Assignment Stage 2 – Restated Financial Statements
Assignment Stage 2 – Restated Financial Statements
ACCT11059
USING ACCOUNTING FOR D-MAKING
9 May 2016
Prepared by
Kym Chisholm
S0244760
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Step 1 – Reflections 3
1.1 Time travel 3
1.2 An accounting story 4
1.3 The efficiency expert 6
1.4 Number crunching 7
Step 2 – Financials 10
2.1 Restating equity 10
2.2 Restating financial position 12
2.3 Restating financial performance 15
2.4 Comments about restating financial statements 17
2.4.1 Comments on Lucky Numbers blog post 17
2.4.2 Comments on The Lucky One blog post 17
2.4.3 Comments on the forum post - Issues with operating comprehensive income 18
2.4.4 Comments on ASS#2 - Step 2: help! blog post 19
2.4.5 Comments on ASS#2 – Step 2: How did I find this learning task? 21
2.4.6 Comments on Restating begins blog post 22
2.4.7 Comments on 23
2.4.8 Comments on 24
2.4.9 Comments on 25
2.4.10 Comments on the forum post - Restating income statement 26
2.4.11 Comments on the forum post - Restating Balance sheet 27
2.4.12 Comments on 27
2.4.13 Comments on the forum post - financial income 28
Step 3 – Clarius Group services 29
3.1 Permanent recruitment 30
3.2 Payroll services 30
3.3 On demand IT support using a contractor 30
3.4 Contribution margin 31
3.4.1 Contribution margin calculations 32
3.4.3 Restating income statement using contribution margin 33
3.4 Restraints 34
Step 4 – Feedback 34
4.1 I provided feedback to: 34
4.2 I received feedback from: 34
References 35
Step 1 – Reflections
1.1 Time travel
"Time travels in divers paces with divers persons. I’ll tell you who Time ambles withal, who Time trots withal, who Time gallops withal, and who he stands still withal."
William Shakespeare
This content also appears on my Back to the Future blog post.
Wouldn’t it be great to have the DeLorean from ‘Back to the Future’ to see how our company is performing five years from now? We could come back to the present and pour all our money into shares knowing with confidence that it all turns out ok in the end (or save ourselves a bundle of cash).
If only things were as simple as owning a DeLorean (or a hot tub time machine, either way you’ll travel in style) as it would mean there is no need to try and run calculations and predictions. It was a good daydream to have while I was reading the first paragraph but unfortunately we cannot take off in our DeLorean and still need to rely on the past to help us formulate a vision of the future.
I love history and need no convincing that it is important to study the past to be able to move forward effectively. In saying that, can human beings ever truly learn from their past? World War II followed fairly closely on the heels of World War I and mania in the financial markets has lead to bubbles and busts since the 17th century when tulips captivated our hearts. Emotions and egos seem to always get in the way of rationality.
When we look at a firm’s financial statements, I wonder how far back we need to look through them to gain a clear understanding of their past? Is three years enough? Five? One decade? While reading about predicting the future, once again my curiosity was piqued on whether analysis of financial statements could have predicted Enron or Lehman Brothers woes before they crashed.
The first step of analysis involves classifying a firm’s activities as operating or financial. I am familiar with this classification step but at no point have I ever re-stated financial statements. So at this point in time, in my early musings of chapter four, I am looking forward to how this can improve my understanding of Clarius Group.
1.2 An accounting story
"Yet by your gracious patience,
I will a round unvarnished tale deliver."
William Shakespeare
This content has been revised from my The NeverEnding Story blog post.
Eight pages in to chapter four and I feel like I have already taken a long journey. It reminded me a bit of the NeverEnding story where Atreyu takes on a quest to find a name and grows his knowledge and understanding through each challenge he faces.
Each section of chapter four opens up slowly, one part at a time, building upon the story preceding it. It always presented challenging new information but never becoming overwhelming as each section built on those that have gone before.
I got dazzled by the number of times cash was mentioned in the ‘How firms add value’ section. I love cash! Free cash flow reminds me of water bubbling and gurgling away as it transfers its flows through nature from the hills down to a body of water. The flow velocity increases as rain falls and more and more water gets transferred downstream (cash flow from operations), or it can dwindle to a small trickle if the decision is made to allow people along the way to take out more then is put in (cash invested into operational assets).
Free cash flow is just like a river, except it is a transfer of financial energy. While it gives us some insights into a firm’s value, it is not a key driver in value creation and so we continue on with our search for the creation of value, just like Atreyu did in his search for the Oracle to provide more answers.
Before we reach the Oracle we meet the challenge of the sphinxes, which only let the worthy go through. Can economic profit withstand the sphinxes judgement and be a worthy measure of whether a firm has added value? It indeed passes with flying colours, with the economic profit formula showing me that it does help us focus on items that really do play a part in adding value.
Digressing from the story for a moment – although I am familiar with the cost of capital, likening it to the costs of choices in our own life produced a much more powerful image than the first time I studied this in a textbook. The cost of choices is a very personal and relevant topic to me. A test of choices that I constantly use in my own life is to imagine I am old and reflect on what items and experiences will hold more value to me when I look back on it. Sure, I could be earning interest on another $12,000 but I would rather treasure the memories of driving my sports car instead!
