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FIN201 Corporate Finance Assignment
This assignment relates to analysing the consolidated financial statements and its notes of JB Hi-Fi Limited for the financial year 2013. The questions of the financial statements were related to the liability side of the financial statement and there is a thorough analysis of its questions. Further, there is an understanding of the difference in the producing annual reports of a financial corporation and partnership firms. Both these forms have different organisational structure and also have different accounting standards to be followed. Therefore, there is thedifference in terms of presentation of expenses, incomes, assets, liabilities, and equity. A company has to mandatorily form all the different financial statements while a partnership firm does not need to form cash flow statement.
Total current liabilities of JB Hi-fi limited have increased in financial year. The current liability for the year 2012 was $ 439,481,000 which increased to $ 442,379,000 in 2013. There is an increase of $ 28, 98,000 in the current liabilities. The current liabilities include trade and other payables, other financial liabilities, current tax liabilities, provisions, and other current liabilities (JB Hi-Fi limited, 2013).
The amount of trade and other payables includes $ 387,020 which includes items like accounts payables, GST payable, deferred income, accruals and other creditors. Other financial liabilities include an amount of $ 956 for interest rate swap, current tax liabilities includes tax an amount of $14,932, and current liabilities include lease provision of $ 1280 and employee benefits of $ 35,111 (JB Hi-Fi limited, 2013).
The major financial liabilities of the organisation are borrowings, provisions, other non-current liabilities, and other financial liabilities.
Borrowings: The Company has borrowings of both secured and unsecured. The secured borrowings include bank loans of $ 149,775 in 2012 which was paid off in 2013. The company has taken unsecured borrowings from the bank of $ 124,331 in 2013.
Provisions: provisions include provision for employee benefits, lease provision, and other provision. The overall amount of provision decreased from $ 13,792 to $ 9416 (JB Hi-Fi limited, 2013).
Other non-current liabilities: it includes lease accruals and leases incentives. There is a slight increase in the non-current liabilities. There is increase from $ 22,797 to $ 23,350.
Other financial liabilities: the other financial liabilities include interest rate swap. The amount of it was $ 803 in 2012 and it was completely paid off in 2013 (JB Hi-Fi limited, 2013).
The provision of current liabilities in the balance sheet includes employee benefits and lease provision. An organisation maintains the provision for employee benefits which includes a number of employee’s benefits/ pension schemes. It also includes lease provision which is created to keep the original premises of the organisation in the same position (Deegan, 2012).
Applicability of the provisions:these standards have the following provisions.
Provision of IAS 37: the IAS 37 provision is made for measuring provisions, contingent liabilities, and contingent assets. The provision is made for accurately measuring the value of possible assets and possible liabilities. The provisions are measured by considering the best estimate of risk and uncertainty. It is used for measuring the value of expenditures in order to settle the obligation (Donelson, et. al., 2012).
Provision of AASB 137: this standard is formed to ensure that proper measures are adopted for measuring the values of the assets and liabilities.
The items contained in current liability which is employee benefits and lease provision is measured appropriately. The provision for employee benefit contains the $ 3,595 which has been accrued due to annual leave accrued but will not be taken and the lease provision amount has also been measured according to the group past history for vacating stores. The provision has been measured considering the amount required returning the group’s lease premises to the same condition. Therefore, both have followed the provisions of IAS 37/ AASB 137 (Donelson, et. al., 2012).
In the recent financial year, there are two interest-bearing loans. One is secured loan and second is an unsecured loan. The secured loan includes a bank loan of $ 149,775 which is repaid in 2013 and an unsecured loan has been taken for $ 124,331. Therefore, cash of $ 124,331 has been raised in the recent time through the unsecured loan. The organisation has taken the loan amount for fulfilling its loan requirements.
Comparing with the previous year amount, it can be ascertained that the secured loan has been completely paid off of the last year and the unsecured loan does not exist in the previous year and has been raised in this year only (Ahmed, et. al., 2016).
Currently, the organization does not have secured bank loans and the company has an unsecured loan. There is no secured bank loan which means that currently none of the company’s assets is secured for banking purposes. This means that company’s all the assets are free from any form of mortgaging purpose (Roberts, 2010).
Non-current borrowings are those borrowings which are repayable for more than 1 year. Currently, there is only one non-current borrowing which is an unsecured bank loan. An unsecured borrowing is one in which loan has been taken without providing any form of a mortgage. During the time of liquidation, such loans are repaid in the last after making repayments to other secured creditors.
