Corporate Financial Reporting of Polymetal International Plc - Case Study Example

Corporate financial reporting [Insert al Affiliation] Table of Contents Introduction 3 2.Assessment of the performance 3 2 Vertical (common size)analysis 3 2.2.Horizontal (Trend) analysis 4 2.2.1.Trend analysis of Polymetal reformulated financial statements 4 2.3.The liquidity and profitability of the firm 5 3.Current exposure to risk of corporate failure 6 4.Impact of the revised requirements for revenue recognition upon the company’s results for the year 6 4.1.Importance of adhering to ethical codes to accountants 7 5.Conclusion 8 6. Appendices 10 1. Introduction Polymetal International plc is a metal mining company that mines silver and gold metals respectively operating mainly in Kazakhstan and Russia countries. The company is, however, an element of FTSE 350. In a business environment, a company without an objective is irrelevant will not operate according to the principle of going concern hence the company’s objective is to maximize shareholders wealth. The company has a goal of becoming a leading metal mining group. The Company has a population size of about 10,000 employees. The close competitors of the firm are: Exxaro Resources Limited, Kumba Iron Ore Limited and compass minerals International Inc just to name a few. 2. Assessment of the performance In the assessment of the company’s performance, the financial statements that is: the income statement and balance sheets are used as the source of the historical data. The two types of analyzes are common size analysis and trend analysis. 2.1. Vertical (common size)analysis The analysis entails the computation of each item of the income statement as a percentage of the total revenue/sales while each item of the balance sheet calculated as a percentage of the total assets (Helfert 2011, p.67). From the reformulated income statement, the following can be ascertained: the cost of sales increased significantly from 47.17% to 45.94 in 2012 and 65.85%. This exhibits that the firm had an increase in direct and indirect expenses. The gross profit of the firm increased from 2011(52.83%) to 2012 (53.84%) then declined to 2013 (25.17%). This reductionis brought about due to increasing in the cost of sales with a consequent decrease in the revenue in the year 2013. The net profit of the company declined from 2012 to 2013. The decline in net profit is brought about by the increase in expenses due to inefficient operations of the firm. From the reformulated balance sheet, it can be shown that the property, plant equipment were 52.08% in 2011, 60.63% in 2012 and 64.36% in 2013. This stipulates a substantial increase in the non-current assets in all the three years (Rodgers, 2008). The total non-current assets generated by the organization were 66.10%, 69.34% and 70.84% in 2011, 2012 and 2013 correspondently. This displays that the non-currents have been increasing at an increasing rate. At a glance, the total currents assets turned down from 41.14% in 2011 to 30.67% in 2012 and 29.16%. Additionally, the total current liabilities were 28.07% in 2011, 19.05% in 2012 and 9.02% in 2013. This shows a considerable decrease in the current assets and, therefore, the future existence of the firm is uncertain. Consequently, the net assets decreased from 59.15% in 2012 to 54.92% in 2013. 2.2. Horizontal (Trend) analysis It is the analysis of the variation of various matching items of the income statement and balance sheets. To make this a success, one end year period is established as a base year after that, the consequent years performance will exhibit the trend (increase/decrease) (Logan, 2014). 2.2.1. Trend analysis of Polymetal reformulated financial statements The first essential item of the income statement to be analyzed is the revenue. The reformulated income statement illustrates that revenue decreased from 39.78% in 2012 to 28.66% in 2013. The second item is the cost of sales which increased from 36.61% in 2012 to 79.59% in 2013.This increase is due to complex operations that are undertaken for the production of the sales output by the firm. The gross profit declined significantly from 42.46% in 2012 to a loss of 38.71% in 2013. The decrease is due to increase in the cost of sales and a consequent decrease in the total revenue. The company garnered a loss of 38.55% in 2013 from a profit of 59.25% in 2012. This loss before income tax is a dependent variable of operating profit/loss hence since the firm had an operating loss, the effect extended to cause the loss before income tax. The firm’s total non-current assets declined from 17.35% in 2012 to 7.27% in 2013. This decrease in the assets distresses the generation of revenue to the company. However, the non-current liabilities increased by 44.47% in 2013 from a previous decrease of 2.40% in 2014. Finally, the firm experienced a drastic drop in the net assets from 18.59% in 2012 to 1.49% in 2013. The decrease is net assets signals ineffective utilization of assets to generate revenue by the firm. 2.3. The liquidity and profitability of the firm The current ratio of the firm was 1.46, 1.61 and 3.23 in 2100, 2012 and 2013 correspondingly. This shows the increase in the current ratio at an increasing rate. This articulates that the firm is capable of paying its debts when they fall due. The quick acid ratio improved from 0.40 in 2012 to 0.76 in 2013. The gross margin decreased from 53.83% in 2012 to 25% illustrating that the firm is unable of generating profit. As a result, the net profit fell from 35.6% in 2012 to 2.51% in 2013. This substantial decrease was due to a decrease in the profit margin. The return on investment dropped from 18.17% in 2012 to 1.30% in 2013. This evidences that the firm’s return on the assets is below the average. The firm’s debt ratio decreased from 0.04% in 2011 to 0.0036% in 2012 to 0.002% this turn down in debt ratio attests that the firm had a decrease in the long-term debt to finance its internal and investment activities. 