International Financial Reporting Assignment Sample

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Part A: Report

Introduction

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In this report, the comparison of the financial performances of British Airways plc and easy jet PLC will be done. Ratio analysis will be conducted considering the annual reports of the respective companies. The impact of IFRS 16 will be highlighted on the company’s performance. Based on the analyses the company better for investment will be identified.

a) Financial analysis for investment

1. Profitability

In calculating the profitability of the British Airways and EasyJet PLC, “gross profit margin” and “net profit margin” has been considered. In FY 2019, the “gross profit margin” for British Airways was 10.07% while for EasyJet plc it was 16.44%. EasyJet plc have sustained their gross profit earnings in the annual sales that has helped them to keep ahead of British Airways. The net profit margin for British Airways was 8.34% while for EasyJet plc it was 5.47%.

Figure 1: Gross profit margin

(Source: Self-developed)

The net profit earned by British Airways in FY 2019 was $1109 million which is more than EasyJet PLCs net profit (britishairways.com, 2022). EasyJet plc had a net profit of $349 million which is less than that of British Airways. Furthermore, the annual sales of British Airways are more than EasyJet, which have led to higher net profit margin. EasyJet plc had a better gross profit margin than that of British Airways. On the other hand, British Airways had a better net profit margin than EasyJet [Refer to appendix 1]

1. Liquidity position

The liquidity ratios have been calculated for the two airlines. In this context, “current ratio” and “quick ratio” has been computed for understanding the liquid position of the companies. The current ratio for British Airways in FY 2019 was 0.69 while for EasyJet PLC it was 0.79. In case of quick ratio, British Airways and EasyJet PLC had a ratio of 0.02 and 0.48 respectively. The “current asset inventory” is found to be $152 million for British Airways. EasyJet plc is holding a greater current asset inventory which amounts to $1285 million (corporate.easyjet.com, 2022). Based on the liquidity analysis, it can be said that EasyJet PLC is holding more cash which can be used for other purposes. British Airways is having a low liquidity ratio which indicates that the organization is struggling in paying the short-term obligations.

Figure 2: Quick ratios

(Source: Self-developed)

The financial health of British Airways is not strong enough for handling the market operations. The company is not closer to the safety margin which further brings to the fact that the business lacks for meeting the current liabilities [Refer to appendix 2]

iii. Efficiency

Efficiency ratio has been calculated considering the “interest coverage ratio” and EPS (Seiler, Papanagnou and Scarf, 2020). In the case of British Airways, the EBIT is found to be $1678 million and the interest expenses is 219 million. This has resulted in an interest coverage ratio of 7.66. EasyJet PLC has an interest coverage ratio of 16.72 which is more than that of British Airways. EBIT for EasyJet is also more which amounts to $970 million. The interest expenses of EasyJet are found to be considerably less than British Airways which is $58 million. The EPS for British Airways and EasyJet PLC is 1.29 and 0.12 respectively. The net profit is more for British Airways than easyJet. Though the shareholders fund is less for British Airways than easy jet PLC.

EasyJet plc has been efficient in their financial performance in comparison to British Airways. The company has been efficient in using their assets and liabilities for generating higher income [Refer to appendix 3]

1. Gearing

Gearing ratio has been calculated for the airlines for evaluating the financial leverage which highlights the number of operations of companies that are being funded. In this aspect, the “debt ratio” and the “debt equity ratio” has been calculated. The debt ratio for British Airways is calculated to be 0.28 (britishairways.com, 2022). The total debt of British Airways in FY 2019 was $5360 million and the total assets were $19484 million. The debt ratio for easy jet plc was 0.11 with total debt of $326 million and total assets of $2985 million. The total equity of British Airways was $6218 million that led to the debt equity ratio of 0.86. The “debt equity ratio” for EasyJet PLC was 6.79 with total equity of 48 million (corporate.easyjet.com, 2022). British Airways is having higher debt in comparison to that of EasyJet Plc. Thus, British Airways can face difficulty in terms of economic downturns [Refer to appendix 4]

