International Accounting Standard and Financial Reporting Standard Applied on BRITIVC Plc - Essay Example

Critical evaluation of the International Accounting Standard and Financial Reporting Standard applied on BRITIVC plc. INTRODUCTION International Accounting Standards (ISAs) and International Financial Reporting Standards (IFRS) are those accounting standards that have been provided by International Accounting Standard Board (IASB) for the preparation of the financial statements. Majority of the countries across the globe have accepted IAS and IFRS as their primary framework for the preparation of financial statements especially for the corporations that are conducting businesses in those territories. These standards serve a variety of purposes among which one of the major purposes is to provide useful information to providers of finance i.e. investors and lenders. This report specifically aims at the critical evaluation of the key financial information provided in the financial statements of Britvic Plc. Those key items are 1) Revenues, 2) Property, Plant and Equipment, 3) Earnings per share. These key items are evaluated in the light of their relevant accounting standards as to check whether these areas are consistent with providing the useful information to the lenders and investors. The following discussion and evaluation highlights these specific areas on separate basis so that each individual key accounting area can be judged regarding the achievement of IAS and IFRS objective (IFRS and IAS Summaries- English, 2011-2012). REVENUES Disclosure Requirements IAS 18 covers revenue recognition for the preparation of financial statements. The major criterion for recognizing the revenues is the transfer of risks and rewards between the parties to the sales contract. Seller transfers the risks associated with the selling item in response to a reward received from the buyer. When risks and rewards are transferred to the concerned parties, the revenues are deemed to be recognized by the selling entity. As far as the disclosure requirements of IAS 18 are concerned, minimal disclosure are required such as the total revenue generated during the current period along with comparative figure of the last year (BDO, n.d.). Revenue Disclosures of Britvic Plc. If the financial statements of Britvic Plc. are accounted for the year 2012, it can be clearly observed from the statement of comprehensive income that the company has generated the revenues of around £1,256 million. In the previous year, the company had upward revenues of around £1,290 million. From the perspective of disclosure requirements, the company has provided the appropriate disclosure requirements in the statement of comprehensive income (Annual Report Britvic Plc., 2012). Besides this disclosure requirement of IAS 18, certain other requirements relating to revenues are also identified by IAS such as Segment Reporting. Under Segment Reporting, the entity is required to provide the disclosures especially relating to segments from where it generates the revenues and resources in the form of assets that used by the entity for the generation of revenues (Annual Report Britvic Plc., 2013). Following the requirements of Segment-based Reporting, Britvic Plc. has identified five geographical regions from where it generates the revenues. These regions are highlighted below along with the amount of revenues generated by each of the reporting region: 1. UK Stills - £336 million 2. UK Carbs - £527.5 million 3. Ireland - £29.3 million 4. International - £146.7 million 5. France - £249.6 million (Annual Report Britvic Plc., 2012) From the above figures, it can be observed that the highest revenue generator in the five geographic regions is UK Carbs followed by UK Stills. However, Britvic Plc. generates a lesser sum of revenues from its international segments including both Ireland and France (Britvic Plc., n.d.). Usefulness of Revenue Disclosure for Investors and Lenders As far as the perspective of providers of finance is concerned, there are mainly two types of finance providers i.e. shareholders and lenders. Shareholders provide the finance to the company in the form of equity i.e. they become the owners of the company and become entitled to earn profits in the form of dividends. On the other hand, lenders make investments in the form of debt and thus require interest and principle repayment at the end of the maturity of their loan amount. Both these finance providers are highly interested in estimating and analyzing the revenues streams generated by the companies. There are various reasons due to which they are more concerned with the revenues projections. Some of these reasons are listed as under: 1. Revenue streams provide an insight of the profitability levels of the company whether the company has the potential to achieve a higher level of profitability. 2. Revenue streams provide the insights relating to the overall operations of the business i.e. how much the company has earned revenues by specifically selling its own products. 3. Revenue streams also enable the investors to keep a look at the commercial activity of the organization such that whether the overall production of the company has increased, leveled or reduced during a period. 