Emirates Airlines Accounting - Case Study Example

al Affiliation) Accounting Introduction The company of choice is Emirates airlines. It is thought to have begun as early as 1985. The dream to come up with and airline was conceive by the Dubai’s royal family. The idea came a time when the Gulf air had scaled back flights from Dubai. The first two crafts, Boeing 727s were put into operation at the beginning of 1985, and they were to offer airline services to Karachi from Dubai. Later the airline got a loan of $10 million from the government of Dubai. This loan enabled them lease another Boeing from the airline of Pakistan. The airline grew and was able to purchase an Airbus that enable them offer long distance flight services. Currently, it is a public company owned by Dubai government. In Middle East, it is the largest airline approximated to operate 3500 flights within a given week. The company has now expanded its reach to America and Australia. It is worth to note that thought the US and Australia channels were established, the company had been having a problem of passenger load to these zones. This has resulted in Emirates stop using the A380 Airbus. On the other hand, the mysterious disappearance of Boeing 777 has cast doubt about the company, especially to Australian. All this factors also have contributed to Emirates suspending one of the three flights to Sydney. However, despite all this challenges, stats show that the company appears in the top ten charts of airlines. As a result, it has generated a lot of revenue to Middle East. Balance sheet of Emirates Airlines Emirates Airlines Balance Sheet March 31, 2012, 2011, 2010 (in AED) (in USD) (in AED) (in USD) (in AED) (in USD) 2012-2011 2011-2010 2010-2009 Current Assets 25,190.00 6,858.99 21,867.00 5,954.17 18,677.00 5,085.56 Intangible Assets 902.00 245.61 901.00 245.33 927.00 252.41 Other Non-Current Assets 50,994.00 13,885.16 42,322.00 11,523.86 35,943.00 9,786.92 Total Assets 77,086.00 20,989.76 65,090.00 17,723.36 55,547.00 15,124.89 Current Liabilities 25,765.00 7,015.56 21,290.00 5,797.05 18,520.00 5,042.81 Non-Current Liabilities 29,855.00 8,129.22 22,987.00 6,259.13 19,552.00 5,323.81 Total Liabilities 55,620.00 15,144.78 44,277.00 12,056.18 38,072.00 10,366.62 Share Capital 801.00 218.11 801.00 218.10 801.00 218.10 Retained Earning 21,256.00 5,787.80 20,370.00 5,546.55 16,794.00 4,572.84 Other Reserves -833.00 -226.82 -565.00 -153.84 -321.00 -87.41 Non-controlling interests 242.00 65.89 207.00 56.36 201.00 54.73 Total Equity 21,466.00 5,844.98 20,813.00 5,667.17 17,475.00 4,758.26 As of exchange rate on November 11, 2012 (Theaker, 2010) USD/AED=0.27229 1AED=0.27229USD Income statement of Emirates Airlines Emirates Airlines Income Statement (in AED million and in USD million) The years ended March 31, 2012, 2011, 2010 (in AED) (in USD) (in AED) (in USD) (in AED) (in USD) 2012-2011 2011-2010 2010-2009 Revenue 61,508.00 16,748.01 52,945.00 14,416.39 42,477.00 11,566.06 Other operating income 779.00 212.11 1,286.00 350.16 978.00 266.30 Operating costs -60,474.00 -164,592.23 -48,788.00 -13,284.48 -39,800.00 -10,837.14 Operating profit 1,813.00 493.66 5,443.00 1,482.07 3,565.00 970.71 Finance costs -657.00 -178.89 -506.00 -138.78 -355.00 -96.66 Other income and loss 517.00 140.77 608.00 166.56 455.00 123.89 Profit before income tax 1,673.00 455.54 5,545.00 1,509.85 3,665.00 997.94 Income tax expense -53.00 -14.43 -78.00 -21.24 -50.00 -13.61 Profit after taxation 1,620.00 441.11 5,467.00 1,488.61 3,615.00 984.33 As of exchange rate on November 11, 2012 USD/AED=0.27229 1AED=0.27229USD Cash flow statement Operating Activities Fiscal year is January-December. All values AED millions. 2009 2010 2011 2012 2013 Net income before extra-ordinaries 264.12M 1.31B 1.1B 1.98B 1.99B Depreciation, Depletion & Amortization 598.89M 717.63M 1.01B 1.17B 1.23B Depreciation and Depletion 464.38M 567.46M 813.79M 983.93M 1.08B Amortization of Intangible Assets 134.51M 150.17M 191.43M 188.24M 149.84M Deferred Taxes & Investment Tax Credit 0 0 0 0 0 Deferred Taxes - - - - - Investment Tax Credit 0 0 0 0 0 Other Funds 104.6M 65.45M 97.77M 19.69M 31.25M Funds from Operations 967.61M 2.09B 2.2B 3.17B 3.25B Extra ordinaries 0 0 0 0 0 Changes in Working Capital (1.51M) (557.83M) 670.27M (174.11M) 506.19M Receivables (299.11M) (464.9M) 297.22M (277.15M) (145.69M) Accounts Payable 342.64M (50.97M) 429.78M 61.19M 356.43M Other Assets/Liabilities (59.08M) (33.59M) (51.77M) 14.14M 327.15M Net operating cash flow 966.1M 1.54B 2.87B 3B 3.75B Investing Activities 2009 2010 2011 2012 2013 Capital expenditure (1.77B) (1.5B) (1.52B) (1.3B) (1.46B) Capital Expenditures (Fixed Assets) (1.62B) (1.37B) (1.36B) (1.22B) (1.32B) Capital Expenditures (Other Assets) (143.96M) (128.93M) (163.65M) (82.74M) (134.26M) Net Assets from Acquisitions 0 0 0 0 0 Sale of Fixed Assets & Businesses 0 1.19M 0 0 0 Purchase/Sale of Investments 0 0 0 (630M) (3.88B) Purchase of Investments 0 0 0 (630M) (3.88B) Sale/Maturity of Investments 0 0 0 0 0 Other Uses 0 0 0 0 0 Other Sources 32.37M 306,000 25.58M 34.07M 10.69M Net investing cash flow (1.74B) (1.5B) (1.49B) (1.9B) (5.32B) Financing Activities 2009 2010 2011 2012 2013 Cash Dividends Paid - Total 0 0 0 (685.71M) (2.38B) Common Dividends 0 0 0 (685.71M) (2.38B) Preferred Dividends 0 0 0 0 0 Change in Capital Stock 0 571.43M 0 0 0 Repurchase of Common & Preferred Stk. 0 0 0 0 0 Sale of Common & Preferred Stock 0 571.43M 0 0 0 