ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION
ASSIGNMENT STAGE 2
Danielle Bradley
CQUniversity
Personal Moodle Profile: Danielle Bradley
Personal Blog Link: Be Audit You Can Be
step 3: Restating Financial statements
Feeling refreshed from my recent wilderness adventure, I came into restating Lyttelton Port of Christchurch’s financial statements with a clear mind that washed away much of the trepidation and fear I felt when attempting to understand chapter 4. Although still quietly nervous, this was overpowered by my excitement to get stuck in and prove that numbers are no longer my foe. With my newfound confidence, and the advice of many of my peers to watch the lecture recordings as I went, I opened my spreadsheet and immersed myself into the financial world of LPC.
First point of call, filling my financial statements with ‘O’ and ‘F’ next to the line items in order to illustrate if I judged them to be either operating activities, activities relating to the daily operating of LPC, or financial activities in which LPC engages with the capital market. Thanks to the wonderful invention of google and having interacted with many of my peers on Facebook when they themselves were trying to identify which category to allocate their items, this process was completed much faster than anticipated. Nonetheless there were still a few items that had me questioning whether my initial judgement was correct or not.
The first item I determined further clarification was required on was ‘fair value hedges’. I initially had this listed as a financial activity but on further thought I asked myself why I deem it so when I don’t really understand what it actually means. As it turns out there are various types of hedges that can either be a component of financial or operating activities. My novice understanding identifies hedges as a means of providing a buffer to protect oneself against financial loss from changes in the value of assets, cashflow or the like. Fair value hedges seem to relate to the accurate or fair value of a firm’s primary assets. After discovering this information, I was still uncertain where to allocate this item so I went back to the source, the annual report, and read what notes related to the firms use of fair value hedges. I now believe LPC apply fair value hedges in relation to the cost of fuel where they can essentially lock in a price with suppliers for the cost of fuel to try and minimise the impact of fuel price rises. Therefore, as this is a transfer between LPC and one of their suppliers which impacts day to day operations I allocated fair value hedges to operating activities.
After having a basic understanding of hedges, I assumed ‘derivatives’ were essentially the same as hedges, being a mechanism to protect or provide a buffer from loss of income or asset worth. From a little further digging I found that hedges themselves are a form of derivative. As such I listed this item as an operating activity also as I could not identify anywhere within the annual report which indicated their derivatives were in relation to contracts between equity or debt investors. These derivatives were also grouped with the hedges in the notes to consolidated statements which provided weight to the thought they are indeed an operating expense. Nonetheless, due to my lack of certainty I additionally posted the following question on the Facebook forum to start a discussion with my peers:
After receiving a response from Tash, I still eagerly viewed the restated statements of my peers to see who also had derivatives as an item and how they’ve allocated it. From the statements I had viewed thus far, derivatives have been allocated to operating activities so I believe I’m on the right track but I’m still very curious as to their thought processes behind this.
The last item I deemed may need further clarification to those viewing my restated financial statements was in regards to ‘Deferred Lease Income’. Now when initially viewing the word lease we may be inclined to view this as a financial activity whereby LPC engages with the capital market. However for LPC, this deferred lease income is in actuality an engagement with another service/supplier. LPC currently have a contract with Solid Energy NZ whereby LPC receive $13m over a 15 year time period in exchange for material obligations from LPC. What I found myself questioning after reading this in the annual report was why is this deferred lease income listed as a liability in the balance statement if they are receiving an income from this relationship? Hopefully I am able to obtain clarification throughout this unit.
The vast majority of line items however I found quite simple to determine their position as an ‘O’ or ‘F’ nevertheless I felt this process did provide me with a greater insight into LPC. For instance, LPC have various types of term deposits, a financial activity, in which they’ve invested money into a bank or similar institution in order to earn income. Now this activity is only present from 2014 onwards when LPC received a substantial payout from insurance (due to earthquakes from previous years). My foremost thought was what a smart idea! If the money is not required for a certain period then what better way to make use of the asset then to utilise it as an income generator. This is evident in the restated statement of financial performance for financing income:
2016 / 2015 / 2014 / 20138,236 / 12,209 / 3,241 / -3,578
The restated statement of financial position highlights the term deposits utilised.
