shareholders’ equity           Shareholders’ equity:           Issued share capital 32 288 288 288 288 Share premium   937 933 937 933 Investment in own shares   (10) (10) (10) (10) Other reserves 34 1,818 1,000 1,344 683 Total shareholders’ equity   3,033 2,211 2,559 1,894 Minority interest 34 200 200 – – Total equity   3,233 2,411 2,559 1,894 Non-current liabilities           Interest-bearing long-term borrowings 27 2,751 2,929 2,971 3,113 Employee benefit obligations 35 330 1,142 322 1,134 Provisions for deferred tax 11 1,154 930 1,069 855 Other provisions 29 210 153 185 114 Derivative financial instruments 31 33 6 33 6 Other long-term liabilities 26 168 188 132 150 Total non-current liabilities   4,646 5,348 4,712 5,372 Current liabilities           Current portion of long-term borrowings 27 423 417 421 413 Trade and other payables 25 2,590 2,726 3,849 3,924 Derivative financial instruments 31 57 18 57 18 Current tax payable   4 54 3 38 Short-term provisions 29 170 410 168 405 Total current liabilities   3,244 3,625 4,498 4,798 Total equity and liabilities   11,123 11,384 11,769 12,064 Source: British Airways Investor Relations Part 3. In your opinion which ONE of the four qualitative characteristics of financial information do you believe is the most important (you must justify your choice) I believe understandability of financial information is far more characteristics of the conceptual frame work for reporting. Figures stated in the annual report are irrelevant to an investor if he does not know the meaning of items stated, if information is not relevant to the objective of the financial statement, and it is not presented on a timely manner. When an investor understands the Financial statements, he is able to interpret it be able to use data for decisions in investing. Part 4. Conclusion. The conceptual framework provided the basic structure of financial statement reporting. It has been adopted as the standard accounting boards and is supposed to be followed for uniformity as a general accounting procedure. A standard framework makes it easy for communication of financial operation and comparison with others. In our study, British Airways used a standard form of financial statements that makes it easy to compare with past performances and be able to relate to other companies in the industry. With the use of standard form of financial reporting, it will not be difficult to analyze performances of allied industries and use it as benchmark information for decisions. References British Auirways. Financial Statements. Investor Relations. Retrieved 23 March 2009 from www.bashares.com/phoenix.zhtml?c=69499&p=IROL-indexInvestor Relations AIS Plus. Summaries of International Financial Reporting Standards. Deloitte. Retrieved 23 March, 2009. http://www.iasplus.com/standard/framewk.htm Read More