A Company Performance and Financial Information of a Business Organization - Research Paper Example

SAIL Company is a leading Indian Steel producer that dominates Indian steel market having the highest earning per share of more than 18 Rupees. The company strongly believes in maintaining and improving its quality, productivity, profitability and customer satisfaction in India that in turn lead to financial gains and long term benefits. The steel giant operates (having production facilities) in India (plus exports excessive production) where Rupee is used as an official currency. This can also be called as its Functional currency. Accountants at SAIL prepare all financial statements in Indian currency; therefore, its presentation currency is also Rupee. (Annual Report, 2008-2009) Forward Foreign Exchange Contract: The most common foreign exchange hedging instrument is a forward foreign exchange contract. SAIL also uses this hedging instrument by locking up the spot rate at the time of transaction. As revealed in the annual report of the company, “In respect of transactions covered by forward exchange contracts, the difference between the contract rate and spot rate on the date of the transaction is recognized in the profit and loss account over the period of the contract. Exchange differences (including arising out of forward exchange contracts) in respect of liabilities relating to fixed assets, are adjusted in the carrying amount of such assets.” (Annual Report, 2008-2009) Income: Foreign Exchange Fluctuation (net) resulted in revenue of 112.12 Crores (rupees) where as Exports generated sales revenue of 807.58 Crores. Expenses resulted from Foreign Exchange fluctuations touch around 225 Crores. (1 Crore = 10 million) Comprehensive Income: Revenue is generated from direct Domestic and Exports sales plus from export incentives given to commercial exporters and trading companies. Similarly, SAIL also earns interest revenue from additional funds raised from Customers, Employees and on Term Deposits. Moreover, the company also earn from miscellaneous sources. Others sources of income are Social amenities-recoveries, Sale of empties, Liquidated damages, Service charges, Subsidy, relief and concession, Dividend earned from Subsidiaries, Dividends from other investments, Profit on sale of fixed assets, Sundries and Foreign Exchange Fluctuations. (Annual Report, 2008-2009) Part 5-b The extent and nature of foreign currency exposure including income gains / losses and the extent and nature of all comprehensive income Revenue is generated from direct Domestic and Exports sales plus from export incentives given to commercial exporters and trading companies. The exports result from selling products to foreign buyers who in turn pay US dollars to SAIL Company for its consignments of steel products. The dollar exchange rate in India fluctuates because of oil import bill. Normally, the dollar demand from importers in India remains higher, therefore, the Indian rupee depreciates. Exporters like SAIL company receive advantage from this rupee depreciation as they receive more Indian Rupees for same amount of US dollars after conversion. “Exchange differences (including arising out of forward exchange contracts) in respect of liabilities relating to fixed assets, are adjusted in the carrying amount of such assets.” (Annual Report, 2008-2009) Similarly, SAIL also earns interest revenue from additional funds raised from Customers, Employees and on Term Deposits. Moreover, the company also earn from miscellaneous sources. The company invests its additional funds obtained from business and sales growth in Treasury certificates, saving schemes, bonds etc. The interest income is earned when company claims these certificates at the day of maturity. Others sources of income are Social amenities-recoveries, Sale of empties, Liquidated damages, Service charges, Subsidy, relief and concession etc. The government offers rebates, duty drawbacks, subsidies etc to exporters and industrialists so that they could bring more foreign exchange in Indian economy. This in turn reduces costs of businesses within India while also favors SAIL Company as its income increases from above mentioned options. Also, the SAIL Company invests its retained earnings to form different subsidiaries and to acquire shares of other profitable firms in different industries. Dividend is thus earned from Subsidiaries and on investments in shares. Secondly, the company disposed off its old fixed assets in an attempt to replace them with modern and state-of-the-art plants and machinery. Sometimes, SAIL earns Profit on sale of fixed assets and Sundries. (Annual Report, 2008-2009) Part 6-a Name & year end Foreign currency: - primary economic environment - functional currency - presentation currency - Economic recession that has reduced the demand. - Increase in prices of raw materials in international market - Depreciation of Indian Rupee that make imports of raw materials expensive - Increase in interest rate Foreign Currency (losses) / gains - Income - Other comprehensive inc. (all) * Foreign exchange * fair value / market to market * other Foreign currency hedging - policy - Forward foreign currency hedging Part 6-b The three major significant risks that can be useful to three different users (shareholders, government and loan creditors) include Economic recession, any unexpected increase in raw materials used by SAIL company and depreciation of Indian Rupee. Analyzing the first major risk, it is worthwhile to mention the fact that Indian Currency is heavily dependent over exports to developed countries. The industries produce