Qantas Group Financial Accounting Analysis - Example

QANTAS GROUP FINANCIAL ACCOUNTING ANALYSIS Student’s Name Institution Table of Contents Introduction……………………………………………………………………………………..3 Part 1: Regulatory Influences on External Reporting For Public Companies in Australia..3 Corporate Governance in Australia...............................................................................4 Qantas Group Sustainability & Environment Reporting Practices.............................5 Strengths & Weaknesses of Sustainability Reports........................................................6 Recent Events That Will Affect Overall Aviation Industry...........................................7 Social Responsibility: Qantas Group...............................................................................8 PART 2: A. Director’s Report & Declaration.............................................................................8 B. Accounting Equation...................................................................................................9 C. Accounting Firm That Audited Financial Statements.............................................9 D. Main Asset & Valuation Method Used......................................................................9 E. Source of Revenues....................................................................................................10 F. Largest Expense in 2015............................................................................................10 G. Share Issue..................................................................................................................10 H. Net Profit & Statement of Cash Flows.....................................................................10 I. Disclosure of Contingent Liability............................................................................11 J. Unredeemed Frequent Flyer Revenue.....................................................................11 2. 2015 Ratio Computation........................................................................................................11 Conclusion………………………………………………………………………………………12 Recommendations………………………………………………………………………………12 References List………………………………………………………………………………….13 Introduction Qantas Group is an Australian-based airline company that engages in the transportation of both customers and goods using two distinctive airlines: Qantas and Jetstar. The focus of this paper rests with the financial analysis of the company where the 2015 annual report will be assessed for such important information as ratios, director’s report as well as its sustainability practices. PART 1 Regulatory Influences on External Reporting For Public Companies in Australia There are basically four key bodies that are directly involved with the formulation, interpretation and enforcement of external financial standards and regulations within the Australian and they include these bodies; the Australian Securities and Investments Commission, Australian Accounting Standards Board, Financial Reporting Council and the Australian Securities Exchange. It is important to note that by the end of 2000, there were a significant number of alterations, which were implemented to ascertain the manner for which regulations and requirements should be developed within the entire Australian financial environment. These external changes shifted the development of the accounting standards to the numerous government-based agencies as opposed to allowing full control on the underlying Australian accounting profession; a move that rendered the accounting profession incapacitated to freely self-regulate. ASIC is an Australian body that is set to monitor and regulate the numerous investments products and services in the market including superannuation as well as savings account and also administers the Corporations Act. The Australian Accounting Standards Board (AASB) seeks to necessitate that all public corporations to comply with all accounting standards; certainly, it also engages in the direct formulation of conceptual framework and contributes to the formulation of a single set of accounting standards for world-wide application. The Australian public companies also undergo regulatory influence on such international-based standards like the recent adoption of IFRSs from the limited US GAAPs. The move is set to allow comparison of activities amongst firms within the different countries and regions. Corporate Governance in Australia Corporate governance is the set of rules, relationships and processes that allows the exercising of authority and control of operations in companies (Dakhelalla, 2014). It also engages difference measures that companies and those that are already in the control of operations are held to accountability of operations (Pass, 2004). It is important to note that corporate governance sets to influence on the way corporations’ goals and objectives are formulated and accomplished as well as the way risk is assessed and monitored. In Australia, the ASX Corporate Governance Council is the major body that serves to formulate crucial and effective Recommendations that seeks to portray an international good practice (ASX, 2010). It also encourages corporations to utilise the specific recommended guidelines so that there can be easier