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ACCT2005 Annual Report Analysis and Interpretation of Bega Cheese Limited: Assessment Answer

ASSESSMENT BRIEF
Subject Code and TitleACCT2005 Annual Report Analysis and Interpretation
AssessmentModule 3 report – Accounting Analysis
Individual/GroupGroup of 3 students
Length1 500 – 2 000 words
Learning Outcomes
2. Analyse and interpret annual report information in order to evaluate performance and financial position.
  1. Recognise the limitations of annual reports and identify alternate sources of information to aid decision making by external stakeholders.
  2. Communicate the results of annual report analysis
and interpretation to a variety of stakeholders.
Weighting10%
Total Marks100 marks

Context:

Module 3 Accounting Analysis report focuses on the analysis and interpretation of the allocated company’s financial performance and position. The allocated company is the same as that for Industry and Strategy Analysis report. Students are required to identify the financial statements, notes to financial statements, and other relevant sections in the

company’s latest annual report, from which information is selected for the company’s accounting analysis.

The module reports are designed to encourage deep learning and an ability to utilise feedback to improve the final report.

Questions

The following questions provide guidance for accounting analysis of your allocated company:

  1. Identify the company’s accounting policies.
  2. Explain if these accounting policies are consistent with the relevant accounting standards. You should refer to five groups of items in the company’s financial statements: assets, liabilities, equity, revenue, and expenses.
  3. Identify if there have been changes in the company’s accounting policies. If so, explain the reasons for, and consequences of, these changes. You should express opinion on the appropriateness of the accounting changes.
  4. Identify connections between the company’s accounting policies and its strategy as discussed in Report 1 Industry and Strategy Analysis. That is, does any accounting policy support the company’s strategy in any way?

Answer

ACCT2005 Annual Report Analysis and Interpretation

Module 3 Report – Accounting Analysis

Introduction 


BEGA CHEESE Limited is one of the biggest diary companies based out of New South Wales , Australia. The company became a listed company in 2011 and is currently value in excess of $900 million. Bega cheese limited has a 25% shareholding in Capitol chilled foods Pty limited. In 2018 FY, the Bega Cheese company was able to increase its revenue by over $211 million over the last fiscal year which was about 17% increase.  In FY 2018, the total revenue generated by the Bega cheese limited amounted to $1,438 million and for the same financial period the Bega cheese limited has  also reported a net profit of $28,768,000. 

1) Identification of the Company’s Accounting Policies.


The Bega Cheese  limited is preparing the financial statements and the annual reports as per the AASB standards is in place and also following the guidelines put in place by the respective regulations of the Australian corporation Act, 2001. The Bega cheese limited has bene listed with ASX since 2011 an it is preparing and reporting the financial statements as a for profit undertaking since then. Further the Bega Cheese  limited is preparing the financial statements  in conformance with the IFRS standard issued by IASB . in 2018 the Bega Cheese  limited has reported that no new standard issued in the form of IFRS has bene used for reporting purpose. The Management of the Bega Cheese limited has  also decided not to adopt any new accounting standards  before their due dates as a precautionary  measure and would also decided to follow the new standard on their respective application dates. For preparing  its annual reports and financial statements Bega Cheese limited is using the historical convention as required to be modified under different valuations principles issued by AASB and IFRS and the modified standard were used for valuing the groups derivative financial securities. 

The following principle of consolidation with regard to subsidiary companies were used and reported  by the company:

  1. It was reported that the Bega cheese financial statements included the consolidate value of the assets and liabilities of all the subsidiaries of the Bega cheese limited the reports were prepared as Bega cheese group consolidated. 
  2. Bega cheese has been reporting to have used the consolidation method for reporting subsidiary operations under the group. Under this method  all the effects of the intercompany transactions and their balances, unrealized gains and losses on account of transactions between the parent and the subsidiary are effectively eliminated to show  the net effect. 
  3. Accounting policies related to the subsidiaries of the Bega cheese are changed where necessary to ensure long term consistency in reporting which were in conformance with the accounting policies adopted by the Bega cheese group.

Joint operations which were operated by the Bega cheese Limited are reported as under:

  1. In relation to the joint operations undertaken by the group the company goes into recognizing the assets and liabilities as per the amounts invested and expenses incurred. 
  2. As and when the group goes on to transact with other companies as a joint operator, the group goes into recognizing gains and losses as per provisions of consolidation under consolidation method and includes the same under consolidated statements to the extent the same belongs to the other joint operators. 

REVENUE RECOGNITION PRINCIPLES 


The Bega cheese limited goes on to recognize revenue in the books of the company under fair value measurement  and reports all revenue net of discounts, returns and other forms of allowances. Revenue is recognized as per the provisions and only when the same can be capable of being measured reliably  and it is expected that the future benefits would be flowing to the entity. 