Alas, another obstacle stands in the way of the Oracle as we come up against the magic mirror gate. Not everyone can withstand its reflections as it shows the real truth of your inside, which for a firm, is their operating activities. I don’t think I have ever grasped the importance of separating operating and financial activities, or the purpose of doing it, until I read this section. My brain thinks in pictures, so I can see the importance of having a clear model of what operating activities are occurring, as they are a key factor for whether value is being created or destroyed.
The Oracle is finally reached and can be likened to the diagram displaying the conceptual view of a firm. This chart is magical and packs in so much knowledge in such a small space. It really brings to life the solid amount of text explanations that precede it. It very much reminds me of yin and yang or the snake medallion in the NeverEnding Story, showing the balance and dual nature of life (or accounting)!
1.3 The efficiency expert
"Make use of time,
Let not advantage slip."
William Shakespeare
This content also appears on my The Efficiency Expert blog post.
Efficiency mania reached its peak around the 1890’s to 1920’s due to the Industrial Revolution and Taylor’s work on scientific management. It focused on reforming everything from education to factories but in doing so, forgot to focus on the human aspect and created automatons who weren’t supposed to think – just be efficient.
The 1980’s produced a resurgence of efficiency experts in Australia, during the ‘greed is good’ era. Payroll was a major target of these experts and once again the human aspect was ignored as ruthless cuts were made. ‘The Efficiency Expert’ movie actually touches on this theme but you may know the movie better by its other name – ‘Spotswood’.
So efficiency has certainly had its time to shine but as the good economic times rolled on, it has taken a backseat as profits just rose and rose without great effort. Jerry Maguire’s famous catchphrase, ‘Show me the money!’ just wouldn’t be quite the same if he had to yell ‘Show me the money in an efficient manner!’
You certainly don’t see movies like ‘Wall Street’, ‘The Big Short’ and ‘Wolf of Wall Street’ running around talking about efficiency either. They are all about making money and profits. As alluded to by Martin, this is the more common idea that people think about in regards to business.
My first brush with profitability was back in Year 6 when one of our subjects required us to run a business. All profits went toward the cost of our school camp and anything on top of that we got to keep. Our school didn’t have a canteen, so a few friends and I ran a sausage roll and pie day, which was so hugely popular we only had to run one! We learnt all about measuring profit but alas, nothing about efficiency.
Now with the economy struggling once again, I see the phrase ‘improving efficiency’ sneaking back into company’s reports. I previously reflected on this observation in The Company Men (and women).
1.4 Number crunching
"Things won are done; joy’s soul lies in the doing."
William Shakespeare
This content also appears on my Lucky Numbers blog post.
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Presenting the return on net operating assets (RNOA) formula slightly differently, provided a new angle to look from and allowed me to further appreciate the relationship of profitability and efficiency. I remember calculating profit margin and asset turnover many moons ago but I had forgotten (or never had it emphasised?) that the interaction of these star crossed lovers was at the heart of adding value. The relationship makes complete sense, once the study guide opens your eyes to it, and I found this well explained.
I learn by doing, so to keep myself engaged and fully process each step, I followed Martin’s calculations by plugging in the numbers I got from Clarius Group’s restated financial statements. This started off with looking at Clarius Group’s net operating assets (NOA) for 2015, which was about one third less than the 2014 amount.
The difference in NOA amounts was due to lower cash, less receivables and a noticeable write down of software value. Some companies had a dramatic change through the year due to a large one off purchase or an acquisition but Clarius Group does not seem to have any standout events. Therefore, I am assuming there was a gradual decline in cash, customers and software value over the year, which leads to my choice of calculating an average NOA figure (as demonstrated by Martin), instead of choosing the opening or closing balance. It is quite easy to see that NOA is an important figure to get correct, otherwise all future calculations are thrown out and you will not really see the reality of your firm.
You can find my calculations at the bottom of this section but in summary Clarius Group had an economic loss of $13,817,000. With 89,582,175 shares available, this meant there was a loss of 15.4 cents per share. The economic loss is greater than the loss shown in the income statement because it takes the cost of capital into consideration. Continual economic losses mean that owners are earning a lower rate than normal which can drive an investor away (Hall 2016).
Profit margin was -6.05% which suggests a loss of 6 cents for each $1 of sales. Asset turnover showed that for each $1 of NOA there was $6 of revenue generated. At this stage, I have not compared these ratios to Clarius Group’s previous years or to benchmarks for the recruitment industry so I am not sure what a “good” ratio should be.
I really enjoyed jumping into the nitty gritty of the ratio calculations and playing around with the financial statements. I am still not completely sold on using ratios but I look forward to learning more about them and being proven wrong!
I am also curious as to how not-for-profits handle their accounting and ratio calculations. Do they still track the same things as for-profits? They still need to make money and stay viable. Do they still need the same emphasis on profitability to stay successful?
Calculations
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Step 2 – Financials
Please review my restated financial reports in a separately uploaded Excel file.
2.1 Restating equity
"Go wisely and slowly. Those who rush, stumble and fall."
William Shakespeare
This content also appears on my The Lucky One blog post.
