Advanced Financial Reporting of Muqaibal PLC - Example

Advanced financial reporting Advanced financial reporting Part C Muqaibal PLC is one of the leading companies operating a chain of retail stores in the UK. The company began its operations in Manchester in the year 1997 by Al-Waleed Saud and Abdullah Hamza and it expanded significantly in different UK cities. The company currently operates 22 retail stores. The company is selling retail items imported from Asian countries including India, Pakistan, China, South Korea, and the Middle East. The industry classification is Retail – Consumer Staples and the sub-category is Food and Drug Stores (UK Standard Industrial Classification of Economic Activities 2003, 2003). The company’s competitors are Booker Group PLC, Bestway Holding Ltd. Co., and Palmer & Harvey McLane Ltd. Statement of Financial Position The statement of financial position of Muqaibal PLC is prepared for the year ending March 31, 2015. The company’s financials are reported in Pound Sterling. The figures are reported in thousands. The company’s statement of financial position is prepared in accordance with IFRS, IFRIC, and the Companies Act 2006 (‎PricewaterhouseCoopers LLP, 2013). Assets The asset side of the statement of financial position indicates that the company has two types of assets – non-current assets and current assets. Non-Current Assets Non-current assets include freehold land, buildings, motor vehicles, and fixture and fittings. The depreciation charge of buildings is determined on the basis of the estimations of useful life and residual values of each asset item. The depreciation is calculated using straight-line method. The useful life of buildings is estimated to be 35 years. The depreciation of motor vehicles and fixture and fittings is determined at different rates between 10% and 50%. The freehold land recorded by the company is acquired for the company’s new regional warehouses that will improve the company’s supply chain management and delivery of goods to its countrywide stores. It is a crucial strategic decision that the company’s management has made to improve its market position in the retail industry. The buildings are recorded at their costs less accumulated costs. These include 22 physical retail stores of the company located in different cities of UK. The company sales are achieved from its retail stores. Although the company has developed its web store, it is not yet functional and therefore, no sales are generated from this source. The company owns a fleet of cargo trucks and company maintained cars for top executives of the company. The company use cargo trucks to transport products-for-sale from its warehouse to its stores. The company ensures that its cargo trucks are well maintained to avoid any disruptions as regular replenishment of stocks in stores is vital for the company’s retail business. The company’s retail stores are well designed for improving customers’ shopping experience. The company has installed modern fixtures and fittings that are managed and maintained on a regular basis according to the available floor spacing and brands that the company offers in its retail stores. However, uniformity in the store design in all stores is ensured by the business to assist customers and enhance their shopping experience. Current Assets The current assets of the company include inventory, prepayment – insurance, trade receivables, provision for bad debts, and cash held at bank. The company has large values of inventory and trade receivables recorded in the statement of financial position. It is in line with the trends of the retail industry as companies need to hold large inventories of products available for sale in their stores. The company has a clear policy and mechanism to manage its inventories and reduce the losses from obsolete and damaged inventory. The accounts receivables incur due to the company’s business and they are non-interest bearing borrowing by customers. These include credit card payments that remain unsettled by UK banks. Furthermore, these include amounts due from other businesses that are directly related to the company. The company insures its inventory in stores and warehouse and also its physical stores and fixtures and fittings. The insurance is made in light of risks and hazards faced by the retail business. The insurance amount is paid in advance to the insurance company. Keeping in view, the retail business of the company and possible bad debts that the company may incur from non-payment of accounts receivables. The company makes a reasonable provision for bad debts and records it in the statement of financial position. The company makes a provision for bad debts that are reported as current liabilities of the company. However, in 2015 the company made a reversal of this provision in its current assets due to over-estimation of bad debts in the last year (Mackenzie & Coetsee, 2013). The statement of financial position also reports the amount of cash held at bank by the company. The amount reconciles with the company’s net cash position based on net cash flow from operating, investing, and financing activities. The net cash held by the company at the year-end is reported in the company’s bank account held at Barclays Bank PLC. The cash held by the company could be used to meet its business requirements and expansion of the regional network. Liabilities The company’s liabilities are non-current and current. Non-Current liabilities are in the form of debentures issued by the company at 10% with a maturity of 10 years. The company raised funding to finance its expansion plans by setting up new regional stores. The current liabilities include accrued electricity and trade payables. Accrued electricity is the amount that remained unpaid by the company for its electricity usage. The accounts payable are amounts due to suppliers of products available for sale in the company’s stores. The large amount of accounts payables is aligned with the nature of the retail business as suppliers offer non-interest bearing credit to the company. The suppliers offer discounts on timely payments by the company. The company’s equity comprises of share capital issued as a par value of £1. The company’s retained earnings are reported as the net income of the company less any withdrawals made by the business. The statement of financial position is balanced as the company’s net assets value is equal to the value of its equity. 