Overview of EVZ Limited and its Divisions
Discuss about the Ethical Decision Making And Reputation Management.
The company being selected for the analysis here is EVZ limited which is listed on the Australian Stock exchange. It is one of the specialists in engineering services sector. It is known for providing innovative quality solutions at affordable prices. The company is mainly operating in 3 divisions namely engineering segment designing manufacturing and installation, power segment designing and installation and finally the water system involving drainage systems and roof structures. The company primarily focuses on the health and safety aspect and employs nearly 390 employees, all of which are skilled (Alexander, 2016). The name of the 4 operating divisions are Brockman Engineering, Syfon Systems, TSF Engineering & TSF Maintenance Services.
- The provisions and contingencies being reported by the company in the annual report has been shown below in the screenshot(Bromwich & Scapens, 2016). The provisions are majorly categorised into 2 categories namely current and non-current liabilities.
As per the notes on accounts given by the company in the financial statements, the company records the provisions in case the company has a financial, legal or constructive obligation due to the past activities or events, for which it is certain that there will be a cash outflow and the respective amount can be reliably measured (Das, 2017).
The total amount of provision which has been recorded in the annual report is $ 3053280 for the year 2017 and $ 3288937 for the year 2016. The provision relates to the employee retirement entitlements in the form of long service leave.
Also the company is carrying the contingent liability in the form of Bank Guarantee facilities and letter of credit facilities amounting to $2800000 as on 30th June 2017 and $ 3509340 as on 30th June 2016 (Belton, 2017).
- The recognition criteria and measurement for the provision and the contingencies of the company has been shown in the notes on account. For provisions, the calculation for present value of the future cash flows in respect of long service leave and the probability of occurrence of the same has been taken on historical data basis. Provision has been made as the entity has the liability on account of the services being rendered by the employees. The liability which needs to be settled within one year has been measured at the amount to be paid within one along with the related costs to settle the liability(Bizfluent, 2017). Those which are to be paid post one year have been valued at present value using discounting factor.
However, on the other side, the contingencies have been recognised as the bank guarantee and letter of credit is secured by the registered equitable mortgage over the assets and other undertakings of the Australian companies.
- There is only one contingent liability which has been recorded by the company and the same is credit facilities being used by the company. Here in the case of EVZ limited, it is the form of bank guarantee facilities and letter of credit facilities amounting to $2.8 Mn out of which $ 2262868 has been utilised by the company and $ 536132 is pending and is available for the controlled entities to be used. These facilities are being secured by the equitable mortgage over the assets and undertakings of company(Chron, 2017). The company is justified in recording the same as the contingent liability in the books as the company has used the facility and the same is not recorded in the books as it is secured but the company may be asked to pay the same anytime. On the other hand, the company could also have recorded the same as provisions instead of contingent liability as the amount is certain.
- The lease items that has been recorded by the company in the financial statements are $ 118616 for the year 2017 and $ 240747 for the year 2016. The same can be categorised in to the current and non-current lease as shown below in the extract of the financial statement. These leases mainly pertain to the plant, property, equipment and motor vehicles. The company also has operating leases for the property and plant and equipment which are non cancellable and with the maximum term of 5 years(Farmer, 2018). The amount of the same is $ 2385517 for 2017 and $ 2069913 for the year 2016. These commitments are not being recognised in the financial statements.
The company also made an operating lease payment of $ 920376 in the year 2017 and $ 980162 in the year 2016 as can be seen in the profit and loss statement (Dichev, 2017).
- From the financial statements, it can be seen that the lease liability has been classified into current and non-current liability based on the periodicity. The break-up of the operating lease has been given pertaining to the different assets and then those due less than 12 months and more than 12 months but since operating leases are not recognised in the financial statements, therefore, they have also not been recognised(Sithole, et al., 2017).
Leases are generally recognised in the books when the significant risk and benefit incidental to the assets has been transferred and not the legal ownership. These are called finance leases and the assets are capitalised whereas the corresponding liability is being shown at present value of minimum lease payments or fair value, whichever is lower. These are being depreciated on a straight line basis. On the other hand, operating lease is shown directly in the profit and loss account as expenses. The same has been done here. From 1st July 2019, AASB 16 will be replacing the current lease standard AASB 117 and it has significant changes in it. It shows the accounting treatment of the leases alongwith how to recognise, measure and disclose the same in the financial statements. It provides for the single lease accounting model and that to be finance lease except the ones which are of less than 12 months period or have low lease values.
- One of the hypothetical situation is when one of the fixed assets is being procured on terms of operating lease valid till 30th June 2022 but with the introduction of the new AASB standards on lease, the same would have to be classified as finance lease. As a result of this, the reinstated figure for the last year would also need to be calculated in terms of finance lease so that it can be shown in the financial statements(Kangarluie & Aalizadeh, 2017).
- The non-current asset being selected from the financial statements of the company would be property, plant and equipment whose balance is $ 3777140 at in 2017 and was $ 4688822 in the year 2016. It is one of the most significant line item in the balance sheet of the company and the company in its notes on accounts has shown the cost, the accumulated depreciation and the net value(Goldmann, 2016). The company has also given the reconciliation for the addition, disposal, opening balance, depreciation, impairment and exchange rate adjustment, if any during the year to give the complete view.
The company recognises and values assets in the books at cost less accumulated depreciation and impairment losses, if any (Félix, 2017). The carrying amount of the assets is being annually reviewed by the management and compared in terms of the recoverable value to identify the impairment, if any. The recoverable value is being assessed in terms of the present value of the future cash inflows from the asset. The company follows a depreciation rate of 5% to 30% on the plant and equipment and applies straight line or diminishing value method as per the asset class. The asset’s residual value and the useful lives are also being reviewed by the management annually.
- With reference to the qualitative characteristics of the financial reporting, the assets can also be valued at the fair value as per the IFRS and AASB guidelines and standards. This is because one of the qualitative characteristics of financial statements is verifiability i.e., a group of knowledgeable and informed users should be able to reach to a consensus that the amount being reported in the financial statements is correct and can be relied upon. Fair value is generally the present value of the future cash flows from the asset and is a more accurate figure towards reality and therefore the same can be used in the financial statements(Heminway, 2017).
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
[Accessed 07 december 2017].
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.
Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.
Kangarluie, S. & Aalizadeh, A., 2017. ‘The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
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