The 2010 Annual Report of PSA Peugeot Citroen - Essay Example

PSA Peugeot Citroën Case Study 1. Introduction This paper seeks analyse and discuss the 2010 Annual Report of PSA Peugeot Citroen (or “PSA”) by answering certain questions. Analysis and discussion would generally involve items and issues found in PSA’s annual report for 2010, particularly its financial statements. This would look at the role of Autorité des Marchés Financiers (AMF) and European Union’s ratios and discussion of problems that may be faced by some decision makers. 2. Questions and Answers 2. (a) What is the Autorité des Marchés Financiers ? Explain why it was established in 2003 and describe its role in the development of financial reporting in France. AMF is the French regulator or the counterpart of Securities and Exchange Commission (SEC) in the US. Its role therefore in the development of financial reporting in France would be the same as SEC. It is tasked along with SEC to develop principles on cooperation in the supervision of markets and market participants whose operations cross international borders (Casey, 2010). In the US, SEC adopts the issuance of FASB’s on accounting standards on financial reporting and so with the same reason that AMF will give the legal force by accounting standards set by standard setting board in France. The AMF was established with the task of ensuring or protecting public savings invested in financial instruments as well all other investment that would result or metalize in a public offering. It also has supervision of the prepared financial information as conveyed to investors. It has therefore is purpose of effectively promoting the proper running of financial markets. It contribution in France regulation of these markets extend in European and international level (International Monetary Fund, 2005). 2. (b) The European Union’s Fourth Directive allows four income statements format. Explain the structure of PSA Peugeot Citroen’s income statement on page 204 in terms of the options allowed under the Fourth Directive and IAS 1. In addition to AMF, the European Union’s Fourth Directive can affect how PSA should present is financial report to users. The said directive in particular allows four income statements format. Explaining the structure of PSA Peugeot Citroen’s income statement on page 204 in terms of the options allowed under the Fourth Directive and IAS 1 could give an insight how to interpret PSA’ financial statements for 2010. The structure of the company’s income statement on page 204 appears to be consistent with options allowed under Article 25 of the Fourth Directive of the EU (EUR.Lex, 2011). The format under Article 25 starts with turnover, which must be reduced by cost of sales, to get the gross profit loss. From the latter figure, this would allow the deduction of distribution costs, administrative expenses, addition of other operating and addition or deduction of other income and expenses will yield profit or loss before tax. From the latter amount, the tax on profit and loss will deducted to get the net income after tax. From the latter figure, extraordinary income (loss) will be added/(subtracted) to get the profit or loss for the financial year (EUR.Lex, 2011). The same is also consistent with the requirements of IAS 1 (Deloitte (2011). 2. (c) The ‘Equity’ component of PSA Peugeot Citroen’s balance sheet on page 329 includes legal reserves (see also note 26.6 on page 256). What are legal reserves? Is this practice allowed in the UK? Given the background understanding some items in the financial statements become interesting. There is the ‘Equity’ component of PSA Peugeot Citroen’s balance sheet on page 329 which includes legal reserves. What are legal reserves? Legal reserves are required accumulated earnings of corporations, which cannot be made available for dividends. It is sometimes called statutory reserve as certain percentage of earning is accumulated and not available for dividends> The term legal reserve may normally include revaluation reserved or increment which can be increase by the revaluation of property, plant and equipment (Lawrence, 1996). Revaluation happens when the market or fair value increased in comparison with the carrying value of the Property, Plant and equipment. The same is therefore decrease by the depreciation of the asset subjected to revaluation or the sale of the asset before the same is fully depreciated (Kieso et al, 2007). In the PSA balance sheet however, the legal reserve on page 256 is deemed to have excluded the revaluation reserve. Is this practice allowed in the UK? Apparently, the use of legal reserve is also not allowed in UK based on the latest financial statement of a UK company (Taylor-Wimpey, 2011). 