Financial Statement - Africa Energy Resources Limited - Case Study Example

Running Header: African Energy Full name: ID number: Unit name and code Lecturer name: Date of submission African Energy An overview of the company The company’s name is Africa Energy Resources Limited. The company is registered in both Australian and Botswana Stock Exchanges. In Australia, it is registered as ASX: AFRI while in Botswana, it is listed as BSE: AFRI. As far as ASX ranking by market capitalization is concerned, the company is valued at 31.4 million Australian dollars. The company is listed under Coal and Consumable fuels sub- industry. The company’s business The company is primarily focused on the development of multiple integrated power projects in Botswana in a bid to meet the increasing demand for power in South African region. AFR provides generation capacity to meet the current substantial supply deficits in the region while forecasting the escalating demand. Recently, the company has entered into a joint venture agreement with First Quantum Minerals limited to jointly develop power generation capacity at the Sese coal project which is located close to existing transmission infrastructure and can supply power anywhere in Southern Africa owing to its central location (African Energy, 2016). The company is also finalizing a development partner for its Mmamantswe coal project that is located on the border with South Africa and this project is designated for future power supply into South Africa as part of the independent power procurement plan that was initiated by South African Government. Location of business headquarters and its main operations The company’s headquarters are in Guernsey where it has its registered office in Granite House, La Grande Rue St Martin GYI 3RS. The company also has a representative office in Australia Suite, 245 Churchill Avenue Subiaco, Western Australia, 6008. As stated above, the company’s principal activities include evaluation and exploration of coal and energy projects in the southern Africa. Consequently, the company’s operations include the joint venture stated above for the Sese project, Mmamabula West Power project which is a 2.4 billion tonne coal project. Both the projects are located in Botswana (Asx.com.au, 2017). The company also has operations in Zambia including Chirundu, Kariba Valley and Zinazongwe projects. Size of the company (Market Capitalization) On 13th April 2017, the company’s market capitalization was 31.4m. Number of employees No data is available on the number of employees the company has although given the industry the company operates in, it employs a large number of employees. Various ratios for the company The company has for a number of years been making losses. As such, the company’s ratios listed below are all negative implying loss of value. Ratio Formula Calculation ROA Net income OR Loss/ total assets =(1,705,044)/19,199,541))100% = -8.88% ROE Net income OR Loss/total equity =(1,705,044)/19,002,236))100% =-8.97% EPS Net income/average outstanding shares =(1,705,044)/612,535,581 =-0.28 cents P/E Ratio Market value per share/EPS = 0.05 cents/0.28 cents = -0.18 Financial statement and disclosure notes 2.1: Accounting policies On page 28 of the company’s annual report, the company lays down the accounting policies that are the basis of preparation on the financial statements it presents. In other words, the financial policies have been used to explain how the company arrived at the figures it presents. In other words, what rules or justifications did it use in treating a certain component of the financial statements in a certain way and not the other. In this section, the company also lays down its statement of compliance with a purpose of communicating to various users of the statements that the financial statements can be relied upon. This is because in preparing the statements, the company has adhered to various provisions including those of the Australian Accounting Standards Board (AASB 2001) while also complying with the IFRS and IASB provisions. The accounting polices section also discloses the fact that the statements have been prepared bearing in mind that the company is a for profit entity. The section also lays down the basis of measurement used which is historical cost convention while laying down the unit of measurement which is the US dollar. The accounting policy have also indicated that the financial statements have been prepared on a going concern basis since the business is expected to continue in operation in the long run. Another purpose that has been served by the section is explaining how the company reached at various estimates and judgements in preparing the reports. The accounting policies have also explained how the company defines and recognizes the various components of the financial statements in accordance with the standards explained above. For instance, the policies define exploration and evaluation assets activities as those involving the search for energy resources, the determination of technical feasibility and the assessment of commercial viability of the identified resources. The policy further explains that exploration and evaluation assets are only recognized if the rights of the area of interest are current and if they meet certain criteria. In other words, the accounting policy section serves to explain how the company defines the components and what criteria has to be met if such components are to be recognized in the financial statements. In general, it can be argued that the section serves to tell the reader how the company defines the assets, liabilities, profits and losses. How are these recognized and measured? What is the justification for choice of the recognition and measurement criteria used? It also tells the reader how the revenue is recognized and measured. In conclusion therefore, the company’s accounting policies are aimed at telling the reader the rules that were followed in arriving at the figures presented and whether they are in line with the conceptual criteria. 