Financial reporting assignment 1

• Description of the different users Stakeholders of financial statements and theirneeds• Assessing the implications for users of financial statements • Explaining the legal and regulato

FINANCIAL REPORTING: FINANCIAL STATEMENTS REGULATORY

FRAMEWORK & INTERPRETATION

Prepared for:

Lecturer, Mr Jun Alejo BathanUnit 10: Financial Accounting and Reporting Assignment Title: Financial Statements Regulatory Framework & Interpretation

Banking Academy, HanoiBTEC HND in Business (Finance)

Prepared by: Maple Group

Ngô Thị Huyền Trang - JessVương Thị Quỳnh Anh - LynnNguyễn Phương Thảo - KeyNguyễn Thị Kiều Anh - Snow

Submitted: 4/11/2013

• Description of the different users (Stakeholders) of financial statements and theirneeds

• Assessing the implications for users of financial statements

• Explaining the legal and regulatory influences on financial statements

• Explaining how different laws/regulations are dealt with by accounting and reportingstandards

• Calculation of accounting ratios to assess the performance and position of Starbucks

• Preparing a report incorporating and interpreting accounting ratios, including suitablecomparisons

The report also have limitation in conducting analysis because there are some information isnot available currently and the using of industry analysis method is limited due to the difficult

in find out information from foreign company

INTRODUCTION

In this report, our group is working in a financial consultancy firm as a client service managerproviding advice and assistance to clients on financial accounting and general businessissues You have been asked by Director of Finance in your company to prepare an analyticalreview of the financial position and reporting of a well-known company Starbucks

Starbucks Corporation is an American global coffee company and coffeehouse chain based inSeattle, Washington Starbucks is the largest coffeehouse company in the world (wasfounding in 1971),Starbucks locations serve hot and cold beverages, whole-bean coffee,micro ground instant coffee, full-leaf teas, pastries, and snacks with 20,891 stores in 62countries, including 13,279 in the United States, 1,324 in Canada, 989 in Japan, 851 in thePeople's Republic of China, 806 in the United Kingdom, 556 in South Korea, 377 in Mexico,

291 in Taiwan, 206 in the Philippines, 179 in Turkey, 171 in Thailand, and 167 in Germany

In addition, Starbucks is an active member of the World Cocoa Foundation Starbucksexpanded its long-term relationship with Maxim's Group to now operate Starbucks stores inVietnam, with the first store in Ho Chi Minh City in early February 2013

This report will analyze deeply about the performance and position of Starbucks in theVietnam market Moreover, provides information about legal and regulatory which influences

financial statement from which shows the importance of finance statement to each user ofbusiness, company and the ways of using different ratios in assessing Starbucks' performance

by explaining the information from the financial statements

1.1 Description the different users (stakeholders) of financial statements and their needs

Starbucks is one of the largest coffeehouse company in the world Therefore, all users ofStarbucks interested so much in financial statements of company because they base on dataand information in these reports to assess development of Starbucks Each users havedifferent requirements about data As a result, Starbucks has to prepare financial statementswhich provide sufficient information for stakeholders to satisfy their needs and wants There

are two types of stakeholders including internal and external users (Catherine, 2008)

1.1.1 Internal stakeholders

Internal stakeholders consist of Managers, Employees, and Shareholders

• Managers: These are the people appointed by the Starbucks’ owners to supervise the

day-to-day activities of the company; responsible for planning and directing the work

of a group of individuals and monitoring their work (Starbuck, 2012)

The manager of Starbuck is Howard Schultz He and others managers in

subsidiaries of Starbucks has direct relationship with the operation of organization

 Manager require financial statements to manage the affairs of the company byassessing its financial performance and position and taking important business

decisions, adjust company’s strategies timely (Catherine, 2008) In financial statement

of Starbucks (2012), total revenue of 2012 is higher than 2011 (increase about $10billion), meaning that manager of Starbucks implement business strategy well

• Employees: are human resources joining directly into the work for Starbuck.