and export their products that in turn create new jobs and bring foreign exchange to India. This foreign exchange is then used to cover Oil import bill and import of consumer products from international market. The worldwide economic recession has reduced Indian exports to advance economies that in turn have resulted in closure of many industries and business firms. In short, this has led to unemployment and reduction in GDP and purchasing power of Indian consumers. In addition, this has also impacted the business of SAIL company as its total demand of steel products by consumers is reduced. The government has also slashed some amount in Public Sector Development Program that has also adversely affected the business of SAIL company. In short, the decrease in overall income and net margins also create distress among shareholders who expect higher dividends from SAIL. Investors can clear off their share holdings and Loan creditors may become reluctant in investing more in steel company shares. Government’s tax revenue will also be reduced after fall in net income. (Annual Report, 2008-2009) Secondly, SAIL imports some of its major raw materials such as Iron Ore, Coal etc from international market. If prices increase, the total costs of business will go up and profits will reduce. In turn, the above mentioned users will be directly affected from any unexpected surge in international raw material prices. The third major risk is the Depreciation of Indian Rupee against dollar due to fall in exports and increase in imports of Oil and petroleum products that in turn result in dollar outflows. Rupee depreciation will make imports of raw material expensive hence profits will decrease. The company may cope with this issue by increasing prices in domestic market that may also reduce aggregate demand. (Annual Report, 2008-2009) Part 7-a Name & year end Acc. Systems - country classific. - if macro uniform type - if micro fair / commercial: - business economics - business practice: UK - business practice US - if another classification Generally Accepted accounting principles in India – mixture of UK and IASB Use of debtors, inventories, creditors etc. accounts Elements - significance - finance / law / taxation - cultural values & identify 3 - other element (if identified) (identify sources) 1 – shareholder oriented 2- taxation - Independence. 1 – collectivism 2 – large power distance 3- weak uncertainty avoidance Part 7-b The accounting system used in India is classified under generally accepted Accounting Principles in India. These principles are a mix of IASB and Uk accounting pactices. Usually, the account titles used under Indian system include debtors, inventories, stock, creditors etc. that provides an evidence of above mentioned point. As far as significance of financial element is concerned, it is worthwhile to mention that accounting information is mostly shareholder oriented that is presented in such a way that investors, shareholders and loan creditors could make financial and investment decisions on the basis of those disclosed information in the annual reports. In addition, the taxation element is independent which means accounting information represents more the underlying economic situation in annual reports. (Annual Report, 2008-2009) Indian culture is highly collectivistic in nature due to strong family system and bonds among people who prefer extended or joint families. Since, it has a low income population; there is large power distance between the elites and poor of society. In addition, there is also weak uncertainty avoidance as people have less tolerance for uncertainty and ambiguity. Part 8-a Name & year end Steel Authority India Limited - 2009 5 present IASB projects 1- Revenue recognition 2- intangible asset 3- financial instrument impairment of financial assets 4- post employment benefits 5- leases 3 significant to your company ranked 1- Revenue Recognition 2- intangible asset 3- Post employment benefits Part 8-b As mentioned above, IASB has been working on five major projects that would help in achieving and improving the differences in Financial Reporting, revenue recognition, recording of financial assets and their impairment over time, leasing, deferred tax, consolidation presentation of financial statements and other etc. usually observed in U.S. GAAP and IFRS. The expected adjustments in three major projects of IASB including Revenue recognition, intangible assets and post employment benefits may also impact SAIL Company since it uses UK and IASB defined accounting system, assumptions and terminologies. Intangible Assets: SAIL has two major intangible assets including Mining rights and Softwares that are not an integral part of hardware. Indeed, SAIL amortises all related costs to its mining rights over the period of lease. Software which is not an integral part of related hardware, is amortised over a period of five years or its license period. The changes in IASB system about recording of identifiable intangible assets and all non-physical assets (acquired for either cash or non-monetary assets or through government grants) will impact SAIL financial statements, since its software development expenditures is charged to revenue in the year of incurrence. (Annual Report 2008 - 2009) and (IASB Current Projects 2010) Post Employees' Benefits: Presently, SAIL offers different employment related benefits to its workers that include provisions/liabilities towards gratuity, accrued leave, long term service awards, post-retirement medical and settlement benefits, future payments to the disabled employees/legal heirs of deceased employees under its