4. Revenue streams provide an estimate to the investors regarding the extent to which markets or products generate revenues for the company and thus tapping the more favorable areas as well as the untapped areas that need further attention of the management of the company. 5. Revenue streams are a key source of expansion and growth related activities for the investors because in order to attract more investment, it is essential for the company to present a substantial increase in the revenue streams of the company (Britvic Plc., n.d.). Given the revenue information provided in the financial statement of Britvic Plc., it is quite evident for the investors and lenders to take their positions. Britvic Plc. struggled in the year 2012 in terms of competing the revenues generated last year i.e. 2011. From this information, the investors might get shaky for their investments and they may not show further confidence in the equity and debt stakes of the company. Not only this, the existing value of the company may be hampered due to such sluggish revenue results which may be reflected in the decrease of the share price of the company. From the perspective of segment reporting, investors might see international regions as the untapped area which may have further opportunities to exploit. Overall, the information provided under the head of revenues in the financial statements, provides a reasonable rationale for further decision-making to be made by the investors. However, their decision will also base other factors, both quantitative and qualitative, that stay parallel with revenue streams generated by the company (Britvic Plc., n.d.). EARNINGS PER SHARE Disclosure Requirements Earnings per share (EPS), is mainly dealt in accordance with the requirements of IAS 33. This standard requires the companies to disclose their net income on per share basis. Earnings per share or EPS provides a key measure to the investors as it is considered as one of the trigger that defines the destination of the company in future time. This particular factor is so imperative in nature that IAS requires its disclosure to be made at the face of financial statements i.e. right below the net income after tax figure (KPMG, 2011). IAS 33 requires the companies to disclose EPS in two ways i.e. basic and diluted. The major difference between the basic and diluted EPS is the number of shares that are taken for the calculation purpose. For basic EPS, weighted average number of shares outstanding (actual) are taken into calculation. However, for computing the diluted EPS, weighted average number of shares outstanding also includes the options or convertible debt instruments into shares. It is assumed that all those convertibles are converted into shares at the date of financial statements. In this way, the weighted number of shares outstanding increases for computing diluted EPS (IFRS and IAS Summaries- English, 2011-2012). EPS Disclosures of Britvic Plc. If the disclosure requirement of Britvic Plc. is taken into consideration regarding Earnings per share, it can be noted that the company has duly fulfilled all the disclosure requirements by showing both basic and diluted Earnings per share. Basic EPS for Britvic Plc. for the year 2012 remained at 23.8p followed by diluted EPS of around 22.4p. These Earnings are a bit low as compared to the previous years’ figures when basic EPS was around 24.3p and diluted EPS was 23p. Besides these standard disclosures, the company has also provided further disclosures due to inclusion of extra-ordinary items in the financial statements. If such items are considered, then the overall net income of the company changes causing a major fluctuation in both basic and diluted EPS. The adjusted basic EPS for the company turned out to be around 27.2p and the adjusted diluted EPS is around 26.5p. (Annual Report Britvic Plc., 2013). The detailed disclosures of EPS are provided in Note 11 of the 2012 annual report of Britvic Plc. The company has followed the detailed disclosure requirements in the Notes to the financial statements such that it has reflected both the net income and the weighted average number of shares outstanding for EPS computation purpose. Britvic Plc. has included the net income of £57.4 and weighted average number of shares amounting to 241.6 million shares for finding out the resulting basic EPS of 23.8p. Similarly, the company has used same amount of net income with 256.6 million numbers of weighted average shares outstanding for calculating the diluted EPS of 22.4p. This Note 11 also contains the detailed information that caused a change in the net income of the company due to which adjusted basic and diluted EPS have been computed. The major differing factor is the amortization of intangible assets which caused a change in net income of the company and thus in resulting EPS (Annual Report Britvic Plc., 2012). Usefulness of EPS Disclosure for Investors and Lenders Investors and lenders are mainly concerned in the projections of EPS even more anxiously. Equity investors are highly interested in getting the EPS estimates after regular interval of time. Lenders often consider EPS projections at the time of issuance of loan to the entity. However, they keep following the earnings results and forecast but do not intervene too much as compared to that of equity investors. For equity investors, EPS is the topmost trigger when they consider when taking a certain position in respect of their investment decision-making. There are various reasons due to which this earnings related information is highly important especially for the equity investors (IFRS and IAS Summaries- English, 2011-2012). Here are few: 1. Earnings per share provide a direct measurement to the equity investors regarding the amount of earnings that they have earned given a share invested in the business. 