International Accounting - Term Paper Example

Introduction to International Accounting Table of Contents Introduction 3 Historical Background 3 Managing the Organization 4 The Financial ments and Current Performance 4 Balance Sheet 4 Exhibition of the Four Broad Heads of the Balance Sheet & Ratios 5 Analysis 7 Profit and Loss Account & Analysis 11 The Impact of the Global Economy 12 A Summary of the Future Prospect of the Company 13 The Quality of the Information Provided 13 Conclusion 15 References 16 Introduction The study focuses upon the Singapore Airlines operating in the Airline Industry. The financial aspects of the company are analyzed with the technique of ratio analysis and their interpretations are provided with the reasons behind the causes of such performance of the company. This will assist in knowing the financial strength and weakness of the company and the opportunity that are present in reviving back to its position. The vital ratios that are important to be known are presented in the study. Historical Background The Singapore Airlines are operating into the aviation industry since 64 years. It had started its operation with single fleet and three flights per week and presently it spreads its span to 99 destinations over 39 countries. The organisation had commenced its business with the name of Malaysia-Singapore Airlines in the year 1947. After 25 years, in the year of 1972, the Airlines had split into two entities, named as Singapore Airlines and Malaysian Airline System. The Singapore Airlines was the first to provide the complimentary headsets and free drinks. In addition to it, their latest innovation of providing in-flight telecommunication services made them pioneer in this service. Eventually, it can be stated that the history of the organisation was the witness of the quality services (Singapore Airlines, 2011). Managing the Organization The Singapore Airlines is a unit of Singapore Government. The holding company of the organisation is Temasek Holdings which acquires 54.5% of voting stock. The organisation has adopted an effective strategy of diversification. It has been diversified into related sectors and industries. Hence, it can be stated the organisation has gone for the horizontal diversification (Singapore Airlines, 2007). The financial statements of the organisation indicates that during the period of economic downturn the organisation was not managed properly as the profit had became negative in the financial year 2009. But there after, SIA has controlled the organisation effectively as drastic changes in the financial performance have been noticed. The Financial Statements and Current Performance Balance Sheet Report published by Statistical Commission (2008) had defined the concept of balance sheet. The report had considered the balance sheet as the statement which has drawn up the values of the assets owned and the liabilities owed by an organisation or a group of organisations, based on a particular point of time. A balance sheet is able to show the ways of best meeting the liabilities. Moreover, comparing the fixed assets and the current assets of a balance sheet, it can be determined the amount of capital is engaged with the permanent investments (Langemeier & Klinefelter, 1998). In this part of the report the different attributes of the balance sheet will be discussed. The balance sheet of the Singapore Airlines can be summarised in respect to the four aspects namely current assets, current liabilities, fixed assets and long term liabilities for the four financial years, started from 2007 to 2010. Exhibition of the Four Broad Heads of the Balance Sheet & Ratios Ratios 9 months 9 months 9 months 9 months Current Ratio CA/CL 2007-08 2008-09 2009-10 2010-11 CA 6772.6 6222.8 5873.4 8737.5 CL 6588.5 7105.6 5042.6 6678.7   1.02 0.87 1.16 1.3           Quick Ratio (CA-Stock)/CL         CA 6772.6 6222.8 5873.4 8737.5 Stock 406.3 379.8 267.1 309.8 CA-Stock 6366.3 5843 5606.3 8427.7 CL 6588.5 7105.6 5042.6 6678.7   0.966274569 0.822309165 1.11178757 1.261877311           Working Capital CA-CL         CA 6772.6 6222.8 5873.4 8737.5 CL 6588.5 7105.6 5042.6 6678.7   184.1 882.8 830.8 2058.8           Gearing Ratio (Debt/Debt+Equity)         Debt         Equity 13535.7 12465.8 13483.3 14,080.60 Debt+Equity           9.28% 9.06% 9.47% 8.57%           (Operating Profit / Revenue) 10.11% -2.41% 7.35% 13.96% Operating Profit 1,105.50 (177.80) 931.60 1,656.40 Revenue 10,938.00 7,371.50 12,675.00 11,865.30           Profit Before Tax         (PBT / Revenue) 11.04% 0.06% 10.32% 16.54% Profit Before Tax 1,207.30 4.60 