Employees need to know about information related to financial position of company,because their future careers and the level of their wages depend on it (Catherine,2008) For Starbucks, employees are people are very important in creating product.Employees of Starbucks also interested in financial stability and profitability of thecompany which also influences to their benefits If data in financial reporting ofStarbucks is good, it expressed the company operate well From this information,employees can assess the ability of Starbuck in providing salaries, welfare policies(commodities discounts, medical insurance…) retirement benefits and employmentopportunities (training programs, promotion…) for them

• Shareholders: are owners who hold shares of stock of Starbucks They interested in

information which help them assess how effectively management is performing itsfunction, how profitable the company’s operations are and how much profit they canafford to withdraw from the business for their own use Based on evaluation throughthe figures from financial statements in annual reports, FMR, LLC - one of the mainshareholders of Starbucks can decide whether to continue to hold, sell or buy moreshares (Starbuck, 2012)

1.1.2 External stakeholders

External stakeholder including trade contacts, providers of finance, and government.

• Trade contacts include two types of stakeholders: suppliers and customers

 Suppliers are individuals or organizations who provide goods to the company on

credit (Catherine, 2008)

Yunnan Arabica coffee bean is company which supplies raw material (coffeebean) for Starbucks will need to consider the financial statements of theenterprises such as profitability….to ensure about Starbucks’ ability to pay itsdebts, and identify how much credit can safely be given for making decisionswhether should make contract with Starbucks or not

 Customers are people who purchases goods and services provided by the

company (Catherine, 2008)

Starbucks’ customers need the guarantee from the company about the quality ofproducts and services  They are concerned about financial statements which

provide useful information about the reliability of the enterprise as confirm thecapacity of the entity in terms of non-current assets or financial position to provethe strength of enterprise to meet any customers’ requirement to decide whether tocontinue buying product of company or not If Starbucks have high profit and highpositive in competitive market, meaning that Starbucks provide high qualityproduct, customer will trust in company to choose using their products

• Providers of finance include investors and creditors

 Investors is people who make investment into the company and expect to gain

financial returns (Catherine, 2008)

Starbucks’ investors are Capital World Investors, Northern Trust Corporation They are concerned about the risk and the return of their

investment Before making investment decisions, they need find out informationabout Starbucks such as assets, liabilities, historical business growth, share pricesand financial strengths Based on this information in Starbucks’ financialstatement, they can assess the ability of the business to pay dividends for them

 Creditors include present or potential creditors who have lent or may lend money

to a business (Catherine, 2008)

Bank of New York Mellon is one of Starbucks’ creditors They need information

from financial statements in order to identify whether their money can be usedeffectively and ability to perform Starbucks’ commitment such as ensuring thatStarbuck can keep up with interest payments and eventually to repay the moneyStarbucks has borrowed

• Government: The government makes rules in order to ensure that the company runs

its business legally and interested in the allocation of resources and therefore in the

activities of business entities (Catherine, 2008)

The Government Taxation Agency requires Starbucks to publish annual report, and

ensure that financial statements must be accurate to calculate tax payments of theenterprise such as business tax, VAT tax…

1.2 Explanation the legal and regulatory influences on financial statements

1.2.1 Company Legislation – Company Act 2006

Company Act is an Act of Parliament which regulates the workings of companies, statingthe legal limits within which companies may do their business (BusinessDictionary, n.d.).Company Act 2006 was fully completed on October 2009 According Company Act

2006, limited liability companies must prepare the financial statement follow the

requirement: prepare accounts annually for distribution for company’s shareholders andthe account should show a “true and fair view” (Frost, 2010) In Company Act 2006, thedirector’s responsibilities are: the members have not required the company to obtain anaudit of its accounts for the year in question in accordance with section 476 and thedirectors acknowledge their responsibilities for complying with the requirements of theAct with respect to accounting records and the preparation of accounts In addition,company must prepare and published account annually.

