Financial and Accounting in Accsys Technologies Plc - Example

Financial and Accounting: Accsys Technologies Plc. Financial and Accounting: Accsys Technologies Plc. Introduction Accsys Technologies PLC sells to different countries of the world. It is unable to earn profits from its operations. For the betterment of the performance, Accsys Technologies PLC has involved in a Joint Venture also. New license arrangements are in progress but up till now there has been no significant improvement in the cash flows (Accsys Technologies PLC, 2013d). Risks attached to Accsys Technologies PLC are as follows: Risks related to Going Concern Assumption Accsys Technologies PLC is going through losses. It sustained the loss of £ 14.341 mn in 2012. Further losses of £ 11.009 mn have occurred in 2013 (Accsys Technologies PLC, 2013a). The company is suffering from profitability crisis. Its tax credits have been extinguished. From 2013, tax has started being charged again. Despite the improvement in the gross profit ratios, net cash used by the operating activities has increased significantly by 140%. (2013: £ 8.938 mn – 2012: £ 3.717 mn) (Accsys Technolgies PLC, 2013b). Just to cover the liquidity crisis Accsys Technologies PLC is going through, it has raised cash by issuing additional capital of £ 4.12 mn. All these issues prove that the company is going in loss, which is accompanied by the liquidity crisis. If this continues in future, Accsys Technologies PLC might not be a going concern. Risks related to Property, Plant and Equipment There are implications of IAS 17 with respect to Property, Plant and Equipment this year. The company has resorted to sale and lease back agreement during the year. Main issue is the accounting treatment of the gain or loss on the sale (Ernst and Young, 2012). It is possible that Accsys Technologies PLC has changed the estimate for the useful of the new leased asset. By this way, it can manipulate the profit and loss accounts for the years to come. Moreover, there is a risk that the company has capitalized the storage facilities that are to be built by the lessor before they are ready for use. Calculation of the depreciation is also a risky matter as land and building will be depreciated on pro-rata basis before the sale as well and after the sale also. Risks related to Accounts Payable Despite the fact that Accsys Technologies PLC has shown a slight improvement In profits, there has been no significant improvement in the payable’s balances. The break-up of trade and other payables reveal that there has been no improvement in the Accruals and deferred income. It raises a risk that Accsys Technologies PLC is not abiding by. All the deferred income was shown as Current liability in previous year, no change in it shows that the conditions of the contract to realize the deferred income are not being fulfilled. Trade and other payables have increased from £ 2.2 mn to £ 2.3 mn (Accsys Technologies, 2013c). This position must be seen in combination of the going concern issues, the increase in profits is not able to satisfy the liabilities. This increases the risk of the misclassification of the liabilities as revenue so that profits are increased and liabilities are decreased. Risks related to Inventory Inventory days have increased from 75 days in 2012 to 114 days in 2013. There is more time consumed on the inventory to convert it into finished products. This should have increased the cost of production, which is not evident from the Costs of Goods sold. The value of inventory is 56% more than previous year. Accsys Technologies PLC can manipulate the figure of the inventory to show it at a higher value. This higher value will decrease the costs of goods sold. It has to be confirmed that the Net Realizable Value testing has been done in accordance with the policy. The customer-tailored nature of the Accsys Technologies PLC products makes it difficult for the management to decide its Net Realizable Value. This gives more space to the management not to record the goods at NRV. Risk related to Revenue recognition There is an inherent risk of the increased revenue recognized in the accounts. Accsys Technologies PLC might be interested in doing this so that financial position is better portrayed as compared to previous year. Much of the revenue of the Accsys Technologies PLC is in foreign currency. There is a risk related to its correct translation. The license revenue is charged on percentage of completion method. There is a risk that the revenue recognized in respect of licenses is not earned actually. Accsys Technologies PLC can easily show the increase or decrease in the completion of the license work. Procedures for Verification of Revenue: First of all, tests of controls will be performed in the following order: Understanding of the revenue cycle will be taken. All the steps and documents that are involved in the revenue recognition will be documented. Then, the weaknesses in the system will be identified. Such weaknesses will then be inquired for with the management. The actions that are taken to counter these risks are then assessed. Once the system is thoroughly understood, tests of controls will be performed on the sample of the revenue transactions. Sample can be drawn on the basis of stratification of the regions. Each transaction is tested whether all the controls are implemented or not. Such controls will mainly involve the authorizations by the sales department and other departments. During the system understanding, it should be considered that: Duties for revenue recognition are segregated. For instance, person X books customer, person Y issues invoice and person Z takes receipts. Personnel of proper authority are authorizing the transactions. Persons authorized for approving sales to Chine shall not approve the sales to Switzerland. Substantive Analytical Procedures Substantive analytical procedures are mainly performed to give direction for the detailed audit procedures (Karla & Audrey, 2013). Following substantive analytical procedures can be performed: 1. Comparing the Geographical Dispersion of Sales Sales should be assessed on the basis of percentage sales driven from different countries. This percentage will be compared with the percentage sales of other companies in the industry. Any variation in the growth of companies in same countries will be inquired for. Moreover this geographical dispersion of sales can be compared with the previous year’s dispersion. Management will be questioned for decrease in sales of China and Ireland. Similar reasoning will be asked for the increase in the sales of Australia, New Zealand and Switzerland. Reasons given by company will be corroborated with other data available. For example, if Accsys Technologies say that sales increased due to aggressive marketing in these countries, then marketing expenses should increase accordingly. 