The unsecured loan which has been taken will be repaid within 2 years. Though it is a non-current liability it will be repayable within 2 years. Since the company has taken an unsecured loan, it surely has to be repaid as soon as possible. Apart from one single borrowing, there are no current long-term borrowings for the organisation (Sutton, et. al., 2015).
There are few non-current provisions such as provisions under non-current liabilities. The provisions are made for employee benefits, lease provisions, and other provisions. Employee benefits provision is made for creating the amount which has to be returned to the employees for pension schemes amount, medical amount and other amounts. Lease provision represents the expenditure made for analysing the amount to be incurred for returning the group’s lease premises to its original conditions.
The company also maintains other provisions but there is no clear information as to why this provision is maintained. The company might maintain this provision for tackling any form of contingent liability or any default in meeting the borrowing amount (Thornton, 2015).
The income tax expense as seen in the company annual report is a deductible expense from the profit before tax. But the income tax expense is not shown in the income statement of a partnership firm.
The reason behind it is that the structure of a partnership firm is different from the company structure. The partnership business, there is a number of partners who share incomes, losses, and control of the business.
The patterns in the partnership pay show their income tax on their respective returns. Each partner further pays tax according to their individual tax rate and is also eligible for tax offset. The only provision which lies over the partnership firm is that it has to get itself registered for turnover of more than $ 75,000 (Australian government, 2017).
In accordance with the accounting policies and standards, there is a requirement to prepare the annual reports such as cash flow, statement of funds flows, statements of changes in equity, income statement and statement of financial position etc. The statement of changes in equity presents information that the profit for the year $ 41,149 and the comprehensive income of $ 9,689 was added to the opening balance of the statement of changes in equity.
In a partnership firm, profits are distributed among partners. After considering all the expenditures, the residual income is distributed among partners in the ratio of their sharing in the business. But in accordance with the corporationfinance accounting standard norms, the profits attained are segregated into different components. The profits are divided into retained earnings, dividend account etc. (Thornton, 2015).
Issued capital can be defined as the capital which is issued to the shareholders for collecting the capital amount. For a corporation, it is required that authorised capital and issued capital is necessary for issuance. In typical partnership firms, the capital to be invested is determined by the partners or through the new partner. The addition of capital is decided through by the amount of capital requirement and in accordance with the net worth of the partnership firm.
Thus, there is series of difference between the capital of partnership firm and the corporate firm are that in a corporate firm, there is an authorised capital divided into units and a share price. In a corporation, the share capital is divided into a number of units and the number of shareholders but restricted in accordance with the corporate law. Further, from the authorised capital, a company issues certain number of shares for creating capital amount (Annual report, 2013)
Figure: describing the balance sheet figure of net equity
(Source: Annual report, 2013)
The above screenshot presents that the equity is valued through adding the contributed equity, reserves, retained earnings, and equity attributable to the owners of the company. And also further added the non-controlling interest of $ 483 and the total equity arrived at $ 243,828 which has increased from the last year’s amount of $ 184,501 (Annual report, 2013).
Country road limited has a corporate structure which has limited liability in the form of authorised capital and issued capital. In accordance with the accounting standard, a corporation has to make annual statements which include a cash flow statement as well. A cash flow statement presents all the inflows and outflows of cash under the operating, financing and investing activities. As a corporate is a separate identity from its owners, there is a requirement to prepare cash flow statements which can record all the cash activities which are taken place during a financial period.
A typical partnership firm does not need to form a cash flow statement. In every partnership firm, partners need to formulate cash flow statements for assessing the cash transactions took place in a financial year. Therefore, all the cash activities taken place are adjusted in the incomes statement and the statement of financial position of the organisation (Annual report, 2013).
The above is the example of the cash flow statement of country road limited which shows that all the transactions took place in a financial year of all the partners are summarised in a document for analysing all the cash transactions in a specific financial year.
Though, there is a requirement that a partnership firm needs to maintain partnership capital account, income statement and statement of financial position but there is no requirement to maintain the cash flow statement.
This report is prepared for understanding the value of financial statements and income statements. The assignment was distributed over two parts namely, part A and part B. the part A was related with analysing the balance sheet part of JB Hi-Fi financial statements and further analysing the current and non-current liabilities of the organisation. The second part of the assignment depicts the analyses of difference in preparation of documents of annual reports of a company and a partnership firm. Since both types of business structure are different in their formation and therefore, there is a requirement of analysing their provisions. The major difference both are in terms of capital formation, equity formation, cash flow statements and presentation of financial statements.