→ By using Company Act 2006 financial statement of Starbucks to the Law firms will become easier This legal will not affect too much on the reporting Starbucks because

it based on the data after business, not on the segmentation of major customers

1.2.2 International Financial Reporting Standards (IFRSs)

International Financial Reporting Standards (IFRSs) is a set of international accountingstandards stating how particular types of transactions and other events should be reported

in financial statements IFRS are issued by the International Accounting StandardsBoard

IFRS are sometimes confused with International Accounting Standards (IAS), which arethe older standards that IFRS replaced (IAS was issued from 1973 to 2000) (Investopedia,n.d.) Financial statements prepared under IFRSs are required to present the financialposition, financial performance and cash flows of the entity

→ As a result, financial statements of Starbuck prepared under IFRSs are required topresent fairly like the requirement of Company Act This standard is very useful forStarbuck, it seem to be a national requirement, international benchmark andregulatory authorities for domestic and foreign companies

1.2.3 UK Accounting Standards

In current, UK Accounting Standards have four parts: The Financial Reporting Council(FRC), The Accounting Standard Board (ASB), The Financial Reporting Review Panel(FRRP) and The Urgent Issues Task Force (UITF):

• The Financial Reporting Council (FRC) is the UK's independent regulator for

corporate reporting and governance Its five key objectives are to promote: highquality corporate reporting; high quality auditing; high standards of corporategovernance; the integrity, competence and transparency of the accountancyprofession; and its own effectiveness as a unified independent regulator In April 2006

it added the Board for Actuarial Standards to its stable (Glossary, n.d.) As a result,

FRC is responsible for funding and ensures the smooth running of the standard settingprocess and has an important role in indicating accounts that do not meet therequirements of accounting standard and the company act.

• The Accounting Standard Board (ASB): UK organization (similar to the US

Financial Accounting Standards Board) responsible for drafting and establishingaccounting standards ASB is a subsidiary of Financial Reporting Council; one of itscommittees publishes the International Accounting Standards (Andrea, 2007) ASBhas responsible in helping FRC in setting accounting standard for companies in UK

• The Financial Reporting Review Panel (FRRP): The Panel sought to ensure that

the annual accounts of public companies and large private companies comply with therequirements of the Companies Act 2006 and applicable accounting standards (FRC,n.d.) This panel has legal backing It means that if company is not follow theaccounting standard, the panel may go to the courts

• The Urgent Issues Task Force (UITF): The UITF was disbanded on 2 July 2012 as

a result of the FRC Reform (FRC, n.d.) Its role is to assist the ASB in areas where anaccounting standard or company Act provision already exists, but whereunsatisfactory or conflicting interpretations have developed This system is able to actquickly when an authoritative ruling is urgently needed (Phillip, 2007)

→ Starbuck will choose using UK accounting standard system, IFRSs or Company Act

to prepare their accountant Normally, Starbuck choose UK accounting standard andCompany Act instead of IFRSs because those regulations are more simply and easier

to understand than IFRSs It helps accountant of Starbuck working easily in preparingfinancial statement for their company

1.3 Assessing the implication for user

Financial ratios are useful indicators of a firm's performance and financial situation.Financial ratios can be used to analyze trends and to compare the firm's financials to those

of other firms In some cases, ratio analysis can predict future bankruptcy Financial ratioscan be classified according to the information they provide (NetMBA, n.d.)

1.3.1 Liquidity ratios

Liquidity ratio is a class of financial metrics that is used to determine a company's

ability to pay off its short-terms debts obligations Generally, the higher the value of theratio, the larger the margin of safety that the company possesses to cover short-term debts(Anon, 2012)

• Current ratio is “a measure of the solvency or liquidity of your business” The

higher the current ratio, the better the capacity to meet short term financialcommitments

• Quick ratio “measures the level of all assets that can be quickly convertible into

cash and used to meet short term liabilities” The higher the ratio, the higher thelevel of liquidity for business (Anon, 2006)