2. Earnings per share helps the investors in tracking down the overall performance of the company especially in terms of relative profitability as the absolute profitability is useless unless it is compared with the level of shareholding invested in the company. 3. Earnings per share, provides a reasonable estimate to the equity investors to carry out a competitive analysis. Such competitive analysis can be made based on the prior period’s information or the industry averages. 4. Earnings per share, becomes an effective tool in projecting the future earnings of the company and thus enabling the equity investors to take an appropriate position before the announcement of next earnings. 5. Earnings per share, serves the equity investors in the form of evaluating the dividend decisions made by the directors of the company. In this regard, the decision of directors is based upon the level of earnings made by the company so that they can declare an appropriate dividend amount to the equity investors. Equity investors take a close look at the level of earnings as this trigger can also lead to change the dividend decision made by the company (IFRS, n.d.). As far as the given the disclosures provided by Britvic Plc. for the year 2012, it is quite evident that the investors will reasonably be satisfied as EPS for both normal and exceptional situation has been provided in a comprehensive manner. Note 11 can be highly imperative for the investors as the detailed information can provide an insight to them regarding the areas which caused a change of EPS under both situations (IFRS and IAS Summaries- English, 2011-2012). The quality of information relating to EPS shows satisfactory results but the amount of EPS for the year 2012 can be a worrying sign to the investors as it has fallen by a considerable magnitude. Based on these figures, the equity investors may feel low in confidence, as the company could not cope with at least last year’s level of earnings. This may also be reflected in the share price of Britvic Plc. which may lead to a significant slump. However, the industry parameters may also define to a certain extent for such a reduction in EPS of the company which is duly sought out by the investors (IFRS and IAS Summaries- English, 2011-2012). PROPERTY, PLANT AND EQUIPMENT Disclosure Requirements Property, Plant and Equipment are covered in IAS 16 which provides a comprehensive framework for the recognition, measurement and disclosures relating to PPE. IAS 16 has provided two methods of recognizing PPE i.e. cost model and revaluation model. Mostly companies prefer cost model accounting for PPE because of the relative convenience which cannot be found in revaluation model. Under cost model, the non-current assets are carried at their book values in the statement of financial position (Deloitte, n.d.). Book values are computed by deducting the depreciation allocated to that non-current asset from the cost of that non-current asset. Depreciation itself can be computed based on various methods including reducing balance method, straight-line method, double-declining method etc. Firstly, the useful life of the asset is determined as well as the salvage value which will remit once it is disposed at the end of the useful life of the asset. Depreciable amount is computed by deducting the salvage value from the cost of the assets and then the remaining amount is allocated systematically through depreciation (IFRS and IAS Summaries- English, 2011-2012). Property, Plant and Equipment has comprehensive disclosure requirements and a note of PPE contain the maximum information relating to the fixed assets as guided by IAS 16. Specifically, this IAS is not applied to those non-current assets that are to be used for normal business operations rather they are accounted for as per IAS 2 – Inventories. This IAS is also not applied on that property which is purchased for investment purpose as the investment property is accounted for in IAS40 (Deloitte, n.d.). PPE Disclosures of Britvic Plc. Britvic Plc. used cost model for accounting for Property, Plant and Equipment. Straight-line method of depreciation is mainly used by Britvic Plc. The company has categorized types of PPE in regards to the useful lives of the assets in use. These categories are listed below with the respect to their useful lives: Plant and machinery 3 to 20 years Vehicles 5 to 7 years Equipment in retail outlets 5 to 10 years Other fixtures and fittings 3 to 10 years Freehold Properties 50 years (Annual Report Britvic Plc., 2012) If note 13 of the annual report of Britvic Plc. is taken into consideration, it can be observed that the book value of the PPE of the company has reduced in 2012 as compared to the previous year. The existing PPE of the company has the carrying value of around £236.6 million which was around £243.8 million in the year 2011. Accumulated depreciation of the company until 2011 was around £292.9 million which was increased to around £302.9 million until 2012. This shows that