The Bega cheese group recognizes tranches of revenue form sale of goods and services and sale of assets only when the group has already transferred significant amount of risks associated with these goods and assets along with the rewards to the buyers of the assets and goods (owners). Similarly the Bega cheese group recognizes tranches of revenue from sale of services when the services were already performed or undertaken to the satisfaction of the eventual buyers of the services. As a far as royalties and rents are concerned the revenue is recognized only when the same were performed as per the previous agreements. Interest income is recognized by the Bega cheese Limited on a time proportion basis using the effective interest method. Similarly the dividends were recognized in the books only right to receive payment is established.

2) Explain if these accounting policies are consistent with the relevant accounting standards.  

The accounting policies adopted by the Bega cheese limited are in conformance  with AASB standards  and the same required certain estimates to be made as far as valuations were made for assets and liabilities etc. As a result of which the Management of the company was required to exercise their judgement for implementing the accounting policies. 

Provision of AASB 7 was implemented in relation to Financial Instruments: Disclosures which  required adequate disclosure of fair value measurements  under  fair value measurement hierarchy. The same was followed by the accounting policies undertaken by the company. 

Further the Bega cheese limited has implemented the fair value measurement in relation to assets under the provisions of AASB 13 which defines the fair value as a price which the company would be expected to receive if an ordinary transaction takes place between market participants on a specific date. 

The Management of the Bega cheese limited has also implemented the provision of the AASB 15  related to Revenue from contracts with customers starting Jan 2018 and under this standard the by following the recommended steps. Under this standard the management identifies the contract , hen goes on to identify the contract obligations to find the contract price and then proceeds to allot the transaction price as per the completion of the performance obligations. 

These examples demonstrates that the Bega cheese limited has bene able to follow the policy regulations put down by the AASB and IFRS in spirit and thus has in full compliance with the terms or there regulatory requirements. 

3) Identify if there have been changes in the company’s accounting policies. If so, explain the reasons for, and consequences of, these changes. You should express opinion on the appropriateness of the accounting changes.

The Bega cheese management has not specifically brought any changes in the accounting polices into play but it has been weighing to implement certain new regulations which would be mandatory for the company to implement in coming quarters. So far many of these impending standard changes have not been implemented because they were not supposed to be effective for the reporting period ending 30th June 2018 but the company’s management is preparing to bring in these changes in the coming period to comply with IFRS and AASB policies. 

Recently the company has decided to implement the changes made by the AASB 9 (financial instruments). The standard became applicable after 1st jan 2018 and replaced the AASB 139. The AASB 9 strives to simplify the model of classifying the instruments used for hedging and complying with risk management practices undertaken by the company. Under the new standard the management would be expected to recognize the credit losses which might be expected to be incurred at the time of asset recognition in the books unlike under 139 when the loss was needed to be recognized when the actual losses were incurred. Thus this gives an early indication of the probable losses which the company is expected to incur and the same is intended to make sure the  investors and shareholders are more aware and leads to better decision making. The group has assessed the probable impact of the application of AASB 9 and found that not much material impact (losses) would be estimated to be reported and borne by the group.

The Bega Cheese Limited has also considered to adopt the AASB 16 which was related to leases and the same is expected to be put into use by 1st January 2019. AASB has issues AASB 16 to replace the existing AASB 117. Under the terms of the new standard the Bega cheese limited is expected to recognize the assets as a right o sue asset and related leasing liability would be reported in the books with regard to all lease assets under use. As per current provision the company is showing the lease expenses but the same would be replaced using depreciation expenses on the right of use assets and interest expenses in relation to assets which were categorized as lease liability. The Bega cheese group is currently assessing the full impact of the new provisions under the new AASB 16 standards and how it is likely to impact the incomes and balance sheet items. The Bega cheese limited is expected under the new AASB 16 to report these changes either using a full fledge retrospective measurement or using a  modified approach (retrospective). This is likely to affect the amount of retained earnings shown by the Bega cheese limited in its books. 

4) Identify connections between the company’s accounting policies and its strategy as discussed in Report 1 Industry and Strategy Analysis. That is, does any accounting policy support the company’s strategy in any way?

As reported earlier the Bega cheese management is looking for increasing the firms reach both in terms of its revenue and market expansion. For this purpose the company has undertaken several steps to achieve the objectives. For this purpose the Bega cheese limited has integrated the recently acquired business of Peanut Company of Australia and the same is seen to have strengthened the supply chain of the company in a positive manner and reduce cost of operations. 

In the most recent FY of 2018 the company was also able to increase the milk supply it  has received as the same was a sort of condition precedent ton which the revenue grew impressively and asset expansions took place. In 2018, the overall milk supply grew  by over 15% to reach 750 million Milk liters and the same helped the company maintain a very competitive position and reduce prices to retina customers (BegaCheeseLimited, 2018). 

In 2018 the performance of the Bega cheese company was quite better as revenue increased by 18% to reach $1.44 billion and the Profit after taxes reached $44 million and the same increased by 45% over the precious year. a robust accounting practice and ethical decision making made it possible to grow the EPS to 23.9 cents which was higher than the previous year EPS by 20%. To archive the strategic goals of increasing revenue significantly, reaching new markets and increase market value the Bega cheese company limited has decided to invest in new long term projects which were aimed at capacity enhancement  and producing at a lower costs through higher efficiency. 


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