Proceeds from Stock Options 0 571.43M 0 0 0 Other Proceeds from Sale of Stock 0 0 0 0 0 Issuance/Reduction of Debt, Net 367.87M 915.45M (1.79B) (99.4M) 1.8B Change in Current Debt 142.87M (142.87M) - - - Change in Long-Term Debt 225M 1.06B (1.79B) (99.4M) 1.8B Issuance of Long-Term Debt 225M 1.06B 1.44B 573.79M 2.41B Reduction in Long-Term Debt 0 0 (3.23B) (673.18M) (603.56M) Other Funds 0 393.5M 0 0 (150.99M) Other Uses 0 0 0 0 (150.99M) Other Sources 0 393.5M 0 0 0 Net financing cash flow 367.87M 1.88B (1.79B) (785.11M) (725.42M) Exchange Rate Effect - - - - - Miscellaneous Funds 0 0 0 0 0 Net Change in Cash (401.45M) 1.92B (409.11M) 312.27M (2.29B) Free cash flow (657.73M) 163.26M 1.52B 1.78B 2.43B Earnings Per Share: NI/AO shares 2012-2011 2011-2010 2010-2009 Emirates Net income-Dividends on Preferred Shares 1,118 5,074 3,418 Average Outstanding Shares 801 801 801 1.40 6.33 4.27 Notes to financial statement data The total value of assets, liabilities and equity is observer to drop steadily since the year 2009 to 2012. On the other hand the current ratio between the three years, calculated as current assets / current liabilities, is seen to be less, 1.004, than the required minimum, 2. This clearly indicates that the company is not performing well since liabilities are almost equal to current assets. In the year 2012, Emirates is observed to have a high debt / equity ratio, approximately 2.6. If an average is done for the three years, it is seen that the company has a mean debt / equity ratio of around 2.3. This implies that the company can be insolvent any time owing to volatile earnings from shareholders. The average earning per share (EPS), a tool used to calculate Return on Investment (ROI), for the three years was $4.00 indicating that Emirates Airlines offers good investment opportunities to its investors. From the data above, income statement, it is clear the company provides its investor with high profits. The average profit margin of Emirates for the last three year is approximately 6.5% while the interest coverage ratio is 7.85% (Namaki, 2008). The company has also improve on how it spend on activities, from the operating activities cash flow statements, they have managed to increase the net operating cash flow. This means that there is more money disposable for other activities of the company. Since the year the company has also accumulated more money to invest. It can be clearly seen from the investment cash flow, that in the years 2012 and 2013, the company bought extra investment thus diversifying channel of making money. Finally, the company is seen to have diversified its financing activities. The net free cash it had at the end of the year 2013, was 2.43 billion. Inventory It used the Airbus Managed Inventory system that which offer services in accordance to the latest industry standard. This inventory solution enable customer scale down inventory cost. This system captures, in real time, the rate at which consumers consume good. When their level drops beyond the threshold level, the system automatically activates top up of other orders. Besides computerizes methods of tracking inventory, they also use manual tag systems in accounting for their inventory. Passengers who are travelling have their bags and languages tagged. Then they board flights, these tags are removed and the total number is recorded. This enables the company know how many customers they have served within a given day. The statistic is important in planning for any phase the company might want to take. Also, in establishing a destination that is most promising for investing. They use cycle counting method to determine the frequency of people as far as destinations are concerned. Through this method, Emirates was able to identify the low turnover of people going to Sydney and took the necessary measure of suspending one flight to that destination. Depreciation All the property of Emirates airline have been assigned variables which are used to determine the value of the product at a given time. This variable are useful live and residual value. When an environment change, it tend to affect the available property making them loose value. For instance, when technology changes thing like computers lose value. In the case of Emirates’ property, it is the residual value and useful life of the property that change. These variable can be adjusted accordingly to reflect the initial value of the property. However, in Emirates airlines it is not the case, that is, no such adjustments are made. Methods employed to account for depreciations straight-line method. The company finds the valued of an asset and assumes salvage value, which is to be used as a factor to reduce the real value of the asset to depreciated value. This method ensures the value of depreciation remains constant within the life span of the asset. Practically, assets do not depreciate constantly for a specified period of time. In fact they depreciate by a high percentage during the initial stages of life and it is for this reason that this company use the method of declining-balance when accounting for depreciation. Revenue recognition The main source of revenue in this company is the airplane. It has however been noted that revenue earned is not stable and the company is suffering from fluctuation of currency both within and without it market. Emirates server a lot of countries and as a result, it has many trading partners with US