Foreign currency items in the Statements of Financial Position are converted at the rate of exchange ruling at balance date. Exchange rate gains or losses are brought to account in determining the net profit or loss in the period in which they arise, as are exchange gains or losses relating to cross currency swap transactions on monetary items. Exchange differences relating to hedges of specific transactions in respect of the cost of inventories or other assets, to the extent that they occur before the date of receipt, are deferred and included in the measurement of the transaction.
Exchange differences relating to other hedge transactions are brought to account in determining the net profit or loss in the period in which they arise. Foreign controlled entities are considered self-sustaining. Assets and liabilities are translated by applying the rate ruling at balance date and revenue and expense items are translated at the average rate calculated for the period.
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Exchange rate differences are taken to the foreign currency translation reserve. 2. Inventories (AASB 1019) as a general principle, inventories are valued at the lower of cost (including fixed and variable factory overheads where applicable) and net realizable value. Cost is determined on the basis of first-in-first-out, average or standard, whichever is the most appropriate in each case. 2. 3 Revenue (AASB 1004) Revenue is recognized to the extent that it is probable that economic benefits will flow to the Group, at the point where a right to consideration or compensation has been established and where the amount of the revenue can be reliably measured.
Terms of trade in relation to credit sales average between 30 to 45 days from the date of invoice. The Group operates in a number of diverse markets, and accordingly the terms of trade vary by country. Revenue is recognized net of the applicable amounts of value added taxes such as Australian goods and services tax. 2. 4 Changes in Accounting Policies (AASB 138, 1001) The Group have adopted the following change in accounting policy on returnable containers. In the past returnable containers were reported as current assets held at deposit value.
The excess cost over deposit value was reported as non-current assets. Given the nature of these assets, it has been decided to reclassify these assets totally as non-current assets. The returnable containers remain the property of the Group throughout their useful life. The life of the assets has been determined to be longer than one year. The containers will be sold and returned a number of times during their life that is greater than one year. Accordingly, returnable containers are recognized as non-current assets and fully depreciated over their estimated useful life.
No change to the net profit reported resulted. The financial impact of the change in the current year has resulted in a reclassification within the Statements of Financial Position and disclosure of the depreciation expense. Comparative information has been restated to reflect this change. Another significant changing issue is the application of the AASB138, under the revised accounting standards, intangible asset is permitted to be carried forwards as an asset only when it has been externally acquired, not internally generated.
Internally generated intangible assets (except internally generated development expenditure) are allowed not to be carried forward as assets. This has a great influence on the investments in bottler’s agreements account, which has a sharp decrease of $1. 9 billion between 2004 and 2005. 3. Flexibility in the Selection of Company’s Key Accounting Policies Being this is one of the well-known Company in Australia, Coca Cola Amatil may be considered does have sufficient flexibility in choosing their accounting policies due to the fact that Australian government heavily regulated the financial reporting issue.
In Australia, all companies are obliged to comply with accounting standards, pronouncements of the Accounting Standards Board, Urgent Issues Group Consensus Views and the Corporation Act 2001, which constrains financial managers at a great extent on how to manipulate those accounting numbers to satisfy their potential clients and shareholders. However, there is no absolutely rigid mode for Coca Cola Amatil to choose, in other words, the CCL management still has certain amount of flexibility in selecting how to depreciate current assets, foreign currency translations, capitalize some costs as well as the employees’ benefits and so on.
The management always through selecting key accounting policies to highlight the company’s performance, in order to incentive interests of shareholders together with the potential clients. According to the notes mentioned in Coca Cola Amatil financial report, it is indicated that because of the adopting certain International Financial Reporting Standards policies, the company has made some modifications to comply with those new standards. (Appendix 3) 4. Accounting strategy CCA operates in the highly competitive nonalcoholic beverages segment of the commercial beverages industry.