1,308.30 1,963.00 Revenue 10,938.00 7,371.50 12,675.00 11,865.30           Profit After Tax         (PAT / Revenue) 8.82% -0.20% 8.53% 13.39% Profit After Tax 964.40 (14.40) 1,081.70 1,588.50 Revenue 10,938.00 7,371.50 12,675.00 11,865.30           Return on Capital Employed (ROCE) / Return on Investment (ROI)         Profit for period/(Total Equity+LTL) 6.15% -0.09% 7.05% 9.22% Profit After Tax 964.40 (14.40) 1,081.70 1,588.50 Total Equity 14,331.10 13,749.30 13,963.10 15,628.90 Long Term Loan 1,343.50 1,438.10 1,390.30 1,599.20           Gearing Ratio         Debt / (Debt + Equity) 8.57% 9.47% 9.06% 9.28% Total Equity 14,331.10 13,749.30 13,963.10 15,628.90 Total Debt 1,343.50 1,438.10 1,390.30 1,599.20           FA Turnover Ratio         (Revenue / Fixed Assets) 0.77 0.49 0.79 0.72 Revenue 10,938.00 7,371.50 12,675.00 11,865.30 Fixed Assets 14,177.70 15,144.70 15,975.20 16,580.70 Analysis Over the period of time, it has been noticed that the amount of the current assets is quite higher in comparison to the non-current assets. It implies that the amount invested in the permanent assets is not too high. Moreover, from the particular information, it can also be stated that the organisation possesses flexibility as having more current assets in comparison to the non-current assets is the indication of the flexibility. In addition to it, a comparative analysis among the financial indicators of the organisation for the previous four years can be demonstrated and the reasons behind increment or the declination can also be determined. But before analysing, it is essential to know about the contents of the aforementioned four broad heads of the organisation. Current Assets The current assets can be defined as the assets that can be converted into cash within a financial year or within an operating cycle. Current assets are useful as a company needs to utilise it while meeting its day to day operation. According to Befumo (n.d.), there are five major parts of the current assets and those are short term investment, accounts receivable, inventories, prepaid expenses and cash and cash equivalent. In case of the Singapore Airlines, all the five above mentioned categories exist. The total value of the current asset for the last four years has already been mentioned. Two major changes have been observed in the current assets in the financial years of 2007-08 and 2008-09. Though the total amount of the current assets slightly differ, the differences between the trade debtors and the cash and bank balance is quite high. There is almost 29.65% difference in the trade debtors and around 9.44% differences in the cash and bank balances of two years. The reason behind the differences between the trade debtors which had been identified by the management was the revaluation of the fuel hedging contract. Furthermore, the declining value of the cash and bank balance indicates a liquidity problem. In oppose to the situation, in the financial year of 2010-11, a drastic transformation has been observed in the cash and bank balance in comparison to its previous year. The management has recognised the enhancement of the operational cash flows and issuance of bond for this hike in the cash and bank balance. Current Liabilities Current liabilities can be denoted as the amount owed to the creditors and to the suppliers for a short period of time. There was a huge difference between the current liabilities of the financial years of 2009 and 2010. After analysing the balance sheet, a huge gap between the current tax payable and notes payable have been found. Both the amount is quite high in the financial year 2010. Sudden increase in these attributes may affect the liquidity of the organisation. On the other hand, the balance of the trade creditors was increased in the year of 2008-09. The management of the organisation had controlled the hike through partially offset the deferred taxation and reduce the sales in advance for carriage. The balance sheet can be further analysed through determining few ratios that will demonstrate the actual financial performance of the organisation. Fixed Assets Fixed assets are the items that an organisation owns for life ensuring smooth flow of the operations and the items also bear its depreciation charges. It can be broadly sub divided as the tangible and intangible assets. The tangible assets have physical existence whereas intangible assets do not possess it. In case of the Singapore Airlines, the fixed assets are the combination of both tangible as well as intangible assets. The format of balance sheet of the organisation categorised the