Short term deposit:
2016 / 2015 / 2014 / 2013150,000 / 90,000 / 90,000 / 0
Term deposits:
2016 / 2015 / 2014 / 20130 / 40,000 / 0 / 0
Finding potential links, such as the one above, between the financial statements made me feel quite accomplished. An individual with limited numerical and mathematical capabilities who is attempting to complete an accounting degree can actually visualise relationships from numbers listed. *Cue celebratory pat on the back*
EQUITY STATEMENT
After categorising my operating and financial activities I followed the recorded lectures and began with restating the changes in equity statement. This process was quick and easy and I felt like an excel pro after learning how to link cells. My 3 year old Summer asked me what I was doing and I explained the process of linking cells. After 500 questions she finished with “Wow mummy you really clever” and you know what, I felt pretty damn clever! Well that was until I obviously clicked something wrong in excel and my cells would no longer link correctly. After an hour trying to fix the problem (and by fix I mean stare at the screen wondering what the heck went wrong) I ended up posting some videos of my problem on Facebook. Many of my lovely peers offered assistance however the main issue couldn’t be rectified so back I went and began my restating all over again. Who would have thought it would be excel itself that brought me to my knees and not the actual process of restating? Not me, that’s for sure!
After completing my financial statements (and writing my commentary of the process) I received feedback from a peer outlining a discrepancy with the total comprehensive income in the restated equity statement for the year 2014. After trying to determine how this discrepancy took place considering my values where the same as outlined in the annual report and all my calculations were equal, I asked my peers for assistance. I received some fantastic support from those offering advice and in the end we were able to determine the problem. The issue related to the following:
Initially I had these above items allocated within the restated equity statement and calculated in the total comprehensive income. However as a result my total comprehensive income for 2014 did not match the CI (comprehensive net income after tax) from the restated financial performance statement. After playing with the calculator it became apparent that it was in-fact the two above items which were contributing to the discrepancy. After removing these items from the restated equity statementthe total then matched the CI yet there was a follow-on effect which caused a discrepancy in the ‘Balance at June 30’ for 2014. Thus it was evident that these items needed to be included in the final balance at June 30 but not as a component of the total comprehensive income. This had me quite confused. How can they be incorporated into the final balance even though they aren’t attributable to the comprehensive income nor are they a component of the ‘transactions with owners recorded directly in equity’? Through discussions with my peers and an in-depth look at LPC’s 2014 annual report, we were able find an adequate answer. The notes to the consolidated financial statements outlined ‘Other Settlement Impacts’ whereby ‘interest rate swaps no longer deemed effective’ and ‘tax on ineffective hedges taken to current tax’ were repaid from the settlement from the insurance received which had an impact on the financial performance for the period by recycling these items in the income statement. This recycling is evident whereby is the equity statement ‘interest rate swaps no longer deemed effective’ is a positive figure 1,636 whereas the income statement has the same item as a negative figure -1,636. The charge of -$1.6million was included in the earthquake related costs for 2014. As such, I deemed it appropriate to add a subheading of ‘Settlement impacts’ in the restated equity statement which is entered after the total comprehensive income. In the end this layout enabled the total comprehensive income to match the CI in the restated financial performance statement and the 2014 balance at 30 June to match that of the initial equity statement. With a sigh of relief, and a whole lot of gratitude to my fellow peers, I was able to move on comfortable with my decision and with a more comprehensive understanding of LPC’s financial situation.
BALANCE SHEET
Now the areas I initially though I would struggle with the most were in relation to where equations were required to determine proportions divided between operating and financial activities, such as cash and cash equivalents in the balance sheet. Surprisingly I found this a straightforward task to conduct the calculations – thank you Maria for providing step by step instructions! Following the recorded lecture, I utlised the 1% of revenue guide for the asset cash to be allocated to operating activities. After completing the appropriate steps I was initially surprised to see the percentage of cash out of total revenue:
2016 / 2015 / 2014 / 201314% / 88% / 200% / 0.88%
But a moment later the lightbulb went off and I could once again see the impact the insurance payout had on LPC’s financial figures. 2014 is the financial year in which the largest sum of insurance was received and therefore it is understandable that the cash and cash equivalents was dramatically higher during this period and the subsequent years. This did make me curious to determine approximately just how much of the asset cash is required to continue the daily operations of a port. So back to the annual report I went to investigate. Outlined in the notes to consolidated statements was the amount of $10million required for continuing daily operations. After making a few calculations this itself calculated to approximately 1% of the revenue for the years and therefore I was happy to utilise the 1% guide. I did ponder why 1% was a fairly accurate benchmark and am hoping to see if this is a recurring theme in my peer’s financial statements.