They face strong competition from many other general and specialty beverage companies. Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of the Company’s Board of Directors. CCA’s financial report has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. It has been prepared on the basis of historical cost, except for derivative financial instruments which have been measured at fair value. CCA Ltd adopts a historical cost principle of accounting.
Historical cost is the system of accounting that bases asset values and expenses on the actual prices paid, rather than on market valuations. It is allows for consistency and comparability. Most of the accounting policies adopted by CCA similarity to other companies in the industry, because Australia regulated all companies to comply with accounting standards. However, the following will show as the key profit drivers of CCA’s success. 4. 1 Inventories: Net realizable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.
Costs of inventories include the transfer from equity of gains or losses on qualifying cash flow hedges relating to inventory purchases. Under the AASB 1019, CCA’s inventory is the cost plus the net realizable value, which cause total inventories increased from $384M to $595. 9M. (Appendix 4. 1) 4. 2 Revenue: CCA recognized revenue at the net of discounts, allowances and applicable amounts of value added taxes. Some specific recognition criteria must also be met before revenue is recognized. CCA generate increased total revenues in recent year. Appendix 4. 2) 4. 3 Foreign currency translations CCA had a Foreign Currency translation increased from $45. 7M to $59. 2M in 2005. This has been taken to the balance sheet instead of showing it as a gain in the profit & loss account. This includes hedges for specific commitments. 4. 4 Changes in accounting policy CCA have adopted Australian equivalents to International Financial Reporting Standards (AIFRS) for 2005. The financial report for the full year to 31 December 2005 is CCA’s first full year report under the new standards.
AIFRS will have a negligible impact on earnings in future years and will not affect cash flows, debt servicing capability or the ability of CCA to pay dividends. Moreover, goodwill is not amortized now but will be tested annually or more frequently if required, for any impairment in the carrying amount. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. Goodwill arising on the acquisition of controlled entities is treated as an asset of the controlled entity.
These balances are denominated in the currency of the controlled entity and are translated to Australian dollars on a consistent basis with the other assets and liabilities held by the controlled entity. CCA also changed accounting policy on returnable containers. This change leads to an increase of total non-current assets from $2697. 5M to $3539. 9M which shows in the balance sheets. Changes in accounting policy also can attribute to improved financial performance or shareholders equity position. Thus any impact of those changes has to be disclosed. . Quality of Disclosures According to Coca Cola Amatil’s (CCA) 2005 financial statement, its disclosures seem reasonable and reliable. Ernst and Young claim that it has provided a financial statement which complies with Australian accounting standards and the Corporations Act 2001 and gives a true and fair view of the financial position of Coca-Cola Amatil Limited and the consolidated entity at 31 December 2005 and of the performance for the year ended on that date. It also shows all the reasonable changes that took place during the ear. CCA has made changes to the composition of the entity through 2005; it has made four acquisitions which are Northern Territory Coca-Cola bottling agreement and related assets, PT Coca-Cola Bottling Indonesia, SPC Ardmona Ltd and Grinders Coffee respectively. It is believed that if all the above combinations had taken place at the beginning of the year, the estimated profit for the group may have been $322. 3 million and the estimated revenue may have been $4,222. 3 million (See Appendix 5a. ).
The transition to the Australian equivalents to International Financial Reporting Statements (AIFRS), in order to ensure that the financial report, financial statement and notes meet the requirements of the AIFRS, the 2005 annual financial report is the first year that has been prepared on the basis of AIFRS and the auditor has also restated the 2004 annual financial report in order to be able to make comparisons with the current year to evaluate the change (See Appendix 5b. ). One area of concern is that of the use of estimates.