fixed assets in respect to the property, plant and equipment, long term investments, intangible assets and other non-current assets. Equity and Other Long Term Liability Long term liabilities are consisted of those items that owed by the organisation for more than one year. Equity can be considered as the ownership that can be expressed in terms of total liabilities subtracted from total assets. This segment of the balance sheet has been classified through ‘Equity Attributable to Owners of Parent’ which is consisted of share capital and reserves, through Deferred Taxation and Account and through Long Term Liabilities and Provisions. The results of this segment were quite stable during the four years and the only around 10% differences have been identified between the three quarters of 2007-08 to 2008-09. The reason of this transformation was the reduction in the fair value reserve. According to the rule-of-thumb, the current ratio should ideally be 2. But in all the four financial periods, the current ratio was less than 2 (Zions Bank, n.d.). Low current ratio indicates that current assets were not adequate to meet the current liability. Hence, it can be suggested to enhance the current assets or to reduce the current liability through paying down the short term loans. Again in case of quick ratio, 0.5 to 1 is considered to be the satisfactory ratio. According to it, the ratios for first two financial periods were satisfactory where the last two financial periods acquire higher quick ratio. It indicates that the assets are not properly utilised. Working capital is used for meeting the expenses of day-to-day operations. There is an increasing trend of the working capital in the Singapore Airlines and in the financial periods of 2010-11, it acquired quite high working capital which was a positive trend. The gearing ratio indicates the way an organisation is financed. In simple words, it depicts the proportion of the debt in the total investment. The ratio indicated that Singapore Airlines is mainly based on equity capital as it possesses a minimum amount of debt. Hence, it can be recommended to the organization to utilize its potential credit scope. Profit and Loss Account & Analysis The primary reason of preparing a profit and loss account is to determine the actual financial performance of a firm. Moreover, it reflects the ultimate performance of an organisation to its management or other users of the financial statements (Wrexham, 2011). The profit and loss account of an organisation can be better analysed through using the ratios. In case of evaluating the profit and loss account of the Singapore Airlines, the similar techniques can be adopted. Few important financial performance indicators have been calculated based on the four financial years consisted of nine months ending on 31st December. The operating profit ratio of the organization was high in the particular financial period of the year 2007-08. The ratio declined soon after and it became negative for the same period of the financial year 2009-10. It again increased in the financial year 2010-11. The recent recession started at the end of the 2007 and that can be considered as the reasons for these fluctuations in the operating profit. Profit Before Tax (PBT) and Profit After Tax (PAT) both are important indicators of the financial health of an organization. The only difference between the two ratios is the amount of tax paid. The same situation has been observed in case of these two ratios since the particular period of the financial year 2007-08. The PBT ratio during the nine months of the financial year 2009-10 was positive but payments of tax made it negative. A drastic improvement had been noticed in the financial performance during the financial year 2009-10 and 2010-11 as the PBT ratio had been enhanced by more than 10% and PAT increased enhanced by approximately 9%. It is definitely a positive sign towards the growth of the organization. The ratio of the Return on Capital Employed (ROCE) to Return on Investment (ROI) signifies the total returns against the total capital invested. Since, the financial year 2008-09, it shows declining trends and again in the financial period of 2010-11 it increased. The Impact of the Global Economy The recent global economic turmoil had badly affected Singapore, a nation of four million inhabitants. Singapore government estimated that the Singapore economy would take 2-3 years time to recover. The effect was also prominent in case of the Singapore Airlines, as its overseas incomes and share prices had plummeted during the global economic