2. (d) Discuss the similarities and differences between PSA and Peugeot Citroen’s accounting policies and US GAAP for inventories and leased assets. To go deeper into company’s financial reports, there is need to discuss the similarities and differences between PSA’s accounting policies and US GAAP on inventories and leased assets. The following are similarities and difference between the company’s accounting policies and US GAAP in terms of inventories and leased assets. PSA’s accounting policies and US GAAP are similar on inventories as far as valuing the inventories at lower of cost or net realizable value based on the notes to financial statements. PSA consolidated financial statements make use of the IAS-2 on inventories. It has its cost to be determined or computer by the first-in-first-out method. The cost that is used comprises all direct and indirect variable production expenses that company incurs in production. Its policy on this matter also included its fixed production expenses using as basis its normal capacity of PSA’s production facility. By asserting that is inventories as not taking a substantial period of time to get ready for sale to customer in the market. Its cost would exclude any borrowing costs (PSA Peugeot Citroën, 2011). The idea is that the principle of conservatism is followed under the IFRS and US GAAP where there is needed not to count the eggs before they are hatched. The carrying value of inventories cannot go higher than original acquisition cost even if the market value goes higher than said cost. The right time to recognize the increase in market value is then revenues are realized and that is the point where there is sale. Revenues are recognized when they are earned according to revenue recognition principle. Corresponding, the expense recognition principle must follow the matching principle where the necessary cost must be recognized when revenue is already recognized. Thus when sale of goods is made, the corresponding revenue must be recognized and the cost goods sold must be recognized as expense or expire costs. PSA’ accounting policies and US GAAP differ however on the allowed method used inventory costing method. PSA’s follows that of FIFO while US GAAP allows LIF0 (Kieso, et al 2007). The difference in method will have an effect on the cost to be recognized because of the assumption of changing prices goods in the market because of the reality of inflation. Under the FIFO method, those which came in first must come out first. Thus the effect would be to understate the cost of goods for the period and overstate the net income. For income tax purposes, the company would in effect be taxed higher than under the LIFO which has the opposite effects of overstating cost and understating income for tax purposes. For financial accounting purposes therefore, there appears to higher reported income under FIFO than LIFO and this would have the effect of overstating the profitability ratios of the company. In the case of PSA, it would therefore mean that is income is higher in using FIFO rather than LIFO. For investment purposes therefore US companies would less profitable compared to companies using IFRS where FIFO is the preferred method. The issue of recognizing leases as capital leases or operating lease will definitely have an effect on the financial statements. Similar the criteria for classifying a lease as capital or operating are the same, prepared financial reports under the two set of standards could still be the same but the absence of the brightly testing criteria for classification may make it more discretionary under IFRS to make classification (PWC, 2011). As to what is normal tendency is concerned will depend upon the purpose of management. If it wants to have more income for the current period, it must target fewer expenses between the two kinds of leases and this is best supported by classifying the lease as capital lease rather than operating lease under IFRS. But if the purpose is to avoid higher income tax, the best thing to happen is to have less income and therefore higher operating expense which can be accomplished by classifying leases into operating rather than capital lease. From a financial accounting perspective, company may choose also operating lease as a possible off-balance sheet financing. This could make the gearing ratio of the company lower and therefore could reflect better financial leverage. 2. (e) Identity and list the main lines of business and geographical areas in the segmental data within the PSA Peugeot Citroen's financial statements Another way to study PSA’s financial report is to identity and to list the main lines of business and geographical areas in the segmental data within the company’s financial statements. The main lines of business in the segmental data include the automotive division, the automotive equipment division, the transportation and logistics division, the finance division and other business division (PSA Peugeot Citroen, 2011). The geographical areas in the segmental data within PSA Peugeot Citroen’s financial statements include Western Europe, Central and Eastern Europe, Latin America, and rest of the World (PSA Peugeot Citroen, 2011) 2. (f) List ten types of corporate social responsibility disclosure in PSA's Annual report The ten types of corporate social responsibility disclosures provided in PSA Peugeot Citroen’s annual report would include the following: The types of CSR as to issues involved would include the following. As to social responsibility, the same encompasses human rights, employee volunteerism, corporate governance, community development,, and education and training. Environmental responsibility covers issues of pollution abatement. Other issues would health and safety, strategic relationship with schools and universities and good relationship with its suppliers and customers (PSA Peugeot Citroen, 2011; Yakovleva, 2005). 