being the major one. Through this, it is able to make revenue from these countries. However, when these countries impose strict rules to bar exportation of revenues to Emirates. Emirates suffer loss of revenue. The management has therefore decided that it will be sending home excess revenue to the UAE every month. This is a measure deployed to minimize these restrictions and prohibitions. Fixed assets Emirate recognizes mostly land and aircraft as their main fixed assets. When accounting for these assets they use depreciation. It is good to understand that most companies view fixed assets as things that do not lose value and will be used to produce goods and services for the company for an unlimited number of years. However, as time goes by, the value of an asset decreases with time due to depreciation. This company enter the initial value of the asset on the books of account but also record the value of depreciation that has occurred to the particular asset. This value of deprecation in a given asset is determined by the method called units-of-production. It is assumed that every asset reduces its value with a given proportion depending on the quantity of job it has done. Measurement of the job done can by determining the number of hours worked, the total distance cover among other. Since Emirates major fixed assets are planes, they use the distance travelled as a criterial to determine the depreciation of the airplanes. Since the distance travelled in a given route is fixed, this is what is referred to the unit-of-production. Therefore, the company can use this data to determine the magnitude of depreciation that would have occurred to a particular plane within a given time period, which is usually one year. Intangible assets These are assets that are invisible but contributes much to growth of Emirates. In Emirates therefore, calculation of the value of all intangible assets is based on the initial value of the asset. If the assets earns interest. Intangible assets are only recognized if and only if they show the ability to bring benefits to the future income. The method use to account for intangible assets is the impairment testing method. Through this method, Emirates has managed to identify assets that carry amount that is unrecoverable. They usually perform this test annually and some of the cases why the do so are as follows. When the initial purpose of use of the asset changes. Moreover, they carry out this test when they spend too much in acquiring intangible assets. This may be exemplified by when they spend a lot of money hiring expertise to come and service the airplanes. Finally, they carry out this test to an asset on which they have realized that it will not server to the end either because it is faulty or there is probability that the asset would be sold. Amortization This is payment of money back to someone whom one owed. In Emirates airline, intangible assets whose usefulness cannot be a measured, that is, their usefulness is indefinite, are the only assets that are amortized. However, they undergo testing every year to check for any impairment. Amortization is done using the straight line depreciation amortization method. In order to calculate amortization, they use the accrual accounting method. Through this method, the lifespan of the intangible assets is determined and all legal requirements attached to these assets are identified. Afterwards, by use of this lifetime period and the purchase price of the given intangible asset, Emirates is able to know how much money it can annually allocate as amortization fund. The concept of amortization is the inverse of depreciation. Where depreciation is use to recoup tangible assets, amortization is used to recoup intangible assets. Long term liability Emirates use discounting to enter long term liabilities in the books of account. They take the present value of the long term liability and enter it as the initial value. This is to avoid paying any other liability, for instance interest, associated with that liability. According to them, the standard long term liabilities are mortgages, debentures and pension payments. Pension accounting Emirates follow the standard SFAS 87, balance sheet reporting rule that require pension cost to be recorded in the balance sheet and not on the footnotes as it was being done in the ancient days. Emirates airlines, offers its employees defined benefit plan. When this benefit is projected, it becomes the actuarial present value of the benefit and therefore it should be regarded as asset or liability and hence should be accounted in the books of account. This is the same method Emirates airline uses when accounting for pension. They deduct them from the income statement. Conclusion in the overall financial status Emirates has a high level of debt and it has therefore failed the Buffet’s investment feasibility test. It has been noted above that, this company provides investors with a high rate of equity per share and return on investment, and however his is a risk to the company. The company has demonstrated the ability to accumulate funds and diversify its financial activities, this is a great move as reflected by the financial activities cash flow table. References Theaker, A. (2010). Annual Financials for Emirates Integrated Telecommunications. New York: Routledge. Namaki, M. (2008). Strategy and entrepreneurship in Arab countries. Basingstoke [England: Palgrave Macmillan. Read More