Narrative and Audit Reports - Assignment Example

I. Narrative Reports A. The initial pages of the annual report generally set its tone. The reports of the company’s top officers present in narrative form the significant events of the year and their effects on the company. These pages also include reports on the prevailing risks and issues that the company is currently confronted with and the counter-measures that the management is implementing for the best interest of the company and its shareholders. The narrative reports and presentation in the annual report serve to benefit the readers of the report who are not well-versed in understanding and interpreting the information relayed by financial statements. B. Both the Chairman’s Statement (CS) and the Chief Executive’s Review (CER) describe 2009 as a very difficult year. They both emphasized that the company’s loss before tax is a natural consequence of the drastic turnaround in the global economies. They also both affirmed the company’s commitment to do its part in combating climate change even if the prevailing adverse economic situation. They as well mention BA’s long-term goal of becoming a leader in the global arena of the airline industry. The CS tackled specific issues that pertained not just to BA but to the entire airline industry of UK. The CS is written from a point of view that sees BA as a primary industry player with respect to the rest of the industry and the business world at large. It discusses the ongoing battles for government regulations that would be favorable for the industry and for BA, the current status of BA’s talks with other airlines regarding mergers and the general trend of the world’s airline industry. The CS also talks of matters that concern BA’s shareholders such as the decision to declare no dividends and to give no bonuses to senior management for the year. In contrast, the CER covers more of BA’s internal issues. It talks of how BA’s implemented cost-cutting measures to combat ill effects of the economic slowdown and of how BA works on further improving its overall customer service to achieve even higher satisfactory ratings. It also talks of the management’s decision to give no salary increases to employees for the year. C. The CFO’s Report contains information that a potential investor like Paul should be interested in. One is the basic earnings per share figure that is -32.6 pence; another is the reduction of BA’s other reserves by £988 million which will significantly reduce the company’s shareholders’ equity. The third is the recommendation of BA’s board to give out no dividends as a result of the company’s operating loss for 2009. On the positive side, the report declares that BA has sufficient resources to carry on with its operations in the coming years despite its unfavorable financial performance for 2009. D. The risks and uncertainties that BA is exposed to include the erosion of its brand reputation, the fierce competition, the failure of its mergers with other players, the effects of deregulation, the availability of debt funding, its relations with its unionized workforce, environmental concerns, the fluctuations of fuel prices and currencies, the fuel supply, the continuing global crisis, government intervention on issues that critically affect the airline industry, the operational constraints of Heathrow, the unhealthy financial state of its key suppliers, the further deterioration in the value of the company’s pension and the need to always secure the safety of its passengers and employees. II. The Audit Report: A. The role of auditors is to express their opinion on whether or not the financial statements of the company fairly present the results of its operations and its financial condition. B. BA’s financial statements are audited by Ernst & Young LLP. In 2009, the audit firm gave an unqualified opinion on BA’s financial statements. It means that the 2009 financial statements prepared for the BA Group and BA as the Parent Company are all deemed to provide a true and fair view of their financial condition and the results of their operations. The audit report is dated May 21, 2009; this means that on that date, the auditors concluded the audit procedures they conducted on BA. III. Performance Analysis: A. Income Statement Analysis BA’s profitability suffered a blow in 2009 when it reported a loss of £358 after generating an income of £728 in 2008. BA’s total revenue increased in 2009 only by 3% and its thanks to the gains realized in the conversion of currencies. Meanwhile, its total operating expenditures increased by 17%. The country also experienced record increases in fuel prices during the first half of 2008. Thus, the expenditures still turned out to be significantly higher despite the reduced number of flights flown, which should have reduced the company’s costs. B. Fuel Prices in UK in 2008 The first half of 2008 witnessed the steepest fuel price increases of the recent decades. Retail prices in mid-July 2008 averaged at 119.4 pence per litre for petrol and 132.9 pence per litre for diesel. Thankfully, the prices decreased sharply in the second half of 2008. By