1. Investment

The financial ratios which have been analyzed for the airlines may not be attractive effectively to the investors. This is due to the fact that the British Airways did not perform well in FY 2019 and portrays a poor financial highlight. The company has not been efficient and further had more liabilities which can be difficult in paying off. Thus, the financial figures in this aspect may not be attractive to the investors. In the case of EasyJet Plc, the financial figures are much better than the British Airways. The company is having a better liquidity position with lower debts than British Airways. The company’s financial performance has been strong which has enabled them to remain in a competitive position in the market (Seiler, Papanagnou and Scarf, 2020). Based on the overall financial ratios, the investors are less likely to be attracted. Though the financial performance being better in case of EasyJet Plc creates a possibility for attracting the investors.

b) Implications of IFRS 16 Leases for the airline’s businesses

The “IFRS 16” brings in a new accounting model for lease. In this aspect the lessee needs to recognize the assets as well as liabilities for a period more than 12 months. Implementation of the IFRS 16 enables for classifying the leases as finance lease or operating lease. All the leases are considered as rents or the operating expenses. The assets which are leased are not included in the balance sheet of the company (ifrs.org, 2022). They are treated as expenses on the income statement. Therefore, the net income and operating income both get affected. The new accounting model as per IFRS 16 changes the existing model. All the financial calculations get affected due to the effect of the new model.

IFRS 16 affects the “leases P&L” in which classification of the leases are done as operating leases. Implementing the new model, it will lead to lower the operating expenses with increasing the interest expenses. Furthermore, EBIT and EBITDA will be also increased with the implementation of IFRS 16. The Lessee requires to identify the “right of use (ROU) asset” and the lease liability under IFRS 16. The balance sheet of the companies will be two-folded in this context. The lease expenses will be recognized as the depreciation of “right of use asset”.

The cash flows of the organizations will not be impacted with the implementation of IFRS 16. The classification of the cash flows can be impacted in this aspect. Under the IFRS 16 the operating expenses will be increased due to exclusion of the cash outflows concerning the operating leases (Paniagua, Rivelles and Sapena, 2018). The increasing cash in operating activities will reflect a decrease in the cash in financial activities. Furthermore, the “NPV of free cash flows” will be more. This is due to higher EBITDA as well as low WACC. Lower WACC is due to higher “D/E mix” within the capital structure of companies for evaluating target capital structure.

Recommendations

The board of directors of “RightInv PLC” is suggested making investments in the EasyJet PLC company. The company is having a stable financial position as observed from the financial ratio analysis. The “net profit margin” and the “gross profit margin” are sustainable for having a competitive advantage in the market. As per the liquidity ratios, the current ratio and quick ratio of the company is 0.79 and 0.48. This determines that the companies have sufficient assets for meeting their obligations. The liquidity ratios for British Airways are not on the higher margin and economic downturn can occur in this aspect. The current liabilities of EasyJet PLC are also on the lower side in comparison to British Airways. Therefore, investment in EasyJet plc can be beneficial for having attractive returns.

EasyJet plc is also having better efficiency ratios than British Airways. The business operations have been effective in minimizing the interest expenses. The gearing ratios have indicated that the company possesses a less amount of debt in comparison to British Airways. This provides the investors with the idea that easy jet PLC have less operations which are funded. The investors can consider making an investment in easy jet PLC as the impact of IFRS 16 is also relevant for the company. More cash will be generated from the operating activities in case of EasyJet PLC that will be beneficial for the investors. The net present value of the cash flows will be also enhanced for this company with implementation of IFRS 16. Thus, investing in EasyJet plc will be a better option. Profitable returns can be gained by investing in the EasyJet PLC since they have sustainable position in market.

Part-B: Essay

Introduction

The “International Financial Reporting Standard 15 (IFRS 15)” is considered as one of the most crucial and significant developments in the past years. This regulatory body has provided better vision and standards for financial standards that are followed by most of the public and private sector companies. This standard has been adopted in 2018 and from then every organization has followed these regulatory standards for financial reporting. These standards have secured a varied degree of success and it is found to be much effective for many organizations that are planning to establish financial statements or records. These standards have recorded theoretical complexity, which have encountered major issues among the financial experts. The main aim of this essay is to discuss the challenges (mainly technical errors) that are faced concerning IFRS 15 standard for recognizing revenue for preparers and financial information.