In order to prepare financial statements, company’s management is required work with estimates and make assumptions for amounts of assets, liabilities, revenues, expenses and disclosures. Although the estimates are based on management’s knowledge, it can be different from the events that will take place in the future (See Appendix 5c. ) Overall, the disclosures in Coca Cola Amatil’s 2005 financial statement sufficiently meet the general requirements of financial disclosures. 6. Questionable accounting figures
With a glance at the balance sheets of CCL in 2004 and 2005, in the category of non-current asset, It was found that the investment in bottler’s agreements are 3278. 3 million in 2003, 1423. 6 million in 2004 and 1506. 4 million in 2005 respectively. There is almost 1. 9 billion-gap between that of 2003 and 2004(See appendix 1). Due to the transition to Australian equivalents to International Financing Reporting Standards (AIFRS) at the end of 2004, the statement has been restated accordingly. Because AASB 138 that comes into force in 2005, companies generally will not be allowed to revalue intangible assets upwards.
This is a problem for Coca-Cola Amatil as it would be forced to revert to the asset’s fair value, reducing it by $1. 9 billion. Another questionable problem is that according to CCA’s financial statements, investments in bottler’s agreements are deemed to have indefinite lives (see CCA 2005 annual report PDF pg. 88). But the truth is that there is a long and ongoing relationship between the Group and The Coca-Cola Company (TCCC) and at 31 December 2005, there were thirteen agreements throughout the Group at varying stages of their, mainly, ten year terms.
In some circumstances an intangible asset may be considered to have an indefinite useful life. The accounting standard defines an indefinite useful life as occurring where: ‘there is no foreseeable limit on the period over which the asset is expected to generate cash flows’. But obviously, they have foreseeable limit on the period when the agreements expire in 10 years. Where an asset is considered to have an indefinite life there is no requirement to amortize the asset. Consequently, the Debt to assets Ratio and the Equity Multiplier will be better off than that when the asset life is definite. 7.
Possibility to UNDO Distortions in the Accounting Numbers CCL was trying to negotiate with the Federal government for concessions on the transition to IFRS, because the bottler’s agreement will not be completely viewed as an asset under AASB138 as CCL entity did prior 2005. As a result, around $1. 9 billion shear reduction occurred in the account in 2005. It is also controversial that CCL considers the bottler’s agreement as indefinite intangible asset based on the view that “no factor can be identified that would result in the agreements not being renewed at the end of their legal terms”, due to its well corporation with TCCC.
However, those assumptions are suspicious. The useful life of intangible asset is defined in AASB 138 as “the period of time over which the asset is expected to be used by the entity”. Therefore, the investment in bottler’s agreements should be considered as a useful life of 10 years and be amortized over 10 year on a straight-line basis with nil residual value. The amortization amount is considered as an expense in financial statement. It could be found a section of investment in bottlers’ agreement of 2005 annual report in Appendix 7. 1.
Due to the useful life is considered as 10 years, it could be seen that the annual amortization amount is $1423. 6m divided by 10, which is $142. 36m. The above process could be found in Appendix 7. 2, which would also have an influence in the balance sheet, making it reduce 142. 36m in the asset amount. 8. CCA’s financial press Most of the recent financial press reports regarding Coca Cola Amatil have focused on the group’s projected financial year profit and the share price. The figures have mostly been accompanied by speculation surrounding CCA’s current marketing gambit with its introduction of the Coca Cola Company’s new product lines.
In October 2005, a Packwire reports that CCA had profit in second half at A$152. 6 million. The report suggests that CCA was expecting to turnaround low earning in South Korea by increasing the volume by 4% in the third quarter. On 4th of May 2006, Sydney Morning Herald reports the sale increase at only 4. 5% instead of 7% expected because of the higher cost of sugar, aluminum, PET resin. This affected the share price causing it to fall 25 cents or 3%. Furthermore, the report stated that CCA was coming under pressure from Pepsi maker Cadbury-Schweppes as a result of supermarket pricing wars.
However, the report did say that CCA was expecting to make profits of between A$325 to A$335 million. In a recent Dow Jones & Company Inc. report said that poor performance in Indonesia as well as South Korea were hindering the company’s progress. It cited poor performance on the Australian Stock Exchange as evidence of the company’s weakening position in its international ventures. (See Appendix 8) Conclusion As informed that Coca Cola Amatil is the one of the largest company, CCL has operated its entire activities by using accounting policies.
