Financial Report for Virgin Australia Holdings Limited - Case Study Example

THE VIRGIN AUSTRALIA HOLDINGS LTD REQUIREMENTS ACCORDING TO THE RESPECTIVE ACCOUNTING STANDARD RELATED TO DISCLOSURES OF SOURCES OF ESTIMATION UNCERTAINTY AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES BOARD OF DIRECTORS 29TH APRIL 2013 Executive summery Virgin Australia Holdings Limited (formerly Virgin Blue Holdings Limited) is a company domiciled in Australia. The preliminary final report of the Company as at and for the year ended 30June 2012 comprises: the Company and its subsidiaries (together referred to as the Group and individually as Group entities) and the Group’s interest in its associate. The Group is a for-profit entity and is primarily involved in the airline industry, both domestic and international. On 22 February 2012 the Board of Directors approved a proposal seeking to separate its international airline business from Virgin Australia Holdings Limited. Under the proposal, all of the shares in the international airline business of Virgin Australia (previously known as Pacific Blue and V Australia)were transferred to a new holding company, Virgin Australia International Holdings Pty Ltd(VAIH).On 30 March 2012, the new structure was effected by Virgin Australia Holdings Limited distributing shares to Virgin Australia Holdings Limited shareholders on a pro-rata basis, by way of inspected dividend. The shares were vested in a professional corporate trustee held beneficially for the VAIH shareholders in accordance with the terms of a trust deed. The Company consolidates VAIH as required by the accounting standards. The preliminary final report has been prepared in accordance with ASX Listing Rule 4.3A and has been derived from the unaudited financial report. The financial report has been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board and the Corporations Act2001. This report is based on the financial report for the year ended 30 June 2012 Introduction The Virgin Australia Holdings Ltd was formerly known as Virgin Blue Holdings Limited. It was established to provide low-cost carrier for domestic and international flights. However, it was later branded itself as “Virgin Australia”. It was established in 2000 and the headquarters are at Bowen Hills in Australia. Under the domestic operations, it uses fleet of Airbus 33, Boeing 737 aircraft, Embraer 190 and 170 in the country. The international operations part does operate using Boeing 737 aircraft and Boeing 777. It comprises of Abu Dhabi, Trans-Tasman, Trans-Pacific and Pacific Island flying (Virgin Blue 2008). This report evaluates the performance and interprets financial statements that are to provide financial analysis of financial statements over a period of one year. The report analysis profitability and financial disclosure requirements for the company. The Requirements According To the Respective Accounting Standard Related To Disclosures of Sources of Estimation Uncertainty And Judgments In Applying Accounting Policies This report is concerned with identification of the information provided to fulfill the various disclosure requirements contained in the corporation act of 2011 and also the AASB accounting standards. The information is analyzed in respect of the users of financial accounting information. Stating the financial statements core objectives would be simple if all users had similar needs and interest (AASB 2004). Accounting information should be free from errors intended to achieve a the targets or to provoke a certain behavior. This improves the quality of decisions made by decision makers. Companies should prepare their financial statements in an acceptable manner so that they can be compared with the previous year’s statement and with the statements of other companies. There is need to bring forward the importance of the increased intangible assets brought by information technology and stiff completion among companies. This means that the value of the company has been rising correspondingly (Aboody 1998), but most existing accounting framework has not been capturing this aspect. There is great need to disclose such information in the notes to the financial statements. Emerging issues should be quickly solved by reference to an existing framework of basic theory. Some companies developed and published their own conceptual framework of accounting, but no single framework has been universally accepted and relied on in practice. Conceptual framework for financial reporting is based on its objectives, qualitative characteristics and the concept of recognition and measurement. Many accounting standards and IFRS differ in the way they recognize and measure intangible assets among other things. This creates the need to disclose such information in order to improve the reliability of the reported results. Recognition and measurement concept explains how, when and which financial statement element including intangible asset and other transactions should be measured, recognized and reported by the system of accounting. Corporation Act 2010 paragraph 100 requires that organizations to prepare financial statements based on historical cost concept. Virgin airlines international group discloses that the financial statements were prepared based on historical cost concept. However, land buildings and derivative financial instruments have been measured at fair value. This disclosure will be helpful to investors and other stakeholders when analyzing the financial statements of the company since they will establish how specific data were arrived at. There are various cost measurement models used in accounting for intangible assets, and entities reporting the intangible assets in their financial statements employ these models in different degrees and in varying combinations. However, it depends on the accounting policy that is adopted by the entity (Craig 2010). These models include initial cost and realizable value. Under the initial cost measurement, intangible assets are initially recorded in their account at cost and no adjustment is made to this valuation in later period except to allocate a portion of the original cost to expense as the intangible asset expires. At the time an intangible asset is originally acquired, initial cost represents the fair market value of