assessment and evaluation of corporate governance practices and thereafter, evaluate the length of benefits a company might enjoy as a result of adopting the changes in the checklist approaches proposed (ASX, 2010). External regulatory influences like the ASX Listing Rule 4.10.3 requires companies avail a definite statement in their respective annual reports that discloses on the level of which they have ensured to follow the Recommendations within the underlying timeframe (ASX, 2010). Qantas Group Sustainability & Environment Reporting Practices Qantas Group has gone to ahead to focus on their immediate environmental strategies set in 2007. For instance, the company has sought to reduce the amount of water and electricity consumption so that they can in essence reduce the overall environmental impact as a whole (Qantas, 2014). The company’s 2020 environmental targets indicate a possible reduction of reducing at least by 20% the level of electricity usage by increasing fuel efficiency by about 1.5% each and every operational year. In the operational period between 2009 and 2014, Qantas Group managed to reduce the level of electricity consumption by about 9%, water usage by 11% and waste-to-landfill by a figure of 20% or so (Qantas, 2014). On the contrast, the firm has noted that it still suffers a challenge in managing jet fuel combustion emissions that accounts for more than 98% of the Group’s total 12 million tonne annual carbon dioxide emission footprint (Qantas, 2014). Presently, the firm’s sustainability and emissions management plan is focused on three elements; measure, reduce and offset. Some of the notable initiatives executed by the company include; the Sustainable Aviation Fuel (SAF), Fuel Efficiency Program and Fly Carbon Neutral among others. Of particular interest, it can be noted that Qantas Group has sought to partner with different organisations in order to formulate and implement effective sustainability standard for adoption of other sectors as well (Qantas, 2014). A perfect partnership model can be noted with the Great Barrier Reef Foundation where it ensures to participate in the Zoox Ambassador Program in order to provide support and assistance in matters related to research prowess in order to comprehend the imminent impact of climatic changes and thereafter provide substantial help to ensure resilience (Qantas, 2014). The information presented in this report is more important to different government bodies that require corporations to report on their immediate carbon emission requirements. It is also important to such stakeholders as the immediate communities that seek to live under safe and healthy environment (Higgins, Milne, & Gramberg, 2015). Their respective desire is for such aviation-based company like Qantas remain committed to protecting the surrounding environment for future generation. The shareholders are also interested with this form of information because it shows how the company is set to achieve maximum results through reduction of wastage and maximisation of wealth (Higgins, Milne, & Gramberg, 2015). Strengths & Weaknesses of Sustainability Reports Strengths of Sustainability Reports First, it can be said that sustainability reports improves the underlying company image and reputation as well. In this regards, the company is able to counter possible negative publicity it has suffered before (Romero, Lin, Jeffers, & DeGaetano, 2014). Secondly, it helps with employee attraction and retaining especially since employees always seek to work with organisations that make efforts to take care of their welfare and also, allow them a chance to give back and volunteer to the local communities (Van Bommel, 2013). Additionally, these reports sets to improve the level of comprehension on aspects related to risk and opportunities for more sustainable initiatives. Through the report, companies are able to improve on their immediate operational environment and thereafter, mitigate the degree of risks that have been identified in relation to sustainability. Weaknesses of Sustainability Reports The reports sometimes are made up of weak goals and objectives. This is indeed a platform for possible disaster in the future hence there is a need to have these reports developed on fundamental and strengthened organisational objectives (Kocmanová, Hřebíček, & Dočekalová, 2011). Consequently, the report is sometimes short-sighted in that they are composed of short-term goals. Most long term initiatives are simply turned off on the pretext that it will long to enjoy benefits. Recent Events That Will Affect Overall Aviation Industry Airline Accidents In the period between 2014 and 2015, the rate of accidents involving major aviation companies has caused a great sense of negative alarm. These accidents have compelled airlines to reroute their respective flights away from the conflict-ridden airspaces especially the Middle East region (Taneja & Arshad, 2014). The rerouting of flights is set to cause a decrease in operational revenues as well as impact on the manner for which aircraft will be insured in the future as well as the level of advanced technology they will be forced to embrace amid high costs (Taneja & Arshad, 2014).. A perfect example is the terrorist attack that resulted to complete wreckage of the Malaysian Airlines