mid-September 2008, prevailing prices were 105.9 pence per litre for petrol and 106.6 per litre for diesel and these prices further decreased in November and December 2008. (Bolton & Groat 2009) The fuel price trends described above clearly explain the huge increase in BA’s fuel costs in the year ended March 31, 2009. In the first half of 2008, BA ended up purchasing fuel at the abnormally high prices of such time. When the prices finally went down to more acceptable levels, the airline operations turned out to require reduced quantities of fuel due to reduced numbers of daily flights flown. A number of BA’s aircrafts were simply parked during the last months of 2008 to cut costs in response to the drastic decrease in the number of passengers. C. Earnings Per Share The EPS represents the amount that a shareholder is entitled to as his share in the total earnings of the company. It is useful in determining the profitability level of a company on a per-share basis. A company’s EPS can be compared with another company’s so as to determine which company operates more profitably relative to its number of outstanding shares. BA’s EPS for 2009 and 2008 are -32.6 pence and 62.1 pence, respectively. The 2009 EPS represents the amount attributable to shareholders if the total losses were to be shared amongst them, while the 2008 EPS is the share of each shareholder in the total income of the company for the year ended March 29, 2008. D. Ratios 2009 2008 Net Profit Margin n.a. 8.84% Current Ratio 0.57 : 1 0.89 : 1 Debt to Equity Ratio 4.68 : 1 2.46 : 1 Price-Earnings Ratio * n.a. 3.77 * Closing prices were taken from the Yahoo UK website The net profit margin defines the level of net profits of BA as a percentage of its revenues. BA earns as net income 8 cents for every pound received as revenue in 2008. Its 2009 operations resulted to a loss so this ratio cannot be computed. The current ratio shows a company’s capacity to pay for its current debts using its current assets. For the year 2009, BA has only £0.57 worth of cash and other current assets for every £1.00-debt due within a year. This is not a good figure; it reflects lack of liquidity. BA’s 2008 current ratio was better at £0.89: £1. The Debt to Equity Ratios of BA for 2009 and 2008 declare that the company’s debts are over four times and two times, respectively, its equity. Price-Earnings Ratio designates the price of each share of BA for every pound that it earns. The lower this amount, the more attractive the company share would be for an investor. E. Using the Financial Ratios These ratios would help in comparing the financial performance of BA with those of other companies. They all would have varying amounts for their profits, debts and assets, but these ratios would serve as objective and sound bases for investment decisions. IV. Consolidated Cash Flow Statement BA generated cash from operations during 2009 and 2008 amounting to £133 million and £303 million, respectively. BA’s significant source of cash for 2009 is its total depreciation, amortization and impairment costs which totaled to £694 million. This represents non-cash expenses that are added back to the company’s cash resources to determine its actual available cash. BA also sourced cash from long-term borrowings amounting to £377 million and reverted as cash £202 million of its interest-bearing deposits in 2009. In the same year, BA purchased property, plant and equipment items worth £547 million, paid £402 million of its finance lease liabilities, paid £177 million as interest and incurred an operating loss of £220 million. These transactions are shown in its consolidated cash flow statement, which provides information that the balance sheet and the income statement alone cannot give. V. BA’s Notes to the Financial Statements contain information that should be considered by investors for better understanding of the company’s financial condition. One is BA’s method of recognizing revenue which clarifies that a good portion of the company’s current liabilities actually represent purchased tickets that are yet unused. Another is the use of fair values in recording BA’s other investments; this information makes it clear that these values are subject to change, depending on the prevailing condition in the financial markets. The data on the operations of BA’s segments also prove to be valuable since it gives a glimpse of BA’s overall operations – what components make up the whole, which ones are profitable and which ones should be discontinued. VI. Limitations of Annual Reports: BA’s annual report, like those of other companies, do not give a sufficient comparison between BA and other airlines. It also does not describe the company’s stock in terms of its performance in the bourse. It would further help investors like Paul if annual reports would as well include projected financial statements for the next three or five years. List of References Bolton, P. & Groat, R. (2009) ‘Petrol and Diesel Prices.’ Library, House of Commons [online] available from [24 March 2010] Yahoo! UK & Ireland (2010) British Airways (BAY.L) [online] available from [24 March 2010] Read More