the goods or services exchange as evidenced by an arm’s length transaction (Dumontier 2002). In compliance with the requirement in AASB 138 paragraph 118, virgin airlines discloses that they have $ 167,000 in depreciation, amortization and impairment. Investors will react positively to this information since it shows that the company is prudent in utilizing its assets. The investors will be assured that some funds are set aside to replace or buy the asset when its useful life is over. This has also helped to explain how the company resulted to the current income since the figure disclosed is charged against the operating profit of the company. If an investor believes that the reported figure is too high, he will be dissatisfied since it means the earnings per share held with the company will be low. However, the company has not complied with AASB 138 paragraph 118 as far as distinguishing between internally generated intangible and other intangible assets. The failure to disclose this information may be detrimental to investors because they need to determine how much of each class of intangible assets the company has. The Current Accounting Practice Of virgin airlines holding limited Regarding These Disclosures The preparation of the consolidated interim financial report requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. In preparing this consolidated financial report, the significant judgments made by management in applying the Group’s accounting policies and key sources of estimation uncertainty are the same as those that applied to the consolidated financial report as at and for the year ended 30 June 2012. The significant estimation changes for the year ended(Zimmerman 2010). The Group has an evolving lease portfolio and is experiencing an increase in leased aircraft with the addition of new aircraft types to the fleet which have been predominantly leased. Aircraft leasing arrangements are increasingly on arrangements which impact the determination of the future maintenance obligations for leased aircraft. Total contract and other maintenance costs have increased by 5.3% for the half-year ended 31 june 2012 compared to the corresponding half-year period ended 31 December 2011. Included in this increase are estimated changes relating to component overhauls on leased aircraft. This increase of 5.3% is inclusive of the impact relating to a reassessment of estimates for maintenance provisions which resulted in a decrease in maintenance expenses of $20.8 million. The company have made the following disclosures as required by various accounting requirements: information about the basis of preparation of the financial statements (e.g. going concern or in liquidation) and the specific accounting policies used(Richardson 2001). Information required by International Financial Reporting Standards that is relevant to understanding the statements that is not presented elsewhere in the financial report cross-references of each item in the statement of financial position and of comprehensive income, in the separate income statement and in the statements of changes in equity and cash flows to any related information in the notes. Significant accounting policies, including measurement bases and relevant policies to understanding the financial report the judgments, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Key assumptions concerning the future and other key sources of measurement uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities in the next twelve months. Information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital. The company has responded to the requirement in AASB 118 paragraph 35 by disclosing that they have $2,106,000 in total revenue from continuing operations. This information is very useful to investors and they will respond positively to it since they will be able to determine that most revenue come from the sale of entities while income from passage account for the least revenue generated from continuing operations of the company. This information is also helpful to other stakeholder who would use the information disclosure to determine the products offered in the company or competitors to use the company as a benchmark when evaluating their performance with respect to a certain segment of the production. Potential Gap That Exist Between the Company and the Requirements of the Accounting Disclosures The Virgin Australia Company reported a high percentage ratio of Debt equity ratio as compared to Qantas Airways. This ratio measures the company’s financial leverage and stability. It clearly indicates a company proportion of debt and equity that the company is using in financing its assets. In other analysis, it was observed that both companies have comparatively high equity to debt ratio. This is observed to be a cheaper way to finance the growth of the company though at an increased risk. Recommendations Virgin airlines limited prepared its financial statements in relation to the requirements according to the respective accounting standard related to disclosures of sources of estimation uncertainty and judgments in applying accounting policies. However since each company has its own way of preparing and disclosing its information, virgin airlines have fulfilled all the requirements. Potential investors are advised that the requirements for all the disclosure for estimates uncertainty and judgment in applying accounting policies. The investor should also consider the limitation of the report in making decisions on investing. References AASB (Australian Accounting Standards Board), 2004. Framework for the Preparation and Presentation of Financial Statements. Melbourne: Australian Accounting Standards Board. Aboody, D. and Lev, B., 1998. The value relevance of intangibles: the case of software capitalization, Journal of Accounting Research, 36 (Supplement), pp. 161–191. Beattie, V., 2005. Moving the financial accounting research front forward: the UK contribution, British Accounting Review, 37, pp. 85–114. Black, G., 2003. Students' Guide to Accounting and Financial Reporting Standards. London: Financial Times Prentice Hall. CCH Editors, 2008. Australian Master Accountants Guide. Sydney: CCH Australia Limited Dumontier, P. and Raffournier, B., 2002. 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