The two things that stood out to me, while reading the instructions for producing a restated statement of changes in equity, were:
• the term ‘clean surplus’ which is something I have never encountered before so it was interesting to see what that referred to
• I really enjoyed being given a solid explanation and sound reasons for why we should give restating a go
This was probably my most detailed look at the statement of equity ever! With Martin’s and Maria’s powers combined, what did they help me end up finding?
• All the equity items seem to be “real” equity and aren’t cloaked in disguise
o Issue of ordinary shares is used to raise money from the capital market and increases share capital
o Share based payments are paid to employees (instead of cash) and in this case there is a performance condition associated with obtaining the payment. Employees won’t qualify for the payment unless Clarius’ total return to shareholders exceeds the relevant ASX index. Interestingly, before AASB 2 was introduced, a company could pay non-cash benefits to employees and it wasn’t required to be reported, meaning much less impact on profit (Boshoff 2014)!
o Distribution to owners was when dividends were still paid out in 2012, back in the good old days for Clarius!
• I can easily identify Clarius made a loss in all four years by looking at the second row of my statement of changes in equity. This same amount is also identifiable as the (Loss) for the year attributed to Owners of the Company within the Consolidated Statement of Profit or Loss and other Comprehensive Income.
• I only have one item in other comprehensive income
o Foreign currency translation differences for foreign operations is a fancy way of saying that Clarius does business internationally and needs to exchange its New Zealand dollar, the Chinese renminbi, Hong Kong dollar, Singapore dollar and Malaysian ringgit back in to Australian dollars. Since exchange rates are always fluctuating, Clarius can make or lose money doing this. I classified this as an operating activity as this is an ordinary part of business activities.
That has been a pretty painless experience (so far) and it seems to be very close in showing a ‘clean surplus’ accounting example!
2.2 Restating financial position
"There are more things in heaven and earth, Horatio, than are dreamt of in your philosophy"
William Shakespeare
This content also appears on my Transformers blog post.
Completing the restating of Clarius Group’s financial statements was fun. Yes, you read that right, f-u-n! This is because it involved two of the things I love in this world:
• numbers and,
• organising things.
This made me think of the quote:
A place for everything and everything in its place – Benjamin Franklin
I also enjoy discovering new ideas that help me see things from a different point of view. I always question whether a new idea fits into my experience and if it does, I let go of older ideas to make room for the new:
Empty your cup so that it may be filled – Bruce Lee
Financial reports are just like a transformer, in that, there is more to them than meets the eye! Transformers hide in plain sight and until you view them from a new angle or perspective, you are unable to see their truly remarkable abilities. Restating financial reports has allowed me to see Clarius Group’s activities from a new perspective, which I can see will help in looking at key performance indicators.
Clarius Group’s restated balance sheet was straightforward to put together. However, I got so paranoid about not missing out any items (Maria stresses this point multiple times in her lecture) that I actually doubled up on two items! I was able to notice this error in my 2015 column because net operating assets (NOA) did not equal net financial obligations (NFO) plus equity. It seemed mostly clear cut as to what balance sheet items were operating or financial.
Operational
Clarius Group needs employees to be able to provide recruitment services and these employees need to be paid and given entitlements such as annual leave. They also need a place to work, so office space is leased for them.
Clarius Group needs databases and software to track their customers and candidates who are waiting on employment, as well as to help them perform their recruitment services. When Clarius Group provides permanent employees to a workplace, they do so under a guarantee, and must compensate a customer if the employee does not work out while under the guarantee. So let’s see how that translates into their balance sheet items:
• Small amounts of cash, Receivables, payables and plant and equipment are self explanatory and linked to providing service to customers and running business as usual.
• Current tax receivables occurred in 2013 because Clarius must have overpaid their income tax based on profit estimates and were due a refund. Current tax liabilities are the opposite situation. They are both linked to profits created from normal business activities.
• Deferred tax assets are accumulated future deductions that will allow Clarius to reduce their tax income in the future. The notes say there are differences in this figure due to employee benefits and office space leases so this asset was classified operational.
• Clarius’ intangible assets are related to their candidate databases and software so this entire amount was classified operational.
• Bank overdraft is the flipside of cash and is used to tide a firm over to help meet short term operating expenses.
• Both current and non-current provisions were related to providing employee entitlements, leasing office space or accounting for the possibility that a permanent employee does not work out during the guarantee period.
Financial
• Interest bearing liabilities are a result of Clarius selling accounts receivable invoices to a third party (I am assuming their bank). It does this to be able to meet immediate cash flow needs. It is a type of debtor finance and while it uses accounts receivable to generate cash, it is purely a financial transaction involving Clarius and their financier.
• Current and non-current financial leases are due to Clarius financing software licences over a three year period. This method of paying for software is the equivalent of a loan from a software developer. Even though the software is used in everyday operations, the leases are similar to a bond or loan as there are generally interest payments as well as paying an instalment of the principal value.
Both
• Clarius has quite low cash balances and it was only in 2014 that I split cash up into both operating and financial (using the 1% rule).
2.3 Restating financial performance
This content also appears on my Transformers #2 blog post.