2. (g) Are your findings in (e) and (f) in line with Gray notion of secrecy? Explain your answer. Gray’s notion of secrecy asserts that accounting values, in turn, affect accounting systems, therefore cultural factors can directly influence how its accounting and financial reporting system is developed at a country level (Doupnik & Tsakumis, 2004). Gray posits that accountant's value system have has their connection with the societal values in each country which is regarded as unique. Since accounting values that could be extracted from the financial statements, in terms of the mainlines of business and geographical and the related types of corporate social responsibility disclosures as far as PSA are heavily influenced from unique societal values of France from which the company basically operates (Finch, nod). In France, the country where the company has established the accounting values cognizant of France culture. The unconsolidated financial statements of the parents are prepared in using French Accounting principles (PSA Peugeot Citroen, 2011). This means that there is a need to recognize the unique culture in France. 2. (h) Calculate the following ratios for 2009 and 2010 and comment on the performance of the company: current ratio, gearing ratio and return on capital employed. Discuss the problems faced by investors and financial analysis in making comparison between companies located in France and elsewhere. There is need to calculate the following ratios for 2009 and 2010 and comment on the performance of the company: current ratio, gearing ratio and return on capital employed to under the company fared in relation with other players on the average. Liquidity PSA’s current ratios for the past two years reveal its good liquidity. Its good liquidity ratios would indicate a decent capacity to pay current obligations. Such ability to pay such currently maturing obligations is required from companies or these companies could be viewed leading into bankruptcy. This is of course bad for investors. Good liquidity is similar to having a well-conditioned zircon system which can assure the building owner absence of trouble with a short period of time. A liquid company can pay accounts payable with outside suppliers and the salaries of its employees. By so doing its suppliers may keep on delivering goods to put allow continued delivery of products and services to the company? It employees will be assured of their pay. The same must be settled at the right time so that a liquid company could also conduct its activities. Does the PSA have these characteristics? PSA’s average current ratio at 1.10 was slightly lower than industry average of 1.33. See Appendix A. In the absence of proof from other indicators of liquidity, the current ratio communicates by telling that the company can survive in the short-term? PSA’s current ratio is not very far from 1.0 level as a minimum to assure good liquefy. PSA’s failure to be liquid, would have to be ready with the consequences as it could cause either company to stop doing business and let creditors take money and resources. Gearing Companies can be asserted to have the need to borrow in general. Such act raising capital in additional to investment made by stockholders. As legal entities working functioning via the board of directors and shareholders, companies can arrive into debt or loan agreement with creditors like banks and other bond investors to have more assets to be used in business. Since said increased assets would be needed to fund or support the growth the company, this is something very important for the company. Revenues then must increase every year as normal part of business. A firm not choosing to borrow may find itself not exploiting the value generation by the company under the optimal capital structure theory (Brigham, E. & M. Ehrhardt, 2010). Although PSA may choose to ask for additional investment from existing shareholders, the latter would in effect be increasing their. Such they would ask management if the former could be compensated with the additional risk. Nevertheless, getting into more dents by companies cannot be assumed unlimited. Doing so could increase the risk of insolvency or bankruptcy especially in case of economic problems that could slowdown in the expected revenues. Thus corporations’ borrowing choices are also meant to maximize value generation by entitling the company for deductibility of interest expenses from these debts for tax purposes. This would in effect increase cash flow of the company. A gauge provides a standard on how should the company limit its borrowings or debts from creditors. The company’s sheet balance items allow the needed information to the so called gearing. This is computed by dividing total liabilities with the total equity of the corporation. To arrive at the ratios of PSA the same can be taken from its total liabilities and total equity per year for two years. PSA reflected gearing ratio average of 3.97 as against industry average of 1.17. See Appendix A.This means the company is highly leverage compared with competitors. But since the company appears to have survived the financial crisis of 2008-2009, its continued business is a signal of its capacity to withstand temporary financial problems cause the external environment. Profitability Profitability essentially means producing higher revenues than expenses. Business entities would naturally incur cost or expenses in running the business but the same should generate higher revenues in exchange of the expenses to indicate