Financial Reporting for Investment

Choosing a sound investment is one of the big challenges facing many investors. It is therefore, worthwhile to take time analysing the alternative investments. The analysis should focus on the financial performance and other key aspects of the company e. g. corporate governance and any major accounting policies adopted by the company. It is only after a thorough analysis that an investor is able to make an informed decision. The company under review is Ted Baker Plc. Ted Baker Plc. is a company listed in the London Stock Exchange (Ticker Symbol: TBK).

It primarily deals in apparel and accessories retail. It also deals with cosmetics, beauty supply and perfume retailing. Apart from retailing, it also manufactures apparel and eyewear (Hoovers 2008). The company deals with under the following brands

• Edward Baker
• Ted Baker Woman
• Teddy Boy
• Teddy Girl

Ted Backer Plc also has subsidiaries. Ted baker Inc. (New York), Ted Baker Ltd, No Ordinary Designer Label Ltd, Ted Baker SARL (France) and No Ordinary Card Services Ltd (Hem Scott 2008).

Accounting policies

Accounting policies are those principles, conventions, rules and procedures, bases that are used or applied or adopted by the management of a company in the preparation of and presentation of the financial statements. Accounting policies are usually applied consistently in the preparation and presentation of financial statements and can only be changed if doing so provides the investors with more relevant and reliable information Accounting policies adopted Ted Baker Plc has adopted the following policies consistently over the years in the preparation and presentation of financial statements.

The financial statements are prepared according to the international financial reporting standards (IFRS). This includes the management judgments, assumption and estimates that are used in together with the policies. The basis of consolidation is for the holding company and it s subsidiaries. The acquisition method is used with inter-company transactions eliminated. The subsidiaries to be consolidated are those that the company has control and has substantial voting power.

Transactions and entities in foreign currencies are translated into the functional currency in accordance to the rules set out for foreign subsidiaries. Revenue is recognized when sold with wholesale revenues recognized when the titled has passed and goods delivered to the customer. These are some of the major accounting policies adopted by the company although there are some new standards and amendments to the IFRSs, IFRICs that were not used in the preparation of the financial statements for the year because they were not effective at the date of the preparation of the financial statements.

Whenever a new standard, amendment or interpretations to the existing standards are issued, IASB always recommends the early adoption even though the effective date has not been reached yet. Examples of these new standards, amendments to standards and interpretations include the following; IFRS 7 Financial Instruments which deals with disclosures and amends IAS 1 – Presentation of Financial Statements. This IFRS requires extensive disclosures on the importance of financial instruments on an entity position (financial) and performance also disclosing qualitative and quantitative on the nature and extent of risks.

Other changes include the interpretations e. g. IFRIC 7, Applying the Restatement Approach under IAS 29, (Reporting in Hyper Inflationary Economies), IFRIC 8 and scope of IFRS 2 Share based Payments, IFRIC 9 Reassessment of Embedded Derivatives, IFRIC 10 Interim Financial Reporting and Impairment and IFRIC 11, IFRS 2 Share based Payment-Group and Treasury Share Transactions. The policies adopted by the management in the preparation and presentation of the financial statements are adequate because the policies have been adopted on a consistent basis and are only changed when the standards, amendments and interpretations demand so.

Although there are some amendments to existing according standards, issuance of new standards and interpretations, the management did not adopt them simply because effective date of those standards is 2008 financial year. Application of accounting policies Standards and interpretations that directly apply to a transaction or even requires that the policy adopted should be determined by applying the standard or interpretation and also the implementation Guide by IASB. (IAS Plus 2008)

The absence of such a standard or interpretation gives the management the discretion to use its judgment in adopting an accounting policy that results into more reliable and relevant information. However the judgments should be in reference to the requirement of guidance of IASB standards and interpretations on similar and related issues and the definitions, recognition, criteria and measurement concepts of assets, liabilities, incomes and expenses in the framework. (IAS 8. 11).

The management can also consider the recent developments from other accounting standards bodies that use similar conceptual framework, other accounting literature and accepted industry practices as long as they do not conflict with sources (IAS 8. 12) Segmental reporting This is where an entity reports in its financial statements the financial position and performance of the various business components or geographical areas that the company operates in (IAS PLUS 2008)

The segments that a company can report on are the business segment which is a component of the company that is either producing a single product or service or group of related products and services or a component that whose risks and returns are different from other components (IAS PLUS 2008) The geographical segment on the other hand is that part of the business which provides single product/services or group of related products and services or component that is subject to risks and rewards different from other component being operated by the company in other economic environment.