In the last section, I already discussed Clarius Group’s key operating activities so let’s launch straight in to the income statement and see what items we find.
Operational
• Revenue was from the three streams of services I have previously described in my Risky Business post so it was completely related to operating activities.
• On-hired labour costs, employee benefits expense, restructuring costs and operating rental expense all relate to employees who are integral to all operating activities.
• Depreciation and amortisation are used to convert the cost of operating assets into expenses.
• Other expenses involved numerous operating overheads such as bank charges, advertising costs, travel expenses and accountancy fees.
• Foreign currency translation was previously discussed in my Equity section. To gain a true understanding of total income I realise the importance of including all sources in the restated income statement, including those classed other comprehensive income.
• Impairment loss was based on Clarius Group’s need to adjust the value of their software. An assessment showed the value they placed on their software was much higher than normal market value.
Financial
• Finance income is generated when Clarius Group interacts with capital markets and can be likened to when we earn interest from a high interest savings account
• Finance cost is related to having to pay interest and borrowing costs on debt market items
The income statement items were easy to classify and the financial statement notes assisted in determining if things like ‘other’ expenses were entirely operational or not. I found the income statement the most useful to break into bits to help me analyse how Clarius Group really earns its revenue and how it interacts with both input markets and capital markets. Restating makes you really have to delve into the notes in the financial statements and understand their activities.
I completely agree with Sue’s post in that allocating tax to the financial and operational components was not that difficult. Tax is a big part of our lives as we start to earn incomes and is not a foreign concept. Just like a company can reduce tax by borrowing more (which leads to expending more revenue on interest payments and less profit) an individual can get a tax benefit by salary sacrifice or claiming as many deductions as possible to reduce taxable income.
On a side note, I had not heard the above tax concept referred to as a ‘tax shield’ before and all I could think about was Captain America’s shield protecting him from a hail of bullets rather than arrows. Take that tax man, try and get past Captain America’s shield!
2.4 Comments about restating financial statements
I tried to make my blog posts interesting and ask a few questions to get people to engage but unfortunately did not receive many responses to my blog posts. Here are the two I did receive:
2.4.1 Comments on Lucky Numbers blog post
Comment from Sue:
I thoroughly enjoy your blog and felt compelled to click on the link regarding “negative economic profit”. Not sure I really grasp the concept but maybe it has something to with the good cash flow but resultant loss of Noni B. I am certain all of Noni B’s ratios will also be negative.
My response:
Hi Sue
Thanks for the feedback about the blog[pic]
As I understand it, the negative economic profit just shows that the company would have been better off putting their money elsewhere than running their business that year! Their return was less than a 10% arbitrary benchmark, so they could have done something else with their money and been more successful.
2.4.2 Comments on The Lucky One blog post
Comment from Germaine:
Hi, was your foreign currency translation already incorporated as comprehensive income in the statement of changes in equity in ass#1? In Aristocrat Leisure it is captured under the total but before the shareholder transactions… ie homeless!. Therefore if i add them in to my restated statement as an operating comprehensive income then my total of comprehensive income in ass#1 and the total in the restated changes in equity spreadsheet dont match. …..Maria Tyler said they have to match. What do i do? Personally I think they need to be operating comprehensive income…..but am unsure. Any ideas?
My response:
Hi Germaine
Yes, the foreign currency translation for Clarius was already incorporated.
I was going to reply with an idea but I don’t think it is right.
I was going to ask if the figure for ‘exchange difference on foreign operations’ was doubling up and already incorporating the exchange differences for the ones relating to the discontinued operations? If so, you could just adjust your 136,446 figure by 6,888 and then the totals would work
The other thought that comes to mind is that It does say that 7170 has been transferred to profit and loss which means it has been included as a gain in the income statement so it would no longer need to be included in ‘other comprehensive income’. Not sure about the (282) amount but I believe it may be included in the losses incurred from discontinuing operations. Therefore, you would only show 136,446 for foreign translations.
I have to head to work but can look at it later on. Hopefully you get a few ideas today!
2.4.3 Comments on the forum post - Issues with operating comprehensive income
Re: Issues with operating comprehensive income
by Germaine Landers - Wednesday, 13 April 2016, 11:55 AM
Thanks for responding!!
The 136,446 amount is due to foreign exchange re continuing operation whilst the -282 is due to exchange difference on translation discontinued operations and 7170 is a realised exchange difference of net investments in foreign operation of a discontinued operation because they sold two subsidiaries.
So to me both -282 and +7170 comes from the operation of the business.
If I remove +7170 and -282 from my restated change in movement of equity statement then the comprehensive income part will match..... but then the overall total equity for the year doesn't match with the total in the ASS#1 statement of change in equity.
Further the 136,446 is in the comprehensive income statement, but that statement doesn't include the values of +7170 and -282, nor does the value 136,446 incorporate them.
I add below what my restated SOCIE looks like with those two devil figures included as operating income.......
Your help is gratefully appreciated !!
Re: Issues with operating comprehensive income
by Germaine Landers - Wednesday, 13 April 2016, 11:26 PM
Kym,
After hours going through Aristocrat Leisure financial reports, I have come to a conclusion. The two items giving me eye ache are 'reserves' from discontinued operations and as such are a type of equity. I just now need to go find something that validates my thoughts.... but I will do that tomorrow.
