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UUAC5300 Accounting and Finance for Executives - Individual Report Assignment, UUNZ Institute of Business, New Zealand

Learning Outcomes -

  • Demonstrate applied knowledge of the accounting regulatory environment and the accounting and finance processes, systems, concepts and techniques used globally in business practice.
  • Apply financial statement analysis, management accounting concepts and finance frameworks to identify and solve complex organisational problems creatively and practically to increase the effectiveness of management decision making, evaluate and change organisational systems, and develop organisational solutions to "real world" problems.
  • Appreciate ethical frameworks and codes of practice and their application to accounting and finance outcomes to help comprehend and address complex ethical dilemmas.

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Answer - Accounting and Finance for Executives

Introduction

In this report, there are two parts. In both the parts of the report, the different aspects of Fonterra's financial performance and financial position in the financial year 2018 will be evaluated with the help of the annual report 2018 of the business. In the first part, the longer and explanatory question of this report will be answered, and in the second part, the short question solution will be given.

Section A -

Question 1 - Identify those core ethical values and critically examine how these can enhance Fonterra's reputation and commitment to become the world's most trusted source of dairy nutrition.

There are two core ethical values of Fonterra, which helps to build Fonterra's reputation in the market and show its commitment, which leads to the business becoming the world's most trusted sources and nutrition. These ethical values will be discussed here. The first ethical value is honesty, and this ethical value ensures that the business solves its conflict of interest with honesty, and this increases the faith of different stakeholders in the business. It has also made a conflict of interest register to increase transparency. Also, the business show honesty in accepting their financial performance failure as it has shown in the case of its financial performance in 2018. This makes the business look more transparent than its competitors. This helps to build the trust of the stakeholders in the market for the company.

The second ethical value is integrity, and due to this core value, Fonterra has opened a whistle blowing hotline (Fonterra.com. 2019.p. 70). In this hotline, any unethical practice going on in the business can be reporting, and the user can keep its confidentiality. This made the stakeholder believe that the business has integrity, and this leads to an increase in the trust of the stakeholder in Fonterra. There are some other ethical values of the company other than these two ethical value and they are Co-operative spirit, do what's right, challenging boundaries and make it happen (Fonterra.com.2019.p.8).

All these have helped enhance Fonterra's reputation and commitment to become the world's most trusted source of dairy nutrition.

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Question 2 - Identify Fonterra's group policy and approach in managing liquidity risk under both "normal" and "stressed condition."

The current Fonterra's group policy and approach in managing liquidity risk under both "normal" and "stressed conditions" are to keep adequate cash and other cash equivalent assets of the business to fulfil its operational expense of the business for about 80 days, and these operational expenses include the financial obligation of the business. Fonterra's group keep adequate cash and marketable securities with itself to fulfil any of its credit obligations and also to close a market position (Fonterra.com. 2019.p. 97). The business review and select its funding facilities according to the profile of the business. All these factors fall under the group policy and approach in managing the liquidity risk of the business in all situations.

Explain the meaning of "stressed condition" and identify alternative policy available to mitigate such condition.

The stressed conditions are the financial situation in the business when it is not performing well financially due to different business and market factors. In another word, it can be defined as the situation in which the business is not earning enough resources to fulfil its financial obligations (Fonterra.com. 2019.p. 97).

The alternative policy that available to mitigate such situation by adopting a negative cash conversion cycle meaning increasing the amount of the payable period of the business significantly more than its receivable period that it gives to the customers. The business also needs to make its inventory management more efficient to reduce its inventory period. These steps will make the business's cash conversion cycle its strength and give the business ample time to fulfil its obligation and recover from any stressed condition. This policy is possible for the business as the business is one of the largest Dairies products company, and this gives the business a great extent of bargaining power in the market.

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Question 3 - Fonterra's FY 2018 results failed to meet its financial and operational target. Critically examine the remedies Fonterra is taking to improve its FY19 performance?

There are some strong and weak points in the remedies taken by Fonterra to improve its Financial Year 2019 performance, and these strong and weak points will be discussed here. The remedies of the company will be explained, and then their strong points and weak points will be evaluated.