2.2: Accounting for provisions, contingent liabilities and contingent assets IAS 37 terms contingent liabilities as possible obligations depending on an uncertain future event occurring or a present obligation but whose payment is not probable or the amount cannot be reliably measured. On the other hand, contingent assets are possible assets which arise from past events or whose existence will be confirmed on occurrence of a certain future event. On the other hand, provisions are to be recognized if and only if a present obligation has arisen as a result of a past event and the amount can be estimated reliably while payment is probable. Thus, if the company has no such obligations or assets, it doesn’t have to disclose any (iasplus.com, 2017). For the annual report period as presented, the company did not have any provisions, contingent liabilities and contingent assets. This is despite the fact that the company operates in the energy sector where provisions, contingent liabilities or contingent assets might be rampant. However, a look at the information presented in the annual report shows very scanty details and hence I think it might be that such information has been omitted from the financial statements. Another reason may be that the company actually had no any provisions to make while there were no any contingent assets and contingent liabilities and that is why may be they have not been mentioned in the report. Owing to the fact that the company has also been operating at losses, it might actually not have set aside any provisions and this is probably why there are no provisions in the report. This is could be true bearing in mind that the company’s statement of accounting policy has also not mentioned any policies that the company uses in regard to provisions, contingent liabilities and contingent assets. The company’s note 8.2 on contingencies and commitments does point out that there were no contingent assets or liabilities for the group for the period under considerations neither were there any commitments. The following is the extract 8.2 Contingencies and Commitments There were no contingent assets or liabilities in the Group at 30 June 2016. There were no commitments at 30 June 2016. The following should be noted; i) The company did not report on provisions, contingent assets and contingent liabilities since it had none that met the recognition criteria and this is why it included note 8.2 above. ii) Since the company did not have anything to report on the above items, it did not have any voluntary disclosures regarding them. iii) Given that the company did not have any provisions, contingent assets and contingent liabilities, it can be concluded that the company could not have employed any alternative method of accounting for them. Making different accounting policies would not affect the company’s reporting on the above items since there were none to report on. 2.2 Accounting for property, plant and equipment and cash generating units During the period under review, the company recognized property, plant and equipment amounting to $1,940. This was arrived at after subtracting accumulated depreciation on the property, plant and equipment amounting to $1,440 for the year 2016. This amounts also considered new acquisitions and disposals. However, it is worth noting that the company’s annual reports have very scanty information regarding property, plant and equipment. As such, it is not clear what method of depreciation was used in arriving at the book value of the assets in question. The Sese project is the only cash generating unit that has been recognized in the annual report owing to forming the smallest group of assets for the company which generates cash flow for the company with the cash flow not being dependent of the other cash flows that the company’s other assets generate. The company also does tests its assets for impairment. In other words, it assesses at each reporting date whether there is objective evidence that its financial assets or a group of financial assets is impaired. However, for the year under review, no impairment was recorded based on note 4.5. Owing to the scanty information on property, plant and equipment, it is hard to conclude whether the company has followed the various accounting standards provisions on property, plant and equipment such as AASB 116. It is also not clear on the depreciation method adopted. However, there are alternative methods that the company could have used in valuing its assets which would have arrived at different amounts as far as the assets are concerned since for instance different depreciation methods would give different values. Since it is not clear what depreciation method was used, it is also not clear why the company used the valuation method it used. The following are the financial statements extracts regarding PPE and depreciation expenses; Balance sheet extract: Property, plant & equipment 1,940 2,413 Professional & administration expense US$ US$ Audit Tax and Accounting 75,338 118,113 Compliance & Insurance 115,358 148,230 Occupancy 77,038 114,199 Travel 106,642 110,064 Marketing 57,195 84,580 Legal fees 71,915 93,432 Depreciation and Impairment of PP&E 1,441 11,130 The following should be noted: i) The company has not made any disclosures on the depreciation method they used to depreciate PPE. However, alternative depreciation methods could have been applied and this would have resulted in different PPE valuation and hence different numbers would have been reported on the balance sheet. ii) There are no voluntary disclosures regarding PPE and cash generating units iii) From the company’s accounting policies, the company employs historical cost method as its basis of accounting. However, a different accounting policy such as fair value accounting could have been applied and this would have resulted to different amounts being reported. iv) There were no voluntary disclosures regarding impairment testing. The following is the extract; 4.5 Impairment The Group assesses at each reporting date whether there is