Whilst restating the balance sheet I had an uh oh moment when I noticed my firm had greater financial assets than obligations. As I was closely watching the recorded lecture I thought why can’t my statement be the same as Maria’s? But due to her explanation I found calculating my NFA (Net financial assets) for 2014 – 2016 a simple process with 2013 being a NFO (Net financial obligation). Once my balance statement was completed I checked the following:
Equity – Total NFA = NOA (for 2014 – 2016)
Equity + Total NFO = NOA (for 2013)
2016 / 2015 / 2014 / 2013NOA / 300,618 / 300,984 / 211,593 / 220,037
Equity – Total NFA / 300,618 / 300,984 / 211,593 / -
Equity + Total NFO / - / - / - / 220,037
Check complete and I was over the moon to see that my figures all seemly matched for the balance sheet! I also enjoyed assisting my peers who also had NFA instead of NFO. For example:
INCOME STATEMENT
The final task was the one many of my peers indicated was the most difficult. Feeling like I had everything under control I linked all the cells from the income statement spreadsheet and noticed I had two types of tax, one for the income tax and another for the income tax on ‘other comprehensive income’. My initial thought was to include all tax reported as one item. However I was a little uncertain as it outlined it was directly related to other comprehensive income which for LPC was fair value hedges. This item I listed as an operating activity and therefore I deemed the tax should be allocated to operating. I then looked at how the equity statement had listed the hedges and saw the amount had already taken into consideration tax (hedges net of tax) whereas the income statement had hedges as a gross figure. After conducting some calculations, it was evident that the income tax on other comprehensive income was indeed attributable to hedges and therefore I calculated them together to have a net of tax hedges in my restated financial performance. This calculation is shown at the bottom of the spreadsheet:
Which as you can see created the same figures as outlined in the equity statement:
Moving on, calculating the tax benefit for the restated income statement was an easier process than I had initially thought. It turns out the task at hand was not something I should have been anxious to undertake. Is it possible that my fear of math is more a case of myself lacking confidence than my actual ability? Once again you have me questioning myself as a person Martin! After finalising my restated financial performance I conducted the check to confirm my CI matched the total comprehensive income/expense for the year in the income statement. When all figures balanced I was overjoyed with my accomplishment.
2016 / 2015 / 2014 / 2013CI from restated financial performance / (60,028) / 20,784 / 343,910 / 18,089
Comprehensive income/expense for the year from income statement / (60,028) / 20,784 / 343,910 / 18,089
CONCLUDING THOUGHTS
Overall, I found the restating of financial statements a fairly straightforward task, with the exception of my equity statement which differed to that of Maria’s and my peers, and was a little shocked that my main form of conflict came from excel itself and not the process of restating. I believe I was greatly assisted by watching the recorded lectures as I went and questioned myself for why I didn’t do this for the entering of my financial statements in ASS#1. I’m hoping that my statements are indeed correct and not perceived as quite simplistic due to incorrect application. The whole process provided me with a greater understanding of LPC and how a significant event in their past is reflected within their financial accounts throughout the years that followed.
Although I thoroughly enjoyed restating LPC’s financial statements, I found the communication and discussion with my peers of the greatest benefit to my learning.From thorough discussions and receiving assistance myself to then assisting my peers once I felt adequate with the knowledge I had gained from restating, finding components of my peer’s statements I found interesting, togaining a broader understanding of items than what was listed in LPC’s financial statements, I believe was the highlight of this step. This conversing between peerswas a great tool to ingrain the information, generate further understanding, put into practice information I had just learnt, and create more food for thought.A small example of these interactions that I managed to find can be viewed on the following page:
To conclude, I think numbers have finally moved into the friend zone, no longer a nemesis of mine and I’m enthusiastic to move forward to more complex tasks of calculating ratios and the like to continue my deepening understanding of Lyttelton Port of Christchurch.
*Please note there are comments on my spreadsheet which can be viewed by hovering over the red triangle in the corner of cells*
step 4: feedback based on steps 3 & 4
The task of providing feedback on the restated financial statements in itself was something I initially believed I would struggle with. I perceive myself as quite proficient at providing feedback for written tasks but asking for my thoughts and comments on tasks of a numerical nature was an aspect I was at first not so comfortable with. Nonetheless once I had completed my own restated financial statements and my commentary of the process, I felt a little more adequate to delve into the financial world of my peer’s firms.
Now I love receiving feedback on my draft work however I feel that the feedback I receive is most often a confirmation of what I have done and not a critical analysis of my work itself. I know that some of my peers struggle with reviewing others work as well as completing the tasks required in which feedback is to be provided on and I think this is reflected in the feedback they deliver. Nonetheless, the feedback provided for this particular step was much more useful than that of assignment1. I received considerable feedback solely confirming the accuracy of my work, nonetheless, I also received feedback with great tips to ensure my calculations were correct,for instance, Angelasuggested it would be wise to calculate the equity balance in the restated financial position statement to ensure this item was calculated correctly instead of linking this back to the original balance statement. Another peer, Klarissa, also highlighted a discrepancy in my restated equity statementthat led to great discussions with my peers and aneven deeper understanding of my firm LPC.Overall the receiving of feedback was a great confidence boost and assisted in ensuring my restated financial statements were correct (well I hope they are).