3. Current exposure to risk of corporate failure Polymetal International plc is exposed to a number of risks that might lead to the failure of the firm. The company is open to hostile changes in the market prices that lead to a decline in the total revenue at some point. The firm deals with derivatives that can cause a loss to the firm given unfavorable movement in the prices. The company being multinational firm unfavorable changes in the foreign exchange currency leads to the incurrence of loss. The firm too, has off- balance sheets risks which are the contingencies that are probable to interfere with the firm’s generation of profits i.e. laws suits. The firm is exposed to financial risk due to increase in the debt value over the years. Also, the organization suffers a risk of being outshined by the other firms in the same industry hence loss in the competitive advantage leading to a failure in its operations. 4. Impact of the revised requirements for revenue recognition upon the company’s results for the year The new revised system requirement of income stresses that revenue can only be recognized in such a way that it replicates the shift of promised services and goods to their customers. Additionally, the revenue amount that is to be recognized should be equal to the consideration that the firm/organization anticipates receiving for the goods and services that are assured (Bragg, 2007). Companies/firms recognize revenue whenever it is probable that payment for such goods and services will be paid when they fall due. FASB requires that there should be a disclosure of revenue recognition for the public to avoid insider trading and rogue trading. In this case, the Polymetal Company recognizes revenue from the sale of silver and gold that are measured at a fair price of consideration receivable after discounts are deducted. More so, the sales are recognized after rewards and risks have entirely been transferred to the buyer. The impacts of these requirements are that they may decline the revenue generation of the company. This is because the amount of goods sold must first of all be probable that economic benefit will be generated from them so that they can be recognized. The business operations of the firm can as well be affected taking into consideration that the performance drivers are affected by the revised revenue recognition standard. This can lead to a low generation of profits by the firm. The creditors who perceive such recognition requirements to be undesirable can waive the loan covenants that they had previously entered into by the company hence affect the overall performance of the firm. 4.1. Importance of adhering to ethical codes to accountants Accountants together with auditors are called upon to practice their professionals within ethical codes provides by professional bodies such as GAAP, FASB and IAS to minimize the agency problem (Schwartz, 2014). The ethical codes can as well help to solve the ethical dilemma that an accountant can be faced with due to self-interest threat, familiarity threat and intimidation threat. The reports produced by the accountant who adheres to the ethical codes helps in transparency and accountability of an accountant over the transactions at hand hence can be used by the managers to make sound decisions. 5. Conclusion In a nutshell, companies should evaluate their performances over time and consequently compare themselves with other companies in the same industry. This will help the respective companies to amend their operations. More so, professionals like accountants and auditors are required to adhere to accounting principles when preparing and reporting the financial statements. References Bragg, Steven M. Revenue Recognition: Rules and Scenarios. Hoboken: Wiley, 2007. Print. [Online] available at: http://www.eisneramper.com/revenue-recognition-standards-fasb-ifrs-0314.aspx Helfert, Erich A. Techniques of Financial Analysis. Homewood: Irwin, 2011. Print. Logan, Tina. Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis.N.p., 2014. Print. Rodgers, Paul. Financial Analysis. Oxford: CIMA, 2008. Print. Available at: http://www.accountingtools.com/vertical-analysis Schwartz, Mark S. "A Code of Ethics for Corporate Code of Ethics." (2009): Print. Available at: http://en.wikipedia.org/wiki/Accounting_ethics 6. Appendices Liquidity ratio 2013 2012 20110 Current ratio = Quick acid ratio Profitability ratios Gross profit margin = Net profit margin = Return on investment = Debt ratio = 2013 2012 2011 1706597 ‘1854065 ‘1326430 Revenue % change (380167/1326430) =28.66% (52765/1326430)*100 = 39.78% - 28.66% 39.78% - Cost of sales 1123796 851839 625740 % change (498056/625740)*100 =79.59% (226099/625740)*100 =36.13% - Gross profit 429474 998226 700690 (271216/700690)*100 = (38.71%) (297536/700690)*100 =42.46% - Operating profit/loss -42880 660919 450771 (42880/450771)*100 =-9.51% (210148/450771)*100 =46.62% - Loss/profit before income tax -157620 651091 408847 (157620/408847)*100 = -38.55 (242244/408847)*100 59.25% - Total non-current assets 2305761 2522359 2149517 7.27% (372842/2149517)*100 =17.35% - Total current assets 948975 1115556 1502588 36.29% -25.76% Current liabilities 293576 693134 1025123 (71.36%) (32.38%) - Non- current liabilities 1173670 792910 812384 44.47% (2.40%) - Net assets 1787490 2151871 1814598 (27108/1814598)*100 =(1.49%) (337273/1814598)*100 =18.59% - Read More