Britvic Plc. has not invested a major portion into its fixed assets rather the previously owned PPE are being diminished on a timely basis. Overall, the additions to the existing PPE of the company were merely £39.6 million. However, the company also disposed of PPE costing £20.5 million in the year 2012. The overall depreciation expense for the year 2012 was nearly £34.4 million (Annual Report Britvic Plc., 2013). Usefulness of PPE Disclosure for Investors and Lenders From the perspective of investors, Property, Plant and Equipment are of prime importance as whatever they invest, is actually invested in the PPE of the company. There are many financial ratios which are analyzed by the investors such as fixed asset turnover, return on fixed assets etc. Among various reasons for the investors’ sake, the following are few reasons due to which this area of financial statement is highly considered by the investors. Here are few: 1. PPE are used to generate revenues such that they increase the overall production capacity of the company which results in increase of production and thus revenues. 2. PPE are used as the pledge to the financial institution for raising loan capital. 3. PPE are used as the overall increase in the total assets of the company. 4. PPE allows investors to have confidence on their investment, as their investment is safe as long as the PPE of the company are nurturing the business. 5. The quality of PPE provides an insight to the investors especially relating to the technology and the overall structure. That technology and infrastructure allows the investors to compare the company with other industry participants which may reflect a rational reason behind the performance of PPE. Under the existing scenario of Britvic Plc., it can be noted that there has been a significant decrease in the Property, Plant and Equipment of the company. The most obvious and harmful impact of this situation can be seen on the revenue generation capacity of the company. Overall revenues of the company have experienced a slump mainly because of the reduction in the fixed assets of the company. New additions to the PPE are also not quite convincing and this can also have a negative impact upon the confidence of the investors in the company and they are likely to make panic. The share price of Britvic Plc. may suffer with such decrease in the PPE and the resulting reduction in revenues. Overall, this situation may leave certain concerns for the investors as to whether they should go for further investment or pull themselves out of this company (Annual Report Britvic Plc., 2013). CONCLUSION This report highlights three key areas of financial statements i.e. 1) Revenues, 2) Earnings per share, 3) Property, Plant and Equipment especially in regards to the quality of information provided to the lenders and investors. Both investors and lenders seek a comprehensive disclosure of these key areas of financial statements and make their decisions accordingly. For Britvic Plc. all these areas have shown sluggish performance in the year 2012 due to which the investors and lenders may feel reluctant in bringing further investment to the company. WORKS CITED IFRS. (n.d.). IFRS and IAS Summaries- English (2011-2012). Retrieved from http://www.ifrs.org/ifrss/ifrs-technical-summaries/Pages/summaries-eng-11.aspx The Institute of Chartered Accountants of India., (n.d.). International Accounting Standards. Retrieved from http://www.icai.org/new_post.html?post_id=400&c_id=139 Britvic Plc. (n.d.).RESULTS AND PRESENTATIONS. Retrieved from http://www.britvic.com/investor-centre/results-and-presentations/2014.aspx Britvic Plc. (n.d.).FINANCIAL REPORTING. Retrieved from http://www.britvic.com/investor-centre/financial-reporting.aspx Britvic Plc. (n.d.).PERFORMANCE AT A GLANCE. Retrieved from http://www.britvic.com/investor-centre/performance-at-a-glance.aspx Britvic Plc. (n.d.). SHARE PRICE TABLE. Retrieved from http://www.britvic.com/investor-centre/share-information/share-price-table.aspx Britvic Plc. (n.d.). CORPORATE GOVERNANCE. Retrieved from http://www.britvic.com/investor-centre/corporate-governance.aspx BDO. (n.d.). IFRS AT A GLANCE-IAS 16 PROPERTY PLANT AND EQUIPMENT. Retrieved from http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20at%20a%20Glance/Documents/IAS%2016.pdf BDO. (n.d.). IFRS AT A GLANCE-IAS 18 REVENUE. Retrieved from http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20at%20a%20Glance/Documents/IAS%2018.pdf BDO. (n.d.). IFRS AT A GLANCE-IAS 33 EARNINGS PER SHARE. Retrieved from http://www.bdointernational.com/Services/Audit/IFRS/IFRS%20at%20a%20Glance/Documents/IAS%2033.pdf KPMG. (2011). INSIGHTS INTO IFRS- AN OVERV IEW. Retrieved from http://www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/Insights-into-IFRS-O-201109.pdf Deloitte. (n.d.). International Financial Reporting Standards. Retrieved from http://www.iasplus.com/en/standards/ifrs Deloitte. (n.d.). INTERNATIONAL ACCOUNTING STANDARDS. Retrieved from http://www.iasplus.com/en/standards/ias Britvic Plc. (2013). Annual Report 2013. Retrieved from http://www.britvic.com/~/media/Files/B/Britvic-V2/documents/pdf/presentation/2013/britvic-2013-front-artwork-10.pdf Britvic Plc. (2012). Annual Report 2012. Retrieved from http://www.britvic.com/~/media/Files/B/Britvic-V2/documents/pdf/presentation/2012/Britvic-plc-Annual-Report-2012.pdf Read More