Challenges to IFRS 15 Standards

The regulatory stands of IFRS 15 has facilitated many companies in designing their financial statements, however, this factor has recorded many issues or challenges that are mainly related with theoretical complexity. Haggenmüller (2019) has provided conclusive evidence about revenue recognition and it will be considered as a predefined purpose for implementing a financial statement for improvement. The regulatory standards are considered to be very much complex and this is the reason behind facing many issues that are mainly associated with improvement or development in regulatory standards. The main objective of these standards is to improve clarity, comparability of revenue and acknowledge the amount of cash flow that exists in a firm. This standard has provided a clear five-step plan to identify revenue from a business organization and this framework is considered to be legalized and followed by every business firm in the world.

The key challenges or issues that are administered in this framework will be described in this pretext. Despite having operational success these standards have recorded a considerable amount of issues in every organization. The real issues that are caused by this accounting standard is the failure of securing success from IFRS 15 revenue contracts from consumers that are associated with the business activity (Napier and Stadler, 2020). Some of the major issues that are related to implementation status are described in designing financial reports. Many financial experts have opinionated that these standards have caused issues that are related to performance obligation; the exact nature of business activities among the employees has caused a considerable amount of issues in keeping the record of goods and services that are essential for providing better financial information. The performance of an organization in respect to deliver better goods and services were not collected in these standards.

The central objective of IFRS is to establish better productivity and profit in preparing financial judgments; in simpler words, this is the ideal benefit that is secured from the financial board. However, it has been found that issues related to revenue judgements are mainly associated with clarity breach. The descriptions of financial judgements prepared by following IFRS 15 lack clarity and it fails in highlighting significant information in revenue recognition. Saptono and Khozen (2021), have stated that IFRS have failed to describe the qualitative disclosures that are essential for estimating uncertainty in a financial report. Thus, if a financial report lacks qualitative disclosures of an organization, then the authenticity and audacity of the report is reduced and it can be stated that the main aim of establishing a financial report will not be met. Thus, the importance of business implications with qualitative disclosure is considered very important for designing a financial statement.

Implementation of IFRS 15 in companies like British Airways can cause disrupting the business operations. There can be issues of revenue judgements and further qualitative disclosures have caused much uncertaini9ty within the financial statements. The airlines make huge profits from its operations worldwide though the financial statements do not reflect the same.

The main problem was associated with theoretical complexity that has identified major technical issues and errors in facilitating better business outcomes. Tax administration with IFRS 15 adoption has faced many issues that are compiled to business organizations (Saptono and Khozen, 2021). IFRS 15 has incorporated certain policies that are considered to be complex and it has secured a substantial amount of loss to the auditor. Many companies have disclosed that specific policies are too complex to be implemented for designing a financial report. It is unclear to compile the policies of IFRS 15 regulation because of this factor the financial experts have failed to analyze the prime benefit of these standards. It is not at all recommended to develop such higher encryption in financial standards because being an international regulation for organizing financial activities, it is very important to be accessible by every organization (Piosik, 2021). Holding theoretical competence and complexity will record inefficient outcomes in designing the financial statements for an organization.  

The issues that are mainly raised upon increasing complexity is the main concern for every organization that is following the standards for designing their financial statements in the capital market. Many organizations have faced chronic issues in designing financial records because failing to provide the ideal business outcomes to the government will result in facing legal issues in the capital market. According to Hameed, Al-taie and Al-Mashhadani (2019), the impact of IFRS 15 policies have affected many countries in earning quality business outcomes in the capital market.  IFRS 15 was meant to deliver better standards for revenue recognition of several companies but this factor was violated because of the increased theoretical complexities under the old standards. The auditors and accountants that are working for a company have provided their review of facing issues in simplifying matters to work in a balanced and structured way.

This difficulty is mainly faced by most of the SMEs because they failed to understand the theoretical knowledge of the standards and resulted in an increase of technical errors. It was a prime issue because when IFRS 15 came into effect then it was very essential to provide better training to the employees for understanding the standards of the principles (Napier and Stadler, 2020). Therefore, it can be suggested that the lack of providing training to the employees have become a major issue in increasing the difficulty in understanding the technical and financial aspect of the IFRS standards. The benefits of training is that it will highlight the key aspects of the business and it will increase the productivity of the employees in identifying the IFRS standards and working protocol (IFRS, 2021). Another major issue or challenge that has been increased by following these financial standards is to analyze the amount or nature of data that are essential for smooth service delivery.