Users: Investors, suppliers, creditors, shareholders

- Using to measure the capacity of Starbucks to meet the short term financialcommitments Based on this data, investors and suppliers can consider whethercontinue invest in Starbucks or not

- Show how liquid is the current assets of Starbucks converted to cash comparingwith the present current liability

1.3.2 Efficiency ratios

Efficiency ratios are ratios that are typically used to analyze how well a company uses its

assets and liabilities internally (Anon, 2007)

• Receivables payment period measures the average number of days customers

take to pay their bills, indicating the effectiveness of credit and collectionpolicies of the business

• Inventory turnover illustrates “how well a company manages its inventory

levels” If inventory turnover is too high, it suggests that a company may beoverbuilding its inventory or that it may be having issues selling products tocustomers (Anon, 2007)

Users: Stakeholders, investors

Stakeholders, investors’ concern about the effectiveness of credit and collection policies

of the business and how well business manages inventory levels For example, based onthis data from inventory turnover, stakeholders, investors can give suggestions forcompany that company such as if it too low, business can overbuilding its inventory,expand market to sell products to new customers

1.3.3 Profitability ratio

Profitability ratio is a class of financial metrics that are used to assess a business's ability

to generate earnings as compared to its expenses and other relevant costs incurred during

a specific period of time (Anon, 2012)

• ROE (Return on equity) “measures the rate of return on the money invested by

common stock owners and retained by the company thanks to previous profitable

years It demonstrates a company’s ability to generate profits from stakeholders’equity ROE show how well a company uses investment funds to generategrowth” (Kennon, n.d.)

• ROCE (Return on capital employed) “measures the profitability of a company

by expressing its operating profit as a percentage of its capital employed” Ahigher value of return on capital employed is favorable indicating that thecompany generates more earnings per dollar of capital employed A lower value

of ROCE indicates lower profitability (Anon, 2012)

• Net profit is a measure of the profitability of a venture after accounting for all

costs (Anon, 2002)

• Asset turnover: Asset turnover “measures a firm's efficiency at using its assets

in generating sales or revenue” The higher number the better (Anon, 2002)

• Gross profit indicates how efficiently management uses labor and supplies in theproduction process (Anon, 2007)

Users: Employees, managers, government

- Indicating the efficiency and profitability of Starbucks’ capital investments

- Show for manager to know ability to generate profit from capital

- Based on profitability ratios, government can know control tax payable ofcompany

1.3.4 Debt and gearing ratio

Gearing ratio is a group of ratio which demonstrating the degree to which a firm's

activities are funded by owner's funds versus creditor's funds This ratio compares someform of owner's equity (or capital) to borrowed funds Gearing is a measure of financialleverage, demonstrating the degree to which a firm's activities are funded by owner'sfunds versus creditor's funds (Anon, 2013)

• Debt ratio: is “a measure of a company’s financial leverage” If the ratio is

greater than 1, the majority of assets are financed through debt If it is smallerthan 1, assets are primarily financed through equity (Anon, 2003)

• Gearing ratio (Capital gearing ratio): “measures the percentage of capital

employed that is financed by debt and long term financing” The higher the level

of gearing, the higher the level of financial risk due to the increased volatility ofprofits (Anon, 2003)

• Cash flow ratio is a measure of how well current liabilities are covered by thecash flow generated from a company's operations (Anon, 2007)

Users: Suppliers

- Suppliers can identify the long-term financing of the business

- Suppliers can measure of Starbucks’ financial leverage or risk

 In order to easy give decision whether should continue supplies materials forStarbucks in the future or not

1.3.5 Investment ratios

Investment ratios are ratios that can be used by investors to estimate the attractiveness of

a potential or existing investment and get an idea of its valuation (Richard, 2012)

• P/E ratio: Price earnings ratio “is the measure of the share price relative to the

annual net income earned by the firm per share PE ratio shows current investorsdemand for the company share A high PE ratio generally indicates increasesdemand because investors anticipate earnings growth in the future” (Anon, 2011)