2. Consumer-wise Assessment of Sales Sales to different customers should be considered on individual basis. If there is any customer with whom sales increased significantly, then the inquiries should be directed to management for asking the reason for the increase of dealings with such customer. More consideration should be given to the sales booked against such customers at the year-end. 3. Comparison with Competitors Sales with the competitors should be matched. This will show the pattern of the industry (IFAC, 2009). This comparison will tell about the competitive position of Accsys Technologies. If Accsys Technologies has made significant increase in sales as compared to the competitors, then this is possible either because of the effective business strategies or because of window dressing of the financial positions. The reasons given by management should be reflected in the financial statements. For example, If Accsys Technologies claims its increase in sales because of its new office opened in that country or opening new display centers, then such expenditures will increase the costs of operations, as well. Detailed Audit Procedures Detailed Audit Procedures are performed to verify the transactions at assertion level. The procedures that will be performed for each assertion are discussed below: A. Cut-off can be tested by verifying the sample of invoices at end of preceding year and a sample of invoices at the start of proceeding year. The dates of the invoices should be checked in particular (Luis, 2007). Moreover, documents like Letter of Credits and Delivery notes should be checked in the similar way. Any delivery note that pertains to the preceding year should not be booked in the proceeding year irrespective of the fact that the invoice has not been issued. B. Re-performing the calculations on the invoice, which include multiplying the quantity with the rates, can test the accuracy of a transaction. The application of foreign currency rates should be tested (Bruce, et al., 2013). C. Classification of the revenue should be checked within the revenue items first. Wood revenue should not be shown in license revenue. Moreover, new shares have been issued in this year. It should be checked that revenue is not included in the shares capital. Verifying the shares issued with the shares registrar documents can check this. Banks that dealt with specifically with the share registration process, their receipts should equal the amount of shares capital issued. List of References Accsys Technolgies PLC, 2013b. Cash Flow - Annual Report. [Online] Available at: http://www.accsysplc.com/wp-content/uploads/2013/09/March-2013-Annual-Report-and-Accounts.pdf [Accessed 26 March 2014]. Accsys Technologies PLC, 2013a. Comprehensive income - Annual Report 2013. [Online] Available at: http://www.accsysplc.com/wp-content/uploads/2013/09/March-2013-Annual-Report-and-Accounts.pdf [Accessed 21 March 2014]. Accsys Technologies PLC, 2013d. Financial Review - Annual Report. [Online] Available at: http://www.accsysplc.com/wp-content/uploads/2013/09/March-2013-Annual-Report-and-Accounts.pdf [Accessed 26 March 2014]. Accsys Technologies, 2013c. Notes to the accounts - Annual report. [Online] Available at: http://www.accsysplc.com/wp-content/uploads/2013/09/March-2013-Annual-Report-and-Accounts.pdf [Accessed 25 March 2014]. Bruce, M. et al., 2013. Interpretation and Application of International Financial Reporting Standards. New York: John Wiley and Sons. Ernst and Young, 2012. International GAAP 2012. New York: John Wiley and Sons. IFAC, 2009. ISA 520 - Analytical Procudures. [Online] Available at: http://www.ifac.org/sites/default/files/downloads/a026-2010-iaasb-handbook-isa-520.pdf [Accessed 26 March 2014]. Karla, J. & Audrey, G., 2013. A Risk based Approach to Conducting a Quality Audit. Mason: Cengage Learning. Luis, P., 2007. Auditing Procedures. 1 ed. Chicago: CCH. Statement of Comprehensive Income 2013 2012 Variation in % Wood revenue 16,555 13,574 22% License revenue 553 75 637% Other revenue 1,714 1,353 27% Total revenue 18,822 15,002 25% Total cost of sales (15,474) (15,050) 3% Gross profit 3,348 (48) Other operating charges (13,548) (12,497) 8% Impairment of license receivable - (2,281) -100% (10,200) (14,826) -31% Share of joint ventures (430) - -100% Finance income 206 154 34% Finance expense (244) (240) 2% Loss before taxation (10,668) (14,912) -28% Tax(charge)/credit (355) 536 -166% Loss for the period (11,023) (14,376) -23% Gain arising on translation of foreign operations 14 35 -60% Total comprehensive income (11,009) (14,341) -23% Statement of Financial Position Non Current assets 2013 2012 % Variation Intangibles 8,226 7,579 9% Investment in joint ventures 62 - 100% Property, pant and equipment 22,271 25,614 -13% Available for sale investments - - 0% Deferred tax 866 1,522 -43% 31,425 34,715 Current assets Inventories 4,860 3,120 56% Trade ans other receivables 3,688 3,576 3% Cash and cash equivalents 20,467 24,574 -17% Corporation tax 623 1,117 -44% 29,638 32,387 Current liabilities Trade and other payables (3,357) (3,385) -1% Obligations under finance lease (264) (264) 0% Non Current Liabilities Obligations under finance lease (1,924) (1,960) -2% Net assets 55,518 61,493 -10% Equity and reserves Shares capital - ordinary shares 4,332 4,040 7% Shares premium account 128,588 124,887 3% Capital redemption reserve 148 148 0% Warrants reserve 235 82 187% Merger reserve 106,707 106,707 0% Accumulated loss (184,511) (174,415) 6% Own shares (39) - -100% Foreign currency translation reserve 58 44 32% 55,518 61,493 Read More