profitability of the business. Profitability can be measured using return on capital employed (ROCE). This can be computed using operating profit divided by the difference between total assets and current liabilities As it turned, PSA came out with a negative ROCE in 2009 but the turnaround in 2010 was very encouraging. This resulted to have a 1% average ROCE for 2 years. Due to absence of industry standard information to compare what PSA has, this paper extends the profitability analysis by computing return on equity for which the company was found to have an average of negative 1%. When compared with industry average of 10%, it could be inferred that the company was operating below industry average. See Appendix A. The problems faced by investors After knowing the messages sent by the financial ratios, a discussion on the problems faced by investors and financial analysts in making comparison between companies located in France and elsewhere would give a further insight in making use of PSA reports. The problems faced by the investors and financial analysts in making the comparison between companies located in France and this would include the need to now the unique culture of the other countries in the world to which the comparison for a France company concerned. This is with the premise that each country has unique culture that would influence the trade-off between secrecy and transparency (Riahi-Belkaoui, 1995). What needs to be disclosed to be made known to public is matter of unique societal value as far the issue of transparency vs secrecy is concerned. If it may happen that if in France one must be disclosed but in another country the same cannot be disclosed as it would offend the societal value therein, then the decision maker is limited in making a balance comparison of involving the two companies being involved in comparison. Failure to make effective comparison could therefore result to not making better decisions which could have attain the situation been otherwise. However decision makers would still be strongly influenced by the profitability, liquidity and solvency of the both companies being concerned. Hence the difference in accounting values in terms of degree of disclosure as allowed by their separate culture could still be deemed addressed by the capacity of decision makers to assume risks. Risk is basically involved in making a decision given the uncertain faced the business. Information disclosed or not disclosed today has just as necessary connection with evaluation of risk involved among investments options they may be presumed to exist in so making a comparison of the companies. 3. Conclusion Answering relevant questions led to knowing more how to make decision in terms of evaluating investment options that would make use of financial statements. The differences in the standards could result to producing different results or effects in the financial statements. It is still upon the decision maker which of the information can be used after considering the possible consequences in possibly restating the financial statements. Appendix A; Source (Reuters, 2011) References: Casey (2010). Continuing Oversight on International Cooperation to Modernize Financial Regulation: Congressional Testimony. DIANE Publishing Brigham, E. & M. Ehrhardt (2010). Financial Management: Theory and Practice. Cengage Learning Deloitte (2011).IAS 1 Presentation of Financial Statements. Retrieved 8 December 2011 from Doupnik, T. S., Tsakumis, G. T. 2004. A Critical Review of the Tests of Gray’s Theory of Cultural Relevance and Suggestions for Future Research, Journal of Accounting Literature, Vol. 23: 1-30. EUR.Lex (2011). EU’ Fourth Directive. Retrieved 8 November 2011 < http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:1978:222:0011:0031:EN:PDF> Finch (n.d.) Towards an Understanding of Cultural Influence on the International Practice of Accounting. Journal of International Business and Cultural Studies. Retrieved 8 November 2011 < http://www.aabri.com/manuscripts/09175.pdf > International Monetary Fund (2005). France: Financial Sector Assessment Program--Detailed Assessments of Observance of Standards and Codes Including Banking Supervision, Insurance Regulation, Securities Legislation, Monetary and Financial Policy Transparency, Payments Systems, Securities Settlement, and Anti-Money Laundering and Combating the Financing of Terrorism. International Monetary Fund Kieso, et al (2007). Intermediate Accounting. John Wiley and Sons Lawrence, S. (1996). International Accounting. Cengage Learning EMEA PWC (2011). IFRS and US GAAP: similarities and differences. Retrieved 8 December 2011 from < http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/IFRS_and_US_GAAP_similarities_and_differences_2011_edition_v1.pdf> Reuters (2011). Industry Ratio. Retrieved 8 December 2011 < http://www.reuters.com/finance/stocks/financialHighlights?symbol=PEUGF.PK> Riahi-Belkaoui, A. (1995). The cultural shaping of accounting. Greenwood Publishing Group Taylor Wimpey (2011). Annual Report for 2010. Retrieved 8 December 2011 from < http://plc.taylorwimpey.co.uk/Resources/Documents/InvestorRelations/ReportAccounts/2010%20Annual%20Report%20and%20Accounts.pdf > Yakovleva, N. (2005). Corporate social responsibility in the mining industries Ashgate Publishing, Ltd. Retrieved 8 December 2011 from < http://www.iasplus.com/standard/ias01.htm > Read More