However, at least I can rest easy knowing all my totals match wear the are suppose to match in the Restated SCOIE! whew!
Re: Issues with operating comprehensive income
by Kym Chisholm - Tuesday, 26 April 2016, 10:38 PM
Hi Germaine
I've finally had some more time to look into this and if I am on the right track....I might be able to shed a bit more light on this issue.
I've responded on your blog:
2.4.4 Comments on ASS#2 - Step 2: help! blog post
My response to Germaine on the comprehensive income issues:
This has been one of the toughest issues I’ve seen when doing the restating. I’m sorry my initial thoughts were not very good or helpful. I was rushing out the door to get to work and was trying to throw some ideas out after reading the notes sections you’ve mentioned in this post.
I think I can finally shed a little bit of light on this issue?!? Unless you have already read AASB 121 –
It is kind of a double up and it is called “recycling” from what I can gather. I have popped some url’s for further reading underneath the following AASB 121 paragraphs…
Paragraph 32 states:
Exchange differences arising on a monetary item that forms part
of a reporting entity’s net investment in a foreign operation (see
paragraph 15) shall be recognised in profit or loss in the separate
financial statements of the reporting entity or the individual financial
statements of the foreign operation as appropriate. In the financial statements that includes the foreign operation and the reporting entity (e.g. the consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment in accordance with paragraph 48.
Paragraph 41:
These exchange differences are not recognised in profit or loss because
the changes in exchange rates have little or no direct effect on the
present and future cash flows from operations.
The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation
Paragraph 48:
On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognised in other comprehensive income and accumulated in a separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (see AASB 101 Presentation of Financial Statements(as revised in 2007)).
Further reading:
–recycling-equals-double-counting.html
Germaine’s response:
You are a star. I have been round the mulberry bush so many times with this. I sat down tonight to give it one final push. I re-read as many notes as I could, I had previously googled my heart out….. what I worked out reading through Notes 21 and 36 (again!) $7,170 was being reclassified from equity to p/l because it was discontinued items. I am relieved that finally I am the right track.
I had also previously blogged that there may have been a double up of the $7170 amount…..and I was totally incorrect because what I didn’t see was the difference in the sign +/- ie taking it out of the equity bucket and adding it to the P/L. Silly me!
Interestingly enough the $282 figure is an enigma. I can’t see the flip side of the reclassification. I suspect that they can’t write notes on everything.
Lastly, thank you very much for getting back to me. This would have taken you quite a bit of effort and time, which I am sure you are pushed for as well. Your help is truly appreciated.
2.4.5 Comments on ASS#2 – Step 2: How did I find this learning task?
My response to Germaine’s reflections on the learning task:
I thought this was a really well written reflection on the learning task. I can feel a bit of frustration and stress poring out onto the blog post and I would like to send my best wishes to you and your Mum.
I do share some of those frustrations in being a flex student. However, I do think there is an expectation in the education world, that students should be spoonfed their answers and this course design does not match up with that expectation at all!
Maybe there isn’t a black and white answer…maybe it is a judgement call and this is part of you showing your decision making as an accountant. You are very articulate and express your views very well. I don’t think the actual answer will matter much if you show your thinking. I think that is the point of the course and you definitely got one of the toughest issues to showcase your thinking![pic]
I hope my comments pointing you to the AASB standard and further reading help a bit. It certainly made me learn something new anyway!
If I was in your shoes I think I would do the same thing and leave them in equity and not add them to income. These items are from disposal of foreign operation and a discontinued operation. I think adding these in to your income would skew your ratios because it is income that will not be received next year and has no place in forecasting ongoing income.
Germaine’s response
I certainly agree that this course isn’t a spoon fed course. I actually really enjoy it (believe it or not) – however the pressure the last two weeks has been horrendous. Like most of us, especially under pressure, I want to know the answer so I can move on to the next target. I really hate unknowns.. they keep me up at night![pic]
You do make me laugh, as does Martin’s email now the pressure is off a little. Thinking is all I do… !!!
It is funny, I am sure I searched the AASB standards late one night, although it didn’t make as much sense as when you sent it through. Maybe it has just taken all this time for me to understand what it really means.
But the good news is, although I am under the pump to get the draft assignment out on Friday, my mum comes home tomorrow! Woohoo!!!
Your comment have been wonderful and I am pleased that you got something out of it as well!
2.4.6 Comments on Restating begins blog post
My response to Sue about cash assumptions:
Hi Sue
You are light years ahead of the rest of us! I just started restating the balance sheet today.
Noni B has tons more cash than the Clarius Group! I found my allocation of cash pretty clear cut as most years the ratio of cash to revenue was under 1%.
I think you have made a reasonable assumption. Short term deposits is cash put in an account (for less than a year) that has a fixed maturity date and its whole purpose is to earn interest. If you withdraw out of it there are penalties and you don’t earn the full rate so allocating this whole amount as a financial activity is valid from my point of view.
Clarius group just has cash and deposits at call, so the language is a little different. Deposits at call are a bank account that offers savings AND checking transactions. It does not have a fixed period and there are no penalties for withdrawing. So I have lumped all my cash together when calculating the 1%.