The employees of the finance and IT sector expressed their concerns in identifying the amount of data that is essential to be implemented in the financial report. Specifically, every organization needs to identify their performance obligation, major business activities and revenue statement to include these data in an annual financial report. Many organizations have adopted a data strategy for integrating finance and commercial teams to avert any kind of legal issues in establishing financial reports (Bernoulli and Wondabio, 2019). Despite doing these activities many organizations faced many issues in creating and storing financial data that increased the accuracy of the financial report. Therefore, this standard has enforced many organizations in establishing a set of new rules and regulations that are essential for driving productive changes in financial reports. Lastly, the major challenge that is faced by financial reporting is to analyze the factors of the external environment that are essential for facilitating the steps of financial reporting.

The business practices or activities are modified by following the trend and other factors of the external environment. This factor is followed by every organization because it improves the financial accuracy of a report (Kivioja, 2018). The impact of implementing proactive business challenges has been very effective in managing a considerable amount of issues that are aligned to design financial reports. The changing variable, cost settlements and modification in contract and selling prices of products are to be analyzed by the entire organization or firm (IFRS, 2021).  Thus, the highlight of implementing IFRS 15 is considered as a constant compliance process that requires update and experience from an industry-specific knowledge. The implementation of IFRS is over but still many people have identified chronic issues and challenges that are developing a turbulent external environment and this factor increased the engagement of trained professionals for maintaining business activities of a firm.

The IFRS 15 includes a five-step model that employs the contract focus. In this aspect, Data capture is one important challenge with the IFRS 15. More data is required for the purpose of capturing, storing and reporting. Bigger data are required to be retrieved from manual documents and for digitization. For the more the existing infrastructure may not be sufficient due to increased data requirements. The nature of obligations that the company poses and not properly defined.

Technical errors are mostly present within the financial statements as the users do not have transparency. The judgment lacks clarity of descriptions and further fields in highlighting the recognition of revenue (Hallström, 2004). The quantitative disclosures also seem to be absent for the judgements which are related to the estimation uncertainty. Furthermore, pricing features are also not fully disclosed concerning the assessment methods. Organizations disclose the policies within their system though it remains unclear complying to the IFRS 15 regulations.

The revenue recognition needs to be done properly in which the “profit and loss statement” are analyzed. The payments and the costs being spread out across the different accounting periods leads to greater issues. The new rules regarding the revenue recognition which are brought by IFRS 15 creates a primary issue of evaluating the time for recognizing the revenue. The recognition of revenue becomes complicated since the policies differ across the industries. This tender provides new rules that bring uncertainty within revenues and cash flows. The “philosophy of revenue recognition” changes and fair representation of statements are not provided (Saptono and Khozen, 2021).

The policies are much complex within this framework for designing the financial reports. Since the framework does not provide any transparency, interpreting the financial statements becomes much more difficult. Poor outcomes are generated while designing die financial statements. As a result, organizations suffer from a lack of integrity in their financial statements that do not attract investors. Several issues have been observed using the standard concerning the performances. There have been several complexities in keeping records of the financial transactions.

Theoretical complexity has been observed to be one major problem with the IFRS 15. The business organizations have faced technical issues with the framework of this standard. The policy that is included in the standard becomes difficult for implementing within the organization (Piosik, 2021). Organizations have faced issues of improper interpretation of financial statements while following the policies of the standard.

Designing the financial statements with the organization has been difficult following the policies of the standard. The working process has become more complex by implementing this standard. The designing of financial records following the new policies have resulted in legal issues within the capital market. The quality of the statements of organizations have Seen a downfall in the capital market. The employees working in the organization or not trained enough for understanding the framework of the standard which is another issue. They lack the knowledge of new policies set by IFRS 15. The employees are not efficient in capturing the data since a large data requirement is possessed by the standard.

Conclusion

The mode of revenue collection and identification has been provided in the essay and the major issues that are faced by the financial experts in this contemporary world have been described in this essay. A great justification has been provided, which has provided great evidence of increased theoretical difficulty in IFRS 15. The main findings of this essay suggest that many employees have failed to understand the policies, theories, and frameworks of the standard because of the highly encrypted language. The operational inefficiency and other issues that have increased the issues of IFRS have been found to be critical. The financial experts have to take help from professional experts to acknowledge the requirements and principles for supporting the infrastructure of a turbulent external environment. Therefore, this essay has provided all the necessary evidence that are essential for reporting the required data for an authentic financial report.