The first remedy is that the company plans to use to improve its financial year 2019 is a re-evaluation of the investment, significant assets, and partnerships to see whether they are meeting the need of the business for which they have been included in the business. It will be also be evaluated whether they are matching strategies and able to give targeted return to the business. The strong point of this remedy is that the alignment of the assets, partnership, and investment of the business according to the business strategy. On the other hand, this remedy does not clarify which are the major assets of the business, and this is one of the weaknesses of the remedy as it does not clarify does not who the business will rate is an asset is major or not. Some current assets may not as major as non-current assets in term of the monetary term but have a major impact in the operation of the business, and this impact may be missed by this re-evaluation (Fonterra.com. 2019.p. 17).

The second remedy is that the company plan is to getting the basic right of the business and increasing financial discipline of the business. The strong point of this remedy is that one of the reasons for the bad performance of Fonterra is some of its aspect lack financial disciplines, and these areas can be addressed by this remedy. On the other hand, there is a major weakness of this remedy, and that is it does not clearly state how it will ensure that the financial discipline will be increased or which areas will make it address.

The third remedy is that the company plans to increase the accuracy of its forecasting by keeping a clear idea about the potential risks and opportunities of the business. The strong point of this remedy is that the business operation will be more efficient if this remedy can be fulfilled. On the other hand, there is a major weakness in it as it how it plans to get an accurate idea of the potential opportunities and risk differently than existing measures that the business has for forecasting.

Question 4 - The FY18 group's normalised consolidation loss before taxation was 154 million as a result of non-operational adjustments. What will be the group's actual result without adjusting those non-operational adjustments?

Calculation of the group's actual result without adjusting those non-operational adjustments

Particulars

Amount (in $million)

Consolidation loss

-154

Add:


Reduction in the carrying value of investment in Beingmate

439

WPC80 recall costs

196

Time value of options

5

Finance income

-23

Finance Cost

439

The group's actual result without adjusting those non-operational adjustments

902

Table 1: Calculation of the group's actual result without adjusting those non-operational adjustments

In the above calculation, all the non-operational expense has been added to the consolidated loss amount, and all the non-operational income has been deducted from the consolidated loss of the business. At the end of this process, the group's actual result without adjusting those non-operational adjustments has amounted to $902million.

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Question 5 - The FY18 group consolidated loss before taxation was 154 million, while the consolidated cash flow showed a closing cash surplus of 285 million. Critically analyse the difference between the two results.

There are many reasons for Fonterra's group consolidated loss before taxation differing from the consolidated cash flow of the business differing in the financial year 2018 significantly. The group consolidated loss before taxation was 154 million, whereas consolidated cash flow showed a closing cash surplus of 285 million. The first reason and main reason for this difference happening in the amount is the fundamental difference in the cash flow statement and income statement recording. The cash flow statement in which the consolidated closing cash surplus is stated record the earnings of the business on a cash basis and the income statement in which consolidated loss is stated record the earning on an accrual basis (Inc.com 2019). Therefore, many of the noncash charges or incomes are not included in the cash flow statement and many cash income or expenses are not included in the income statement. Therefore, the impairment loss, depreciation, foreign exchange losses are adjusted back with the profit of the business in the cash flow statement and also the working capital changes are also added to the profit which again increases its amount. This leads to the net cash flow in the Fonterra's cash flow statement's operational activities showing a higher amount than the income statement's net income significantly (Fonterra.com. 2019.p. 90).

Then investing and financing activities of the cash flow statement reduces the amount of net cash flow of the business, but still, the amount is higher than the consolidated loss of the group. Therefore, the difference occurs due to the one showing cash amount which available with the business and another showing the net income of the business after deducting all expense. The business needs both the result to be high as one decides its cash capabilities, and another decides its financial sustainability in the long period.

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Section B -

a) Describe the four components of financial statements in FY18 annual reports. What are they and describe what each is designed to report?

The four components of financial statements in FY18 annual reports are Income Statement, Statement of financial position, Cash Flow Statement, and Statement of change in Equity (Fonterra.com. 2019. p. 86-90). The income statement is designed to report Fonterra total revenue, cost, and net income that business has recorded from its operation in the financial year 2018 (Bragg and Bragg 2019). Statement of financial position is designed to report the equity, assets, and liabilities of the business on a particular date (My Accounting Course 2019). Cash Flow Statement is designed to report how different decisions or activities of the business impact the cash flow or cash and cash equivalent of the business. The activities of the business under this financial statement can be divided into three parts, and they are investing, operating, and financing. Statement of change in Equity is designed to report the change in the different elements of the equity component of the business in a given period (Accounting-simplified.com 2019).

b) State the accounting equation in $ terms for Fonterra at the beginning and end of the financial year.