objective evidence financial asset or group of financial assets is impaired. No impairment was recorded for the year. 2.4Accounting for income tax For the year under review, the company realized a net loss. However, the company’s earnings are taxed at the corporate rate of 30%. This resulted in an income tax expense of $443,334. Part of the company’s tax accounting include recognition of tax losses and deferred taxes. However, I don’t think that the company could have applied a different policy in accounting for tax which could have resulted in a different tax amount given that the company made a loss and hence could not have been expected to pay any taxes on the loss. The following extract shows how the company reported on tax; Income Taxes (a) Income tax expense: 2016 2015 US$ US$ Current tax ‐ ‐ Deferred tax ‐ ‐ Overprovision in respect to prior years The following should be noted; i) The company has made losses for a number of years and hence it did not have income taxes. ii) The company did not have any voluntary disclosures regarding them. iii) Given that the company did not have any income tax, it can be concluded that the company could not have employed any alternative method of accounting for income tax. Making different accounting policies would not affect the company’s reporting on income tax since there were no income tax to report on. 3.0 Ethical matters Principles of corporate governance call for companies to act ethically. In this regard, the company has established a code of conduct which outlines how directors, employees and senior executives of the company are to behave when conducting their business which is shown on the company’s website. However, the company’s annual report makes no mention of ethical matters while no news were found to do with the company’s ethical matters. However, the company has flaunted a number of rules regarding corporate governance. For instance, it has not observed diversity it its operations while only half of its directors are independent. The board was also served by Mr. Alasdair Cooke who is not an independent director by virtue of being a major shareholder. In addition, the board has also not established a nomination committee in line with corporate governance recommendations. These and other areas overlooked by the company put its ability to behave ethically in question. And although the company has stated that it behaves ethically, the fact that it has not observed a number of corporate governance issues can only lead to a conclusion that the company does not behave ethically to some extent (africanenergyresources.com, 2017). For instance, why would an ethical company exclude women from its board and management? Why would it be chaired by a major shareholder who is able to influence decisions? As such, the company needs to re-look at its ethics in a bid to improve on all areas of corporate governance. 4.0 Reflective Journal I am ---------an accountant at-------------------. I have been an accountant for ----------- which has given me a considerable experience in the field. However, during this years, I have always faced challenges regarding accounting for cash generating units as well in accounting for specific balance sheet items such as provisions. The issue of deferred taxes has also been a great challenge to me. Sometimes I have accounted for an item more than one getting a different result each of the time. However, I have increasingly faced these challenges through increased research which has included going back to school as well as asking for help from my peers on how to account for these items. From these challenges, I have learnt a lot about myself. For instance, I realized that I am as good as any other accountant with increased determination and commitment. I also learnt that if I was to be a little bit more confident and never fearing to research or enquire when in doubt, I have the potential of become the best accountant. One of the reasons for my studying IFR and accounting in general is to improve my accounting skills. I want to have a good grasp of accounting policies and accounting standards. I want to understand why, when and how to apply a certain principle or standard in my accounting career. I want to learn how to effectively account for all the items of the balance sheet and probably assume an executive role in my work place. My opinion of research is a good one. Research has made me a better accountant by helping me discover things that I had never known. Through research, I have clarified issues and learnt how to account for various items while learning how to effectively apply accounting standards and principles. I think. I think as the name suggests, research involves searching for knowledge. I view it as systematically searching for knowledge to describe, explain predict or even apply certain phenomenon in a certain field. For instance in accounting, it might involve searching for knowledge on how to apply accounting principles and standards. I think that my research levels are very low and hence there is need to improve on them. To improve my research skills, I intend to conduct more and more research in a bid to gain experience. I also intend to make enquiries on how to go about research whenever in doubt and as often as I can from those that are more experienced. I also intend to read widely on what research is and how to conduct it. This way, I gain to equip myself with more and more skills thus effectively developing my research skills. References: African Energy, 2016, Annual Report 2016 Asx.com.au, 2017, Energy sector profile, Retrieved on 15th April 2016, Retrieved on 15th April 2016, from; http://www.asx.com.au/documents/products/asx-energy-sector-profile.PDF iasplus.com, 2017, IAS 37- Provisions, contingent liabilities and Contingent assets, Retrieved on 15th April 2017, from; https://www.iasplus.com/en/standards/ias/ias37 africanenergyresources.com, 2017, Corporate governance, Retrieved on 15th April 2017, http://africanenergyresources.com/display/index/corporate-governance ‐ ‐ ‐ ‐ Read More