downturn. Moreover, the organisation had laid-off around 9,000 employees spread across various parts of the world and had grounded 17 fleets (Seneviratne, 2009). The financial performance of the organization had also declined as the airlines company slumped its operating loss to a SGD 28.0 million during the three months ended on 31st March, 2009 (Centre for Asia Pacific Aviation, 2011). The fluctuations in the Passenger Load Factor (PLF) and the passenger number growth (PAX) in the organization can be graphically demonstrated as follows: Source: (Centre for Asia Pacific Aviation, 2011). A Summary of the Future Prospect of the Company The Singapore Airlines has always emphasised on quality and innovation. It reflected from the designer bone China flatware to its ‘KrisFone’ services. It had introduced suites along with the cabin improvements for all other classes. In the future too, the organisation has committed to bring more firsts as SIA continually strives to ensure quality services through innovation. In case of the future financial performance, it has already been noticed that the financial performance indicators are rising and it can be expected that within the mid of 2011-12, the organisation will able to get back to its lost position. The Quality of the Information Provided The report is primarily focused upon the financial performance of the organisation. Hence, the entire analysis has been conducted from the financial perspective. While analysing the financial performance, the financial statements available in the organisation’s own website have been undertaken. Hence, there should not be any doubt regarding the authenticity of the information. For the historical backgrounds and the future prospects, also the corporate website has been used. While discussing the impact of the global economy on the organisation, news published in the media has been referred to highlight the recent issues with in-depth analysis. Thus, the authenticity and the quality of the information provided in the report can be ensured. Conclusion The Singapore Airlines had experienced many challenges in the industry. Due to the financial crisis the sector was also hit and it also affected the performance of Singapore Airlines. They have been signs of recovery in the economic environment and the airlines industry has been showing potential in gaining back its position. The Singapore Airlines is focused upon their future objectives through innovative and quality service that will assist in increasing and improving their performances. From the analysis and the future expectation it can be concluded that the Singapore Airlines will regain its position in the financial year 2011-2012. References Befumo, R., No Date. Current Assets. How to Read a Balance Sheet. [Online] Available at: http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Notes/101-ReadsingB2.pdf [Accessed March 28, 2011]. Centre for Asia Pacific Aviation, 2011. Singapore Airlines Suffers Rare First Quarter Operating Loss As Yields Collapse. News. [Online] Available at: http://www.centreforaviation.com/news/2009/05/15/singapore-airlines-suffers-rare-first-quarter-operating-loss-as-yields-collapse-outlook-grim/page1 [Accessed March 29, 2011]. Langemeier, L. N. & Klinefelter, D., 1998. Uses of the Balance Sheet. Balance Sheet — A Financial Management Tool. [Online] Available at: http://trmep.tamu.edu/cg/factsheets/rm5-5.pdf [Accessed March 28, 2011]. Statistical Commission, 2008. Balance Sheets. Items for Discussion and Decision: National Accounts. [Online] Available at: http://unstats.un.org/unsd/statcom/doc08/BG-SNA-Chapter13.pdf [Accessed March 28, 2011]. Singapore Airlines, 2007. Notes to Financial Statements. Annual Reports. [Online] Available at: http://www.singaporeair.com/saa/en_UK/docs/company_info/investor/annual/SIA_AnnReport0607.pdf? [Accessed March 28, 2011]. Singapore Airlines, 2011. SIA History. The SIA History. [Online] Available at: http://www.singaporeair.com/saa/en_UK/content/company_info/siastory/history.jsp [Accessed March 28, 2011]. Seneviratne, K., 2009. Singapores Economy: Perils of Globalization. News Analysis. [Online] Available at: http://www.irrawaddy.org/article.php?art_id=15356 [Accessed March 29, 2011]. Wrexham, 2011. Profit And Loss Account. Cost and Costings. [Online] Available at: http://www.wrexham.gov.uk/assets/pdfs/business/se_manual/63_profit_loss.pdf [Accessed March 28, 2011]. Zions Bank, No Date. How To Prepare And Analyze A Balance Sheet. Business Resources. [Online] Available at: https://www.zionsbank.com/pdfs/biz_resources_book-2.pdf [Accessed March 28, 2011]. Read More