I think cash in transit is more than credit card transactions still to be realised. I think it also encompasses online transfers or even bank deposits (from cash daily takings) that have been received at the bank late and aren’t posted straight away into their bank account.
I think its a good call to split out the term deposits and just use cash at back, cash on hand and cash in transit to do your 1% calculations on[pic]
Have fun in NZ! Whereabouts are you going while over there?
Sue’s response:
Thanks for your comments. It is great to have insight from people with industry knowledge. We are off to North Island – Auckland, Coromandel Peninsula, Rotorua, Taupo, Napier and Wellington. Will be a lovely break.
2.4.7 Comments on Continuing the Nerd tendencies! blog post
My response to Sue about share-based payments:
Hi Sue
I found a pretty good website for share based payments -
Clarius Group also offers share based payments to employees. From what I gather it is essentially paying part of their salary with shares instead of cash. So the employees perform their jobs and can be compensated by a share based payment. There are two types: cash settled and equity settled and it looks like both our companies give equity settled share based payments.
The website link above explains what happens on the accounting side fairly well. The share based payment reserve tracks any payments made to employees. Equity is increased if share payments are made. A company normally provides options which gives employees the right to buy ordinary shares but they may not do so for various reasons (including not meeting the conditions). If options are not exercised than the share based payment reserve gets adjusted to reflect this.
It looks like Noni B has service and performance conditions that need to be met before receiving the payment but I could not see what they specifically were. The performance condition for Clarius Group is that the total return to shareholders needs to exceed the relevant ASX index. Interestingly, before AASB 2 was introduced, a company could pay non-cash benefits to employees and it wasn't required to be reported, meaning much less impact on profit!
2.4.8 Comments on Continuing the Nerd tendencies! blog post
My response to Sue about deferred tax assets:
I also really liked your question about deferred tax assets. I had not really thought about that aspect before so I looked into it a bit further.
AASB112 got issued in 2015 and it seems to crack down a bit more on deferred tax assets (DTAs). Para 34-35 are quite clear on stating that a DTA can only be recognised if it is probable a future taxable profit will be available.
When the DTA arises from a tax loss but the company has a history of recent losses, they are required to show evidence for why it should be recognised. The company is also required to assess each year if their recognised DTAs are still likely to be recoverable.
You can see in Note 7 for NoniB's 2015 report that $1800000 of deferred tax assets is for 'future tax benefit of tax losses' and they then justify this amount, saying that while they have had losses, new management has made so much improvement they expect to return to profit.
Clarius Group, on the other hand, mention that they have unrecognised DTAs in relation to their losses. They have not been able to recognise them in the financial reports because they have had 4 losses in a row and cannot justify the probability of returning to profit soon. They also had a derecognition of tax losses in their 2015 report.
Para 24 talks about DTAs that arise from temporary differences and while they also should be recognised only when future profit is probable, there are a few more exceptions (which AASB112 explains) around these items. This is why they are shown in the annual report. Clarius Group do have a footnote saying DTA's relating to employee benefits, lease provisions, etc are not included in revenue.
Not sure if I have explained that in a way that all makes sense but I found this something really important I will probably look for in the future. So thank for bringing it up or I wouldn't have even noticed it!
Sue’s response:
I wish I had your time and enthusiasm. Thanks! you have helped with some great reading for me to follow up on. $18M is a serious deferred tax asset. With unemployment at the current high levels lets hope that Noni B and Clarius can learn better ways of doing business so they can post a profit sometime soon.
2.4.9 Comments on Balance sheet confusion blog post
My response to Sophie:
Hi Sophie
I have my restated spreadsheet up on my blog post –
My company is like yours with current and non current headings so feel free to take a look at it. You are right, when restating your balance sheet you can completely forget about what is current and non current. Instead you bundle all your current and non-current assets together that you deem to be operational and bundle all your current and non-current assets together that you think are financial. Same for liabilities
Response from Sophie:
Did not receive a reply but my comment was ‘liked’ by two people so I hope that meant it helped them.
2.4.10 Comments on the forum post - Restating income statement
Re: Restating Income Statement
by Kym Chisholm - Tuesday, 26 April 2016, 8:37 PM
Hi Nathan
If you have a look at Week 5 resources, Maria has her Wesfarmers Restated Financial Statements up. The online lecture for week 5 also helps explain this as well.
You are right, it is operational. In Maria's case, she had a positive figure for discontinued operations so she put it in the operating income. Whereas you have a negative figure so you would place it in the operating expenses.
The reason why it is listed separately from other expenses and why tax has been paid separately can be found in AASB 5 (). This is a standard put out by the Australian Accounting Standards Board and is a legal requirement that companies must follow. It states in paragraph 33:
33
An entity shall disclose:
(a) a single amount in the statement of comprehensive income comprising the total of:
(i)the post-tax profit or loss of discontinued operations and
(ii)the post-tax gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:
(i) the revenue, expenses and pre-tax profit or loss of discontinued operations;
(ii) the related income tax expense as required by paragraph 81 of AASB 112
(iii) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and
(iv) the related income tax expense as required by paragraph 81 ofAASB 112
.