Appendix 4 Specific recognition criteria must also be met before revenue is recognized Appendix 4. 1 [pic] [pic] Appendix 4. 2 I) Sale of goods and materials Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably. ii) Rendering of services Revenue from installation and maintenance of equipment is recognized when the services have been performed and the amount can be measured reliably. iii) Interest
said the statement. Appendix 8b Costs, competition sour Coke profits By Matt O’Sullivan May 4, 2006 AdvertisementAdvertisement COCA-COLA Amatil expects full-year profits to rise by only as much as 4. 5 per cent as it struggles to offset the impact of surging sugar prices and increasing competition for drinks sales in supermarkets.
The fizzy drinks company has forecast a 7 per cent increase in costs this year – at the higher end of its earlier guidance – due to higher prices for sugar, aluminium and PET resin, which is used to make plastic bottles. The profit forecast yesterday failed to impress investors, who sent the share price down 25c, or more than 3 per cent, to $7. 05. CCA’s managing director, Terry Davis, said the company was intent on recovering the costs of goods this year by increasing prices for its products. The trading environment in Australia remains highly price competitive in the supermarket channel,” he said at the annual meeting in Sydney yesterday. CCA is forecasting annual net profit of $325 million to $335 million – near the market consensus of just over $330 million – thanks in part to the growing popularity of its new Coca-Cola Zero. Last year it posted an annual profit of $320. 5 million. The $18 million advertising blitz following the launch in January of Coca-Cola Zero, a drink aimed at young men, helped increase Coca-Cola volumes by more than 10 per cent in the first four months of this year.
Mr Davis said he would be surprised if Coca-Cola Zero did not reach $100 million in sales this year, and up to $300 million within three to five years – making it as popular as its No. 2 brand, Diet Coke. “There are still many outlets that we don’t sell Coke Zero to. This was always going to be a category killer,” he said after the AGM yesterday. But competition from Pepsi-maker Cadbury Schweppes, which has resulted in heavy discounting in supermarkets, has stopped CCA increasing prices by 4 per cent for all of its products, as planned in February.
Nevertheless, Mr Davis said the company hoped to increase the prices charged to supermarkets by 4 to 5 per cent in June or July in order to recoup the surging input costs. CCA’s black spot in recent years has been its business in South Korea, but Mr Davis said the operations remained on track to return to profitability in the first half after axing 10 per cent of the workforce. Meanwhile, CCA’s board received a stark warning yesterday from shareholders opposed to high remuneration packages for executives.
Almost 29 per cent – or more than 150 million – of the proxy votes cast were against a resolution giving Mr Davis rights to acquire up to 320,000 shares under an incentive share plan. But Mr Davis said he was not surprised at the opposition because “it seems people are just voting against [remuneration packages] for the sake of making a noise”. CCA’s chairman, David Gonski, said the package provided a “strong incentive” for Mr Davis to deliver results and a significant proportion of the award was related to success. Appendix 8c
Copyright (c) 2005, Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission. Beset by losses in South Korea, lower sales in Indonesia and flat volume in Australia, Asian-Pacific soft-drinks bottler Coca-Cola Amatil Ltd. failed yesterday to convince investors that it can maintain robust profit growth. Amatil, which is 34. 5%-owned by Coca- Cola Co. , said in a statement to the Australian stock exchange that “all key markets experienced soft volume” during the first three months of the year.
The company said it expects “double digit” growth in 2005 net profit and devoted the first half of a three-page news release to what it called innovative and major product launches. Later in the day, Amatil issued a separate statement to clarify the first. “Subject to no deterioration of current economic or trading conditions, low double-digit net profit growth for the CCA Group is expected for full year 2005,” the company said in the second statement. Shares in Amatil fell 7. 2% to 7. 69 Australian dollars (US$5. 95), off 60 Australian cents each in Sydney.