Importance of Segmental Reporting

Segmental reports are important to the shareholders of the company in that they are able to identify the profitability of the various business and geographical components that the company operates in. Increased transparency in terms of breaking down the company into segments helps the shareholders to understand the operations of the company, thereby making the financial reports more relevant and reliable. Segmental reports also help the shareholder to basically understand the strong and weak points of the company and hence determine the future allocation of resources.

The company has analysed the segment results in terms of the various products, division and geographical areas that the company operates in. The primary reporting segment in terms of the divisions is retail and wholesale while the secondary reporting segment is geographical areas i. e. the UK and other. The most apparent benefit of this type of analysis is the fact that the shareholders are able to understand the performance of the company based on the various reportable segments. The other benefit is the shareholders can be able to understand the real drivers of the growth in the company i. e. what segments are the most profitable and which are the least profitable. Segment analysis also helps the management to formulate the strategies for the various reportable segments and therefore help them in their objective of maximising shareholders wealth.

Disadvantages of segmental information

Although segmental information provides some important information to both shareholders and management, there are some disadvantages that come with it. First segmental reports provide the shareholders with extra information and therefore could easily lead to information overload, which could make the already existing information less useful.

The other disadvantage is that the preparation of these segmental reports increases the cost of preparation and presentation of financial statements. The cost of preparing and presenting the financial information should not exceed the benefits derived from them. Segmental reports also may not be that easy for the shareholder to understand hence rendering them irrelevant. Ratios Financial ratios are used to evaluate the performance of the company over time and also in comparison with other industry players or averages. The key financial ratios include;

• Liquidity
• Profitability
• Leverage
• Activity ratios

Liquidity Ratios

These are ratios that determine the ability of the company to meet its current obligations. Current obligations in this case are liabilities that mature in less than one year. Higher liquidity ratios are desirable. Some of the common liquidity ratios are the current and quick ratio (acid-test). The company’s current assets should sufficiently cover the current liabilities. The liquidity ratios show the ability of the company pay off its current obligations and at the same time without disrupting the current operations and projects.

Basically, liquidity ratios shows the ability of the company to adequately meet its current obligations (About. com 2008) 1) Current ratios Current ratio takes into account all the current assets of the company divided by all the current liabilities. It is one of the liquidity ratios, which determines the ability of the company to pay its short-term obligations. The companies with lower credit ratings/credit worthiness are expected to have high current ratio in order to compensate for any risks of lending to that company. 2) Quick ratio (acid –test ratio)

This ratio takes into consideration the current assets which are more liquid i. e. current assets less inventory. The acid-test ratio generally accepted is 1:1 i) Current ratio Current ratio = current assets Current liabilities 2007 2006 53,397,000 46,775,000 22,289,000 = 2. 4:1 24,740,000 = 1. 9:1 ii) Quick ratios Quick ratio = current assets – inventory Current liabilities 2007 2006 (53,397,000-27,825,000) (46,775,000 – 23,475,000) 22,289,000 = 1. 1:1 24,740,000 = 0. 9:1 Analysis of liquidity ratios

The company’s liquidity position improved compared to the 2006 figures. The current ratio increased to 2. 4:1 up from 1. 9:1 in 2006 while the quick ratio was 0. 9:1 in 2006 compared to 1. 1:1 in 2007

Profitability Ratios

These are measurements that are used to evaluate the ability of the business to generate earnings that can meet the expenses of the company. Higher profitability ratios indicate better performance (About. com 2008) Gross percentage profit This ratio provides information on the pricing and cost structure adopted by the company.

This means that the ratio indicates whether the pricing policy used by the company is sufficient to generate mark up that can meet all the expenses and provide the company with a profit as well. Low gross profit ratio indicates that the company is generating low earnings or could mean that its production costs are high and may be experiencing difficulties in keeping these costs under control. Net percentage profit This ratio is also called the net profit margin. Net profit margin ratio shows the level of profits that the company is able to earn from every amount of sales.

Net profit is the amount of profit left after all the expenses including taxes and interest have been deducted. Net percentage profit ratio acts in the same way as gross profit ratio i. e. it shows the efficiency in production by the company, whether the cost structure and price policy in place is able to generate enough profits Return on Shareholders Equity This ratio shows the amount of earnings that the company is able to generate for every amount of investors funds. Higher ratio indicates better earnings for the investors because they are getting value for their invested funds.