The analysis may be presented in the notes or in the statement of comprehensive income. If it is presented in the statement of comprehensive income it shall be presented in a section identified as relating to discontinued operations, ie separately from continuing operations. The analysis is not required for disposal groups that are newly acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition (see paragraph 11).
Re: Restating Income Statement
by Nathan Welch - Wednesday, 27 April 2016, 10:34 AM
Hi Kym,
Thanks for your in depth answer, it was very helpful and i can see now that it belongs in operating expenses.
Good luck with your assignment
2.4.11 Comments on the forum post - Restating Balance sheet
Re: Restating Balance sheet
by Kym Chisholm - Thursday, 28 April 2016, 9:15 PM
Hi Mikiellie,
You need to check your Total Operating Asset row. Specifically your formula in L41 and M41. In your sum it does not include L40 and M40 which is an extra figure for 2013 and 2012.
This is throwing out your Net Operating Assets.
You also have a typo in M60. You have put in the figure $40,844 and it should be $40,884.
Everything should balance ok after that.
Not sure if you have seen Maria's online lecture but she recommended linking all the figures from your initial balance sheet into your restated balance sheet to avoid those typo errors.
I've reattached your spreadsheet and if you have a look you will see an extra tab called 'Restated Financial Statements (2)' where I have redone the Balance Sheet for you to refer to.
Hope that helps!
Response from Mikiellie:
Did not receive a reply but have noticed that the draft of her assignment now has a spreadsheet that balances and the errors I mentioned have been corrected so assume these comments helped Mikiellie understand the errors.
2.4.12 Comments on Restated Balance Sheet blog post
My response to Debora on why restated balance sheet was not balancing:
Hi Debora
You are missing the ‘Non controlling interests’ row in your Equity section. Without having this entry you are overstating NFO + Equity which is why its not balancing with NOA.
The equity section should not be changed in anyway so just need to add this row back in to the restated equity section (in your balance sheet) and you will find everything will balance.
Hope that helps!
Response from Debora:
Hi Kym,
It does balance now. Thank you so so much[pic] !!
All the best
2.4.13 Comments on the forum post - financial income
Re: financial income
by Kym Chisholm - Thursday, 28 April 2016, 10:11 PM
Hi Simona,
The term "members of parent entry" just means all the subsidiaries that make up MACA Ltd.
It might be worthwhile reviewing the section titled 'Not just one company' within Chapter 3 of the Study Guide.
Your income statement says it is 'Consolidated' which means there are a bunch of companies (subsidiaries) that make up MACA Ltd and MACA Ltd itself is referred to as the parent.
Your 2015 and 2014 profit figures on the annual report show that in both these years all the profit made was attributable to MACA's subsidiaries that it controls.
If MACA had non-controlling entities it would mean MACA would own less than 51% and would not control these entities. The annual report for 2015 and 2014 shows no entry for this field. If it did show an entry this would help adjust the profit so we don't overstate the profit amount. A company that does not fully own a subsidiary cannot claim 100% of their profit as their own.
Step 3 – Clarius Group services
Clarius Group offers three different types of services to their customers, which is quite convenient for step three!
They provide
• Traditional recruitment services and place permanent, temporary and contract workers in both public and private sector roles
• Offer managed services (including payroll) and;
• On demand information technology (IT) skills to help companies (who don't have the right people or resources) develop IT projects by providing the talent.
Not surprisingly, recruitment agencies hold their cards close to their chest and it has been quite hard to figure out reasonable estimates for fees they might charge for their services.
While trawling through a few forums I found the issue of their fees and charges to actually be quite emotive. There were people accusing recruitment agencies of dodgy dealings and screwing recruitment candidates and businesses over, while people in the industry were defending their honour and practices.
In the end I managed to get some guidance on fees that the Clarius Group might charge for providing the following services.
• A recruitment service that provides an experienced permanent administration assistant for a role in a private business
• Payroll services to an external private business
• Providing a company with on demand IT support by supplying a contractor from their contractor pool to finish a short term project
3.1 Permanent recruitment
The median base salary for a permanent administration position is currently $52,000 while the median total salary package is $57,488 (People2People 2016).
Fees for permanent recruitment are usually calculated as a percentage of the total salary package value. I found two separate forum threads that mentioned 15% as a good indication of the fees involved for providing a permanent placement (Moz 2012; mango52 2013). While this information is slightly dated, I am still happy to use this assumption as I assume these margins do not change drastically year to year and it is within the period of when the economic conditions took a downturn in Australia.
Revenue for filling a permanent administration position = [pic]
3.2 Payroll services
The pricing structure for payroll services seems pretty standard and typically involves a flat monthly base fee ranging from $20 to $100 as well as a charge for each employee paid which would cost between $1 and $10 per employee (Brooks 2015).
The above information was supported by actually finding an online payroll fee calculator that stated there would be a $25 service fee per month and a cost of $6.48 per month to pay one person on a fortnightly basis (SmartPayroll 2014).
This payroll service would be an example of a curvilinear function if the company paying for this service examined this cost. The charge for each employee exponentially increases, rather than linearly, as at certain staff cut-off numbers the price does increase but only by a small amount.