Flight 17 in the Ukraine region. The immediate response was for other major airlines like Air India and Jet Airways opting to reroute their flights away from this region. Although the rerouting of the flights did not affect the pricing of tickets, it prompted further delays and thereafter resulted to increased airline costs that was eventually passed on to the travellers (Taneja & Arshad, 2014). EU-Russia Crisis According to Popova (2014), the underlying European Union sanctions on Russia has led to a significant level of retaliation by the country that has sought to considering possible ban on EU and US airlines that utilises its airspace on transit to other notable regions especially the Asia Pacific region. The move will have a significant impact on such routes as Japan and Korea for major EU-based airlines like British Airways and Air France-KLM. Possible impacts of the crisis involves enormous fuel bills, possible longer journeys that will necessitate the need for substantial number of stopovers as well as high prices to the passenger, which in turn affect the degree of competition of the EU-based airlines in the existing market (Popova, 2014). The expected worst hit airline will be Finnair that has continuously used the Russian airline to serve destinations within the larger Asia Pacific region (Popova, 2014). Social Responsibility: Qantas Group The Group is indeed socially responsible. Since its inception in 1920 in Queensland, this popular Australian airline has continued to serve and improve the surrounding communities for where they conduct their operations (Qantas, n.d). For instance, Qantas Group has ensured to forge a partnership with the Museum of Contemporary Art in Sydney by advertising on its behalf the annual program exhibitions and special events to the rest of the world the “Flight to Sydney to Visit MCA” initiative (Qantas, n.d). Secondly, in support of community-based activities, Qantas together with the “Indigenous Marathon Foundation” (IMF) seeks to empower the young Aboriginals and Torres Strait Islander become meaningful leaders within their communities. A donation of up to $1.4 million is awarded to the Front Runners initiatives as well to assist with education and career growth (Qantas, n.d). PART 2 A. Director’s Report & Declaration The Directors’ report provides pertinent information related to the exact names and numbers of company’s directors and those that have already retired. It also provides information related to the company’s principles’ activities, dividends, review of operations, meetings, and events that remain subsequent to the balance sheet date (Qantas 2015 Annual Report pg.24-48). The report provides data regarding their respective interests and benefits which is basically in form of the number of shares and rights held at any given moment in time. Another important item presented within the report is the information pertaining to remuneration data of executives and CEOs in relation to the base pay and annual incentives; and the exact remuneration structures adopted to implement on these compensation packages. Consequently, the report provides information on the company’s environmental obligations, indemnities and insurances structures as well as the name of the auditor of the financial statements. On the contrast, the directors’ declaration provides a confirmation to the stakeholders that the statements presented in the annual report have been prepared in accordance with the Corporations Act 2001. It also sets out to show confidence to stakeholders of the ability of the company to meet its obligations as and when they fall due. Both of these reports are required in order to cement the information that was presented in the annual report as being a true and fair representation and that all regulations were indeed adhered to while in the process of preparation. B. Accounting Equation Accounting Equation; Assets= Liabilities +Shareholders’ Equity 17,530,000=14,083,000+3,447,000 C. Accounting Firm That Audited Financial Statements KPMG provided the auditing services and the opinion indicates that there were no contraventions of auditor independence and applicable code of professional conduct in regards to the audit work (Qantas 2015 Annual Report pg.48). Other work conducted by the audit firm includes non-audit services that were conducted in the period between 2014/2015. D. Main Asset & Valuation Method Used The main asset owned by the company is property, plant and equipment, which has an opening book value of $10,500M and a closing of $10,715M. The asset is valued under the fair value approach, which sets to provide an estimate of their respective present values of future contracted cash flows. They recorded at their costs (being the fair value of the considerations availed) in addition to possible incidental costs that are directly associated with the acquisition process. E. Source of Revenues The company’s major source of revenues comes from passenger and freight tickets while other sources of revenues include; the frequent flyer marketing/ redemption and membership revenues, contract work, commissions and aircraft financing revenues. F. Largest Expense in 2015 The largest form of expenditure for the airline is fuel costs that current stands at $3,937M. The expense has decreased since 2014 