The accounting equation of the Statement of Financial Position is stated below.

Total Assets = Total Equity + Total Liabilities

Therefore, the accounting equation in $terms for Fonterra at the beginning of the financial year is stated below.

$17842million = $10594 million + $7248 million

Also, the accounting equation in $terms for Fonterra at the end of the financial year is stated below.

$18015 million = $11666 million + $6349 million

c) Identify the two largest revenue sources of Fonterra for FY2018 and state the sources' respective amount in monetary terms.

The two largest revenue sources of Fonterra for FY2018 are Ingredients, and Consumer and Foodservice. The Ingredients, and Consumer and Foodservice amount to $16306 million and $7122 million, respectively, for the FY 2018 (Fonterra.com. 2019.p. 92).

d) Has cash flow at the end of 2018 improved or declined from 2017, and why?

The cash flow at the end of 2018 has declined from 2017 due to the high amount of Bank overdraft that Fonterra has taken from its bank (Fonterra.com. 2019.p. 90).

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e) Identify the two largest expense items of Fonterra for FY2018 and state the items' respective amount in monetary terms.

The two largest expense items of Fonterra for FY2018 are the cost of goods sold and administrative expense. The cost of goods sold amount in monetary terms in the FY2018 is $17279 million, and the administrative expense in monetary terms in the FY2018 is $873million (Fonterra.com. 2019.p. 86).

f) What is the largest non-current asset the company owns and state its opening and closing net book value?

The largest non-current asset that the company owns is Plant, property, and equipment. The opening net book value of Plant, property, and equipment is $6391million, and the closing net book value of Plant, property, and equipment is $6810 million (Fonterra.com. 2019.p. 88).

g) Does Fonterra provide information about its borrowings? If yes, give two examples of its largest borrowings and also specify their respective amount in monetary terms.

Yes, Fonterra provides detailed information about its borrowings. The Medium-term Notes and Bank Loans are examples of Fonterra's largest borrowings. The amount of Medium-term Notes in FY2018 is $4640million and in FY2017 is $4573million. The amount of Bank Loan in FY2018 is $1128million, and in FY2018 is $854million (Fonterra.com. 2019.p. 97).

h) Which accounting firm audited the financial statement and what opinion was issued?

PricewaterhouseCoopers (PWC) is the accounting firm which audited the financial statement of Fonterra in the financial year 2018. The opinion that was issued is audited financial statements, and summary financial statements are consistent with each other of Fonterra and also that the financial statement and summary are made according to the guideline issued in FRS- 43: Summary financial statements which have been published by the New Zealand Accounting Standard Board (Fonterra.com. 2019.p. 103).

i) How are the operations of Fonterra financed?

The operations of Fonterra are financed by inventories, Trade, and other receivables, Amount owing to suppliers, payables and accruals, and other movements (Fonterra.com. 2019.p. 90).

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j) Would you invest in Fonterra and why?

No, I would not invest in Fonterra due to many weaknesses found in its financial performance and financial position in the financial year 2018, and these weaknesses will be discussed here. The first weakness that has been identified is the net income from its operation in the financial year 2018, and this is a bad sign for the business as it shows the negative growth of the business in term of its profitability. The second weakness is the loss of the business in its comprehensive income statement, and this means another investment of the business has not been profitable.

The third weakness is the increase in the proportion of liabilities in Fonterra, and this means the financial obligation of the business has increased in the financial year 2018. It has also been noticed that both current liabilities and non-current liabilities of Fonterra has increased and this means that both short term and long term obligation of the business and this is not a good sign for the sustainability of the business.

The fourth weakness is Fonterra is continuing to give dividends to its shareholders in the market even when there is a loss in its operation and other income sources, and this is making the business more financially weak. Although, this dividend may give return to Fonterra's shareholder, but in the long run, the financial weaknesses which increased by this dividend payment will impact the share price of the company share that the shareholder hold negatively. The fifth weakness is the decrease in the cash, and cash equivalents of the business and this are mainly due to the company taking a high amount of Bank overdraft from its bank account (Fonterra.com. 2019.p. 86-90). This, shows that the financial capabilities of the business are decreasing, which is not a positive sign for the business. All these are weakness which has been identified. For these weaknesses, I will not invest in Fonterra.

Conclusion

In this report, a different aspect of Fonterra's financial performance and financial position in the financial year 2018 had been evaluated. After evaluating all aspects of the business, it had been concluded that Fonterra is not a good investment option in the current situation.

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