Employees' Family Benefit Scheme. The accountants calculate the monetary amounts of the above mentioned benefits by employing actuarial tools or valuation method at the end of year. The associated costs are then recorded in Profit and Loss or Income statements in case after considering along with actuarial gains/losses. Any modifications in presentation of financial statements would definitely impact the financial reporting system employed at SAIL. (Annual Report 2008 - 2009) Revenue recognition SAIL usually records its Sales revenue after including indirect taxes such as customs duty and excise duty. However, the steel manufacturer also include any sales discounts and price concessions offered to buyers plus export rebates received from government. The Sales are recognised at the time of delivery of materials / produce / consignments to the buyers including the cases where delivery documents are endorsed in favour of the buyers. The export sales are recognised on the issue of bill of lading, negotiation of export bills upon expiry of period etc. hence any attempts by IASB to ensure convergence in US GAAP and IASB accounting systems may impact SAIL since it has to make modifications in revenue recognition assumptions and methods. This will affect presentation of financial statements. (Annual Report 2008 - 2009) Conclusion (a) Strengths: As far as strengths of Steel Authority of India Limited is concerned, it is worthwhile to mention that firstly, SAIL has been a market leader in the industry and has established its product reputation among the dealers and consumers. Secondly, it enjoys enormous financial resources and working capital for further investments Market Reputation and Goodwill: The first major strength is SAIL’s market reputation and goodwill among dealers and consumers who wish to purchase SAIL’s products because of its top quality. The company has a large pool of loyal customers that has enhanced its market reputation and goodwill in accounting terms. Extensive Resources: The second major strength of SAIL is the availability of enormous financial resources. Indeed, this financial power is a result of focus on quality and creating long term value among customers who return again and again for purchases. The additional financial resources are then utilized to disburse dividends while the remainder is used for reinvestment, updating of plant and machinery and business expansion. Weaknesses: Two major weaknesses are financial burden on company and reduction in market research to gain cost efficiency. Financial Burden: The depreciation of rupee has increased the costs of imported raw materials, therefore the total costs of business has soared in recent years. Also, the surge in inflation in Indian market has increased salaries and wages expense that also adds financial burden to company. Marketing research; The company now focuses less on market research as it believes it does not need any additional research due to consumer acceptance and brand recognition. This may hurt sales in long run, however, may save costs in short time period. Conclusion (b) The financial statements such as Income Statements, Balance Sheets, Cash Flow Statement and Statement of Retained Earnings are used to analyze a company performance over a certain period and to communicate financial information of a business organization with its shareholders and stakeholders (who are actual users of a company’s business information). First, the Government of India holds 85.52% of the SAIL Company’s equity; therefore, its financial statements provide pertinent information to government regarding company’s assets, liabilities, profits, expenses and losses. This can help the concerned authorities in making decisions and problem solving that can stimulate growth in the company as well as the economy because it is a government owned organization. Financial statements are also important to the Government to reveal taxable income. In simple words, how much tax revenue SAIL company generates for Government. Another group that may be interested in the financial statements is the loan creditor. The financial statements are significant to them because they would like to know the debt and the amount of highly liquid assets that can cover the debts. In short, loan creditors could estimate SAIL’s current and quick ratio besides its working capital to make any investment decisions. The creditors based on the information available in the financial statements can extend loans for certain time periods (for example 1-, 2-, or above years). For instance the SAIL’s debt to equity ratio is 27% meaning that the business if financed mostly by equity rather than debt thereby showcasing the fact that the company has capability to pay back huge short and long run loans. The third group for which SAIL financial statements are extremely useful is Equity Investor group that comprise of existing and potential shareholders as well as holders of convertible securities, options or warrants. The financial information as portrayed in financial statements enables the shareholders and interested investors to determine whether SAIL is a right option to invest additional money and whether they could earn reasonable return (dividends, rights and bonus shares) on their existing investments or not. Secondly, it helps investors estimate the worth of shares in open market (stock exchanges) as well as factors that may improve or reduce share prices. References: No author. “SAIL Annual Report 2008 – 2009” No author. “IASB Projects” Iasb.org 2010 http://www.iasb.org/Current+Projects/IASB+Projects/Intangible+Assets/Intangible+Assets.htm Read More