Revenue for providing yearly payroll services to a small private company with ten employees = [pic]
3.3 On demand IT support using a contractor
Hourly contracting rates for Queensland went against the norm and actually increased to $89 as shown in the ITCRA Employee Trends Report (cited in Dinham 2015). Total fees for a contractor include their hourly rate plus “on costs” (super, payroll tax, etc) plus Clarius Group’s margin. A fee of contractor hourly rate + 25-30% for costs and margin was provided as an example and will be used in my assumptions (Moz 2012).
Assuming the IT resource on demand is contracted out for an eight hour day, the revenue for providing an IT contractor to work on a one month project (after we pay the contractor their $89 per hour salary) = [pic]
3.4 Contribution margin
The four main costs associated with a recruitment firm are (Begg 2016)
• People
• Rent
• Advertising
• Insurance
Clarius Group is a service business and needs lots and lots of people to be successful (both recruiters and job candidates). Clarius obtains most of its revenue from contractors (who cost more as they work more) and as it is a sales based industry, I assume there would also be a large emphasis on paying commissions to recruiters. This means I am assuming that the majority of Clarius Group’s ‘on hired labour costs’ would be variable. The income statement shows on hired labour costs was a whopping 78.6% of revenue which I believe would be equivalent to cost of goods in a retail business.
Rent, advertising and insurance are all fixed costs but as we can see in Clarius Group’s income statement, these are of a much smaller amount. Other expenses listed in the income statement are:
• Employee benefits which are things like annual leave (only paid to full time salaried employees) so they are fixed.
• Depreciation is fixed
• Already covered rental expenses (fixed)
• Most other expenses listed in the notes, covering things like utilities, advertising, insurance, etc are all fixed. However, I did note three expenses that would be variable costs:
o Bad and doubtful debts
o Travelling expenses
o Recruitment costs
If I add the above three variable costs to the ‘on hired labour costs’ it can be seen that total variable costs are now 80% of revenue and I will use this percentage as a guideline in calculating individual variable costs for the three services provided by Clarius Group.
3.4.1 Contribution margin calculations
|Service provided |Sales |Variable cost |CM |
|Permanent administration |$8,623 |Permanent placement has less variable cost associated with it than |$3,449 |
|placement | |those associated with contractor placements. Using a figure of 60% | |
| | |of sales to estimate variable costs | |
| | |8,623 x 0.6 = $5,174 | |
|Payroll services |$1,078 |I think payroll services would be more dominated by fixed costs. |$647 |
| | |This is assuming staff providing these services are on a fixed | |
| | |salary. Using 40% of sales as estimate | |
| | |1,078 x 0.4 = $431 | |
|On demand IT |$5,340 |Using 80% of sales as my estimate. This is a contractor service as |$1,068 |
| | |discussed above. | |
| | |$5340 x 0.8 = $4,272 | |
3.4.3 Restating income statement using contribution margin
For my own personal interest and learning, I completed another restatement of the income statement by classifying items by cost. Please note the net operating income is not the same as Clarius Group’s original income statement as I did not want to skew my estimates by including the one off restructuring and impairment expenses.
| | | | |2015 | |
| | | | |$'000 | |
|Revenue | |178,953 | |
|Less variable costs: | | |
|On hired labour costs | |(140,672) | |
|Bad and doubtful debts | |(1,791) | |
|Travelling expenses | | |(861) | |
|Recruitment costs | | |(412) | |
|Total variable costs | |(143,736) | |
|Contribution margin | | |35,217 |20% |
|Less fixed costs: | | | | |
|Employee benefits expense | | |(28,419) | |
|Depreciation and amortisation expense |(1,041) | |
|Operating rental expense | | |(3,773) | |
|Telephone charges | | |(779) | |
|Consultancy fees | | |(573) | |
|Software support | | |(561) | |
|Office expenses | | |(548) | |
|Subscriptions | | |(464) | |
|Accountancy, audit, tax fees | | |(451) | |
|Insurance | | | |(410) | |
|Legal fees | | |(352) | |
|Bank charges | | |(299) | |
|Marketing and promotional expenses | | |(279) | |
|Net advertising costs | |(226) | |
|Other operating overheads | | |(1,886) | |
|Total fixed costs | | |(40,061) | |
|Net operating income | | |(4,844) | |
3.4 Restraints
Still to do
Step 4 – Feedback
4.1 I provided feedback to:
4.2 I received feedback from:
References
Begg, S 2016, Operating costs of a recruitment company, In house recruitment group, blog post,
Boshoff, A 2014, Accounting for share-based payments, Pitcher Partners,
Brooks, C 2015, Choosing a payroll service: a buying guide for businesses, Business News Daily, 30 October,
Dinham, P, ICT contracting increasingly competitive, but hourly rates drop, ITWire, 30 April,
Hall, S 2016, What is a negative economic profit, Ehow,
Mango52 2013, How much do recruitment agencies charge? Whirlpool, forum, 20 January,
Moz 2012, Using recruitment agencies – experience/advice, HRBuzz, forum, 13 June,
People2People 2016, Salarysiite,
SmartPayroll 2014, Pricing,
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