• Dividend yield: “It is a measure of the ability of a company to maintain the level

of dividend paid out” The higher the cover, the safer of dividend is The higherP/E ratio is, the more willing market pay for company’s earning is, and vice versa(Anon, 2008)

Users: Investors, Shareholders

- Know how many profit for investors/ shareholder can earn per share of Starbucks

- Know how much earning for each dollar invested in Starbucks

- Know how many times over the profits could be paid the dividend

 Identify risk and profits from your investment in Starbucks

1.4 Explanation how different laws/regulations are dealt with by accounting and reporting standards

1.4.1 The influences of law to accounting and reporting standards

• Company Act 2006:

The Companies Act 2006 is a piece of primary legislation that largely applies tocompanies directly A number of provisions are currently being set out in secondarylegislation, mainly through regulations or orders made by statutory instrument wasdeveloped from the Companies Act 1985 in order to meet four key objectives:

- To enhance shareholder engagement and a long term investment culture;

- To ensure better regulation and a 'Think Small First' approach;

- There are some of the key effects resulting from the Act include:

For all companies:

- A clear statement of directors' general duties clarifies the existing case law based rules

- Companies will be able to make greater use of electronic communications forcommunications with shareholders.

- Directors will automatically have the option of filing a service address on the publicrecord (rather than their private home address)

- Directors must be at least 16 years old, and all companies must have one naturalperson as a director – i.e they cannot have all corporate directors

- There will be improved rules for company names

- Companies will no longer be required to specify their objects on incorporation

- The articles will form the basis of the company's constitution

For private companies:

- There will be separate and simpler model Articles of Association for privatecompanies

- As part of the "think small first" agenda, there will be a separate, comprehensive

"code" of accounting and reporting requirements for small companies

- Private companies will not be required to have a company secretary

- Private companies will not need to hold an annual general meeting unless theypositively opt to do so

- It will be easier for companies to take decisions by written resolutions

- There will be simpler rules on share capital, removing provisions that are largelyirrelevant to the vast majority of private companies and their creditors

For key benefits: Shareholders

- There will be greater rights for nominee shareholders These will include the right toreceive information electronically or in hard copy if they so wish

- There will be more timely accountability to shareholders by requiring publiccompanies to hold their AGM within 6 months of the financial year-end (Anon,2012)

→ The Companies Act 2006 is a piece of primary legislation that Starbuck largelyapplies to their companies directly Using it help Starbuck make it easier to set up andrun a company; and provide flexibility for the future

• Partnership Act 1890

A partnership is established whenever two or more people set up in business togetherwith the intention of sharing profits and losses and do not form either a limitedcompany or a Limited Liability Partnership (LLP) Even if they do not intend to form apartnership, if they enter into this type of relationship a partnership is formed

Partnerships formed under the Act are often unwieldy and can lead to disputes betweenpartners For instance, under the default provisions of the Act:

- A partner is not obligated to participate in the running of the business in any way,which means that they do not have to turn up to work

- Partners cannot retire If a partner dies or decides to leave the partnership, thepartnership must be dissolved, assets distributed equally, and then a new partnership(or other business) created The process is by no means simple, and can beextremely costly

- Partners cannot be expelled from a partnership

The Partnership Act 1890 (c.39) is an act of the UK Parliament, which governs the rights and duties of business people who do business with a common view of profit

It has a least membership of two and a maximum of unlimited since the year 2002 The most important influence of Partnership Act 1890 to accounting standard is the income allocation It requires loss or profit of partnership has to distribute to each partner, based on their proportion of capital contribution (Anon, 2009)

→ By using Partnership Act 1890 Starbucks have the lack of formality that surrounds it

An agreement of Starbucks is drawn up to counteract the restrictions of thePartnership Act1890

• European Directive:

The European Commission has released its proposals for a fourth money laundering directive (4th Directive) All countries in the European Union area must comply with the regulations, the rules of the alliance including UK The scope of activities

undertaken by legal professionals that are within the 4th Directive and the protection oflegal professional privilege has not changed The key components of client due

diligence and the money laundering offences also stay the same such as:

The annual accounts are to comprise a balance sheet, a profit and loss account and the notes to the accounts, these documents constitute a composite whole The Directives lay down the principles which govern the drawing up of these documents

The Directives list the information which must be provided in the notes to the accountsThe annual report must include a fair review of the development of the company's business and of its position

 The Directives provide for a system of auditing under which Starbuck must have their annual accounts audited by one or more persons authorized by national law to auditaccounts Besides that, it’s still have some key changes about: Risk assessments,

enhanced due diligence, simplified due diligence, record keeping requirements,minimum sanctions, the vexing issue of beneficial ownership.

1.4.2 The influences of regulation to accounting and reporting standards

• International Accounting Standard (IAS) and International Financial Reporting Standards (IFRS)

International Accounting Standard (IAS)

An older set of standards stating how particular types of transactions and other eventsshould be reflected in financial statements In the past, international accountingstandards (IAS) were issued by the Board of the International Accounting StandardsCommittee (IASC) Since 2001, the new set of standards has been known as theinternational financial reporting standards (IFRS) and has been issued by theInternational Accounting Standards Board (IASB) IASC has no authority to requirecompliance with its accounting standards However, many countries require thefinancial statements of publicly-traded companies to be prepared in accordance withIAS (Anon, 2009)

International Financial Reporting Standards (IFRS)

A set of international accounting standards stating how particular types of transactionsand other events should be reported in financial statements IFRS are issued by theInternational Accounting Standards Board

Generally Accepted Accounting Principles (GAAP)

The common set of accounting principles, standards and procedures that companiesuse to compile their financial statements GAAP are a combination of authoritativestandards (set by policy boards) and simply the commonly accepted ways of recordingand reporting accounting information

→ By using International Accounting Standard (IAS) and International Financial

Reporting Standards (IFRS), Starbuck have to use to compile their financial

statements and particular types of transactions helps these statements more clearly and understandable for the company’s stakeholders

• UK accounting standard:

In UK, the accounting standard system including:

Financial Reporting Council (FRC)

In the United Kingdom, an independent regulator responsible for setting standards forcorporate reporting and actuarial practice, as well as monitoring and enforcingaccounting and auditing standards They also oversee the regulatory activities of the

professional accounting bodies and operate independent disciplinary arrangements forpublic interest cases involving accountants and actuaries (Anon, 2009)

Accounting Standard Broad (ASB)

UK organization responsible for drafting and establishing accounting standards ASB

is a subsidiary of Financial Reporting Council; one of its committees publishes theInternational Accounting Standards Accounting Standard Broad (ASB) makes,improves, amends and withdraws accounting standards Many of ASBs specialize inthe various fields or sectors of accounting (Anon, 2003)

Financial Reporting Review Panel (FRRP)

The task of FRRP group for examining questionable accounting practices in theUnited Kingdom, a review panel established to examine contentious departures fromaccounting standards by large companies It is a subsidiary body of the FinancialReporting Council or we can say that receives and investigates complaints about theannual accounts of companies in which it is claimed that the accounting requirements

of the Companies Act have not been fulfilled (Anon, 2007)

Urgent Issues Task Force (UITF)

The UITF is a committee of the ASB and is designed to assist the Broad in themaintenance and development of good accounting standard and best practice infinancial accounting and reporting The main role of UITF is to deal with urgentissues not covered satisfactorily by existing standards Such issues usually arise wherethere are new developments in financial reporting or where controversial orconflicting interpretations of the application of existing regulations are developing(Anon, 2005)

→ In the UK accounting standard an independent regulator responsible for settingstandards for Starbucks reporting and actuarial practice, as well as monitoring andenforcing accounting and auditing standards, it also makes, improves, amends andwithdraws accounting standards

4.1 Calculation accounting ratios to assess the performance and position of a business

(2012) Indicators Comment Liquidity and efficiency