1053 Part D Notes to Consolidate Financial Statement Muqaibal PLC is a public limited company that has been incorporated under the Companies Act 2006 (Registration Number xxxxxx). The consolidate financial statements of Muqaibal PLC are prepared in accordance to International Financial Reporting Standards (IFRS), represented in the Pounds Sterling that are rounded to nearest million. The reporting and the treatment of the financial items are on the base of historical cost to anticipate certain financial instrument, customer loyalties, valuation etc. The amounts that are reported in the financial statement are estimates and estimated assumptions on the basis of historical experiences. Closing inventory Inventories are the goods that are held for the resale. The company recognized inventory as an expense due to which they are valued at the lower of the cost and fair value less cost to the sell. The company makes use of weighted average method for closing its inventory at the cost basis. However, the perishable goods are closed using LIFO (last in first out method). Application of two depreciation method The depreciation and impairment of the company are done under the IAS 36 Impairment of assets. Thus, the depreciation and impairment amount is carried at higher fair value less the cost of disposal and the value in use. However, the impairment amount for the intangible assets is done on the basis of annual impairment test that determines the cash generating unit of the assets. The company acquires goods on the basis of purchase method that realized it’s as a cost that are expenses. Hence, the acquisition of the intangible assets is measured at the fair value. Hence, the intangible assets of the company are acquires as an asset. The company recognized intangible assets separately at the fair value at the acquisition date. The company makes use of straight-line method to amortize the intangible assets to finite the useful of the costs at the rate 10 to 50 percent cost per year. The tangible assets are the reported in the financial statements less the accumulated depreciation. The cost of the assets is recognized as an impairment value that is also depreciated using straight-line method. The residual value of the assets is anticipated on the basis of the economic useful life of the assets. The depreciation rates of the tangible assets are determined on the basis of historical events of the company. Thus, the depreciation for the Property, Plant and Equipment is depreciated using the following rates: The buildings that have a life more than 40 years unexpired are depreciated at the rate 2.5 percent. The lease property of the company that has life less than 40 years is depreciated according to the annual installment considering the period of lease. The Plant, Equipment, fixture and fitting and vehicles of the company are depreciated on the rate that varying 9 percent to 50 percent on the base of anticipated economic life of the assets. The goodwill of the company is impaired determining the recoverable amount that the company generates with respect to its goodwill. Thus, the amount that is recognized for recoverable is relatively higher than the fair value of the disposals and value in use. Thus, the amount of the cash that is generated is deducted from the carrying amount is carried to the impairment loss account. The company also performs impairment testing to estimate its asset to what extend the impairment loss occurs. Accrual The company prepared its financial statement under IAS 1 – Accrual Basis of Accounting (IAS 1 — Presentation of Financial Statements, 2014). The company recognizes its assets, liabilities, equity, income and expenses on the basis of accrual. Thus, the commercial income is recorded with respect to the appropriateness of the accrual of the year-end. In addition, the accrued expense of the company is paid in the latter accounting period that is deducted from the accrued expenses. The prepayments are the amount that the company pays in advance against the goods or services it utilizes in the future (Mackenzie & Coetsee, 2013). The company values the prepayments and differed taxes of the company on the day of the payment. The prepayments and deferred taxes of the company are reported according to IAS 12. Thus, the prepaid expenses of the company are reported as the liabilities or the prepayment of the cash (Mackenzie & Coetsee, 2013). The prepaid are carried on the balance sheet on the amount it paid to its suppliers. The amount of the prepaid is expired in certain time period that is decided at the time of the contract. They expire and become expense for the company on the basis of the events and time period (Mackenzie & Coetsee, 2013). Hence, the treatment of the prepaid rent, prepaid insurance and deferred taxes of the company are done with accordance to IAS 12. Provision of Bad Debt The doubtful debt accounts are the provisions accounts to specify certain allowance for amount that is not recoverable from its debtors. IAS 30 or IFRS 26 Financial Instruments govern the provisions for the bad debt accounts (Mackenzie & Coetsee, 2013). The trade receivables are recognized as loans and receivables that are measured at the amortized costs using effective interest method (‎PricewaterhouseCoopers LLP, 2013). Hence, the company carries the trade receivables/debtors at invoiced amount. The amount of provision reported in the financial statement is based on the estimated and actual costs depending on the future events of the company. However, the short-term liabilities do not imply interest rate on the invoiced amount. The company has included the changes to IFRS 7 to report the financial instrument: disclosure that states the disclosure for the offsets for the financial instrument (Mackenzie & Coetsee, 2013). Hence, the provision for the doubtful accounts is measured at the present value of the amount that is required to be settled in the future. The company recognized the debtors initially at the fair value that is later amortized cost suing interest rate method (Mackenzie & Coetsee, 2013). References AASB 137 - Provisions, Contingent Liabilties and Contingent Assets. (2014). AASB 137 - Provisions, Contingent Liabilties and Contingent Assets. Retrieved from http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf AASB 139 Financial instruments: recognition and measurement. (2014). AASB 139 Financial instruments: recognition and measurement. Retrieved from http://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-139--Financial-instruments-recognition-and-measurement?standard= IAS 1 — Presentation of Financial Statements. (2014, Jan 4). Retrieved from http://www.iasplus.com/en/standards/ias/ias1 Mackenzie, B., & Coetsee, D. (2013). Wiley IFRS 2013: Interpretation and Application of International Financial Reporting Standards. New York: John Wiley & Sons. ‎PricewaterhouseCoopers LLP. (2013). Manual of Accounting - New UK GAAP. London: ‎PricewaterhouseCoopers LLP. UK Standard Industrial Classification of Economic Activities 2003. (2003). London: The Stationery Office . Read More