Analyze Financial Reporting of CSR Limited

Transcription

1 Analyze Financial Reporting of CSR Limited 1 P a g e

2 Introduction The report evaluates the financial reporting of the CSR Limited in light of the accounting policies and practices followed by the firm in light of the GAAPS and accounting standards. CSR is the leading building products company in Australia providing products for residential as well as commercial buildings. The financial reporting of the entity is reviewed and reported as under: 1. Background Information a. Key Accounting Policies: The firm values the inventories at the lower of the cost of the market value. The cost of inventories includes the cost of materials, labor and manufacturing overheads related to the purchase and production of inventories. The firm does not use any specific policy for accounting the value of inventory and the method of valuation of inventory changes with the nature of the inventory. However, the company uses either a first-in-first-out (FIFO) or average cost basis for major portion of its inventories (Annual Report, 2012, pg. 48). Trade receivables are recognized initially at fair value and subsequently measured at amortized cost. An allowance for doubtful debts is raised based on a review of outstanding balances at balance date. Bad debts are written off against the allowance account and any other change in the allowance account is recognized in the statement of financial performance. b. Accounting standards in respect of accounting policies: The accounting policies for valuation of inventories and receivables are governed by AASB 102- Inventories and AASB 7- Financial Instruments: Disclosures. 2. Flexibility in selecting key accounting policies AASB 102 on inventories requires that the inventories shall be measured at lower of cost and net realizable value. The matter of determination here is the cost of inventory. According to the standard the cost of inventory includes the cost of materials, conversion cost and other costs which are incurred to bring the inventory to their present condition and location. The standard says that the goods and service which are not interchangeable and can be easily segregated must be valued using the specific identification method and the other inventory can use FIFO or weighted average cost formula. Thus the firm has the 2 P a g e

3 option either to use specific identification for identifiable goods or use either FIFO or weighted average cost method (AASB- 102, 2009). Thus the organization has little flexibility in accounting policies for valuation of inventories. For recognition of reporting of receivables, AASB 139 states that when financial assets are impaired by credit losses and the entity records the impairment in a separate account (e.g. an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) (AASB- 7, 2009). The allowance on receivables is made by the organization on the review of the accounts received in past, bad debts in previous years and market performance of other receivables in the same industry. The management has high flexibility in the accounting policy used for creating allowance on receivables because it is highly affected by the personal judgment and approach to accounting. The conservative manager would provide for higher allowances while the aggressive manager would provide for less allowance. 3. Accounting strategy of management The management of the company keeps the flexibility in use of method of valuation of inventories. It uses the prescribed methods, FIFO as well as weighted average cost. The system must have been selected by the organization so that it can use appropriate method for accounting of inventories on the basis of the nature of the inventories. Further the flexibility gives the management the opportunity to use the measurement policy on the basis of profitability of the company. For the goods with rising prices, the company can reduce the profits by measuring the inventory at FIFO and increase the profits by measuring them at weighted average cost. Similarly, in times of declining prices of the goods, the profit can be increased by valuing the inventory at FIFO basis and reduced by using the weighted average method. As for the accounts receivables, the allowance on accounts receivables is completely at the discretion of the management and is affected by the personal judgment as well. The management can increase its reported profits by reducing the allowance for receivables considering that the quality of receivables is good and reduce profit by increasing the allowance. 3 P a g e

4 4. Quality of disclosures The firm has disclosed the methods used for valuation of inventories being the mix of FIFO and weighted average. For receivables, the firm discloses that the receivables are recorded initially at realizable value and later adjusted for allowance on the basis of the accounting policy adopted. The financial report of the company does not discloses the details of inventories that are valued at FIFO cost and weighted average cost and nor it discloses the method that is used by the management to determine which method of valuation of inventory should be used by the firm. For receivables, the management does not disclose the rate at which allowances are made on receivables and the method used by the management to review the quality of accounts receivables and decide on the rate of allowance that is to be provided. The management also did not disclose if some of its accounts are more risky than others which are not risky at all. Thus, it can be concluded that the quality of disclosures made by the company is not very good. 5. Potential questionable accounting number The Report of the CSR limited company discloses the value of inventory classified as raw material; work in process, finished goods and land held for sale and noncurrent inventories of raw material and land. There is no explanation on how the valuation has been arrived at. The company has not disclosed the method used for valuation of each type if inventory. Thus, the values of all the inventories in the balance sheet are questionable numbers. The receivables show the trade receivables and the allowance for doubtful doubts. There is no explanation on the rate that is used for calculation of allowance. The allowance for doubtful debts was $5.6 million in 2011 for million receivables and is $5.4 million for million receivables in There is no reconciliation present for the amount of allowance. Thus the value of allowance for doubtful debts is the questionable number. 4 P a g e

5 6. Footnotes to undo the distortions in numbers In order to undo the distortions in the number reported in the annual report by the company due to the lack of complete information, the following discloses must be added to the annual report: a. The details of major components of inventory that are values using the FIFO method and weighted average cost should be disclosed in the notes to the accounts. In addition to the details, the company should also disclose the criteria considered by the management while deciding the method that should be used for valuation of inventories. Thus the notes should disclose the characteristics of inventory that influences the decision of the management on whether it should be valued on FIFO basis or weighted average basis. b. The company should disclose the rate for calculation of the allowances on accounts receivables. If different rate are used for different accounts receivables than they should be disclosed. Like the use of age of reveals for calculating the allowance used different rate for allowance of bad debts depending upon the age of receivables outstanding. The receivables with longer age have higher rate of allowance for bad debt. The notes should also disclose the process and method used to recognize the more risky and less risky accounts receivables. Since all the receivables are not risky and do not require the provision for bad debt allowance, the management must disclose the method which enables the firm to identify the accounts receivables that are subject to allowance for bad debts. 7. Financial press Discussion of the company s performance and accounting numbers The recent financial press announcing the results for the year ended 31 March 2013, discloses that the company has reduced its trading revenues by $1,682.4 million which is down by 7% from previous year due to the deterioration in the market conditions. The company has observed that the residential construction in Australia is down by 6%. The EBDITA (earnings before interest, tax, depreciation and amortization) are of $161.8 million which are down by 34%. The impact on profit of the company is due to the decline in market activity mitigated by significant reduction in cost base and overhead expenses. The EBIT of the company is $72.5 million compared with $156.7 million in 5 P a g e

6 YEM12. Building Products EBIT of $77.4 million down 11% in line with market conditions with result underpinned by strong performance in Gyprock, PGH and Hebel (News Releases, 2013). References Annual Report CSR Limited. [online] Available at Centre-and-News/Annual-Meetings-and-Reports/Pages/default.aspx AASB Inventories. [online] Available at AASB- 7. (2009). Financial Instruments: Disclosures. [online] Available at News Releases Results announcement for the year ended 31 March [online] Available at 6 P a g e