where it was stated at $4,461M (2015 Annual Report, pg.50). The two possible reasons for the decrease might be due to the recent decrease in the global oil prices per each barrel, which has been translated to reduced jet fuels. The reduction might be also as a result of reduced flight mileage so that the airline resorted to abandon long route destinations that were not profitable at all. G. Share Issue On August 20, 2015, the Board agreed to issue shareholders with 23 cents per share where a return amount of approximately $505M of share capital was gathered (2015 Annual Report, pg. 87). H. Net Profit & Statement of Cash Flows The net profit for the financial year that ended 2015 is stated at $560M while the net cash flow from operating activities, which is indeed more, stood at $2,048M within the same year. Indeed this is normal because there are certain items that undergo different treatment in the income statement. For instance, such noncash expenses like depreciation, amortisations and others are included while computing the net profit while such expenses do not decrease the level of cash a business is able to produce in a given operational period. I. Disclosure of Contingent Liability No form of contingent liability is identified by the directors in their report. J. Unredeemed Frequent Flyer Revenue The revenues have been presented as a liability because flight redemption of the passengers has not been uplifted as required. 2. 2015 Ratio Computation Ratio Calculations Return on Equity (ROE) = Net Income ÷ Total Equity = 560/ 3,447 =16.24% Return on Assets (ROA) = Net Income ÷ Total assets =560/ 17,530 =3.19% Profit Margin = Net Income÷ Sales = 560/ 15,816*100% = 3.54% Asset turnover = Sales ÷ Total assets = 15,816/17,530 =0.9 Current Ratio: current assets/ current liabilities = 5,049/ 7,470 = 0.68 Debt-to-equity ratio= total debt/total equity (771+ 4,791)/ 3,447 =1.61 Interest coverage=EBIT ÷ Interest 1,048/349 =3 Debt Coverage Ratio=net income/debt service 560/2,276 =0.24 Price Earnings= market value per share/EPS 3.84/(560,000,000/2,196,330,250) =3.84/0.25 =15.36 Dividends Per Share= dividends paid/ no/of ordinary share 4,000,000/2,196,330,250 =0.002 Conclusion To sum up the discussion above, it can be noted that Qantas Group practices environmental sustainability and also engages in different corporate social responsibilities like promotion of arts as well as such community initiatives like the IMF. Qantas Group is expected to face such challenges like recent flight accidents and decreased revenues due to conflicts like the EU-Russia crisis. The annual report has identified different accounting items while the ratio analysis has also ensured to provide relevant information related to its financial soundness. Recommendations From the discussion, it is suggested that the Qantas ensures to devise effective measures needed to guarantee future profits despite probable implications of such aspects as the freight accidents and so on. The management should also come forth to devise effective marketing strategies to ensure maximum utilisation of asset and equity-base so that they could improve on earnings as well. References List ASX. 2010. Corporate Governance Principles and Recommendations with 2010 Amendments, 2nd Ed, ASX Corporate Governance Council. Retrieved on December 11, 2015 from http://www.asx.com.au/documents/asx-compliance/cg_principles_recommendations_with_2010_amendments.pdf Dakhelalla, R, F. 2014. The impact of corporate governance principles on board characteristics: An Australian study. University of Wollongong Thesis Collection. Higgins, C, Milne, M, & Gramberg, B 2015, 'The Uptake of Sustainability Reporting in Australia', Journal of Business Ethics, vol. 129, no. 2, pp. 445-468 Kocmanová, A, Hřebíček, J, & Dočekalová, M 2011, 'CORPORATE GOVERNANCE AND SUSTAINABILITY', Economics & Management, vol. 16, pp. 543-550. Pass, C. 2004. Corporate governance and the role of the non-executive directors in large UK companies: An empirical study, Corporate Governance, vol.4.no.2; pp.52-63 Popova, N. 2014. “External events threaten to upend the airline industry”. EuroMonitor, Retrieved from http://blog.euromonitor.com/2014/09/external-events-threaten-to-upend-the-airline-industry.html Qantas. 2015. 2015 Annual Report. Retrieved from http://qantas2015-annualreport.reportonline.com.au/system/files_force/downloads/2015_qantas_annual_report.pdf?download=1 Qantas .N, d. About us: In the Community. Retrieved on December 11, 2015 from http://www.qantas.com.au/travel/airlines/community-support/global/en Qantas, 2014. “Our commitment to environmental sustainability”. Retrieved on December 11, 2015 from http://www.qantas.com.au/infodetail/about/environment/our-commitment-to-environmental-sustainability.pdf Romero, S, Lin, BB, Jeffers, AE, & DeGaetano, LA 2014, 'An Overview of Sustainability Reporting Practices', CPA Journal, vol. 84, no. 3, pp. 68-71. Taneja, M & Arshad, M. 2014. “Recent airline accidents and the implications”. The Smart Cube. Retrieved from http://www.thesmartcube.com/insights/financial-services/item/recent-airline-accidents-and-the-implications Van Bommel, K 2013, 'From Values to Value: Sustainability Reporting and the Dynamics of Commensuration', Academy of Management Annual Meeting Proceedings, pp. 1229-1234. Read More