Capital Structure and Financial Analysis

This assignment examines the concept of capital structure, exploring various theories that explain how companies decide on their financing mix. It then applies these theories to a case study of Marks & Spencer, analyzing their financial statements and key ratios to assess the company's capital structure and overall financial health. The analysis provides insights into M&S's investment decisions and risk profile based on their debt and equity financing strategies.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
FINANCIAL ACCOUNTING.........................................................................................................1
Q.1.INTRODUCTION....................................................................................................................3
Accounting policies that relates to property, plant and equipment of FCT Group .....................3
Disclosure Requirements of AASB116 and AASB 136..............................................................3
CONCLUSION................................................................................................................................4
Categories of intangible assets of FLT group..............................................................................4
CONCLUSION................................................................................................................................5
Q.3. INTRODUCTION...................................................................................................................5
Accounting treatment of provisions and policies in respect to long service leaves.....................5
Accounting treatment of unrecognised dividend ........................................................................6
CONCLUSION................................................................................................................................6
Q.4. INTRODUCTION...................................................................................................................6
Contingent assets and liabilities and their disclosure in financial statements.............................6
Q.5 INTRODUCTION....................................................................................................................7
Analysis of the financial ratios....................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

Q.1.INTRODUCTION
Financial Accounting can be defined as a branch of accounting which deals with the
financial transactions of the company as well as records, summarizes and presents the financial
statements. Flight centre travel group is the world's top-most and profitable travel retailer
personally delivering amazing experiences to people, partners, and satisfying their customers to
a great extent. This report deals with the financial policies that the company is adopting and
various accounting standards.
Accounting policies that relates to property, plant and equipment of FCT Group
As per the Annual report of FCT Group, company is following the guidelines provided
by the Australian Accounting Standard Board. Financial statements are prepared as per the
Australian Accounting standards which show true and fair view. These accounting standards
needs to be followed by the company in order to set the disclosure of financial transactions.
Flight centre travel group is charging depreciation on assets as per the policies given by the
Accounting standards of Australia (Acharya, V.V.,and et.al., 2013)Company is charging
depreciation by following Straight line method so as to reduce the carrying amount of an asset
over its useful life. Property, plants and equipment are disclosed at historical cost less
depreciation. The useful life of property, plants and equipment are analyzed and checked at the
end of each financial year (Al-Najjar, B. and Hussainey, K., 2011)
According to the financial statement of FLT, it can be seen that book amount of building
at the end of financial year 2016 is declined in comparison to 2015. This is due to the gain
realized in the year 2016 on sale of New Zealand head office building. There was no disposal of
property in 2015 which results in higher book value. But if analyzing the accounting policies
followed by FLT group, there is an increase in net book amount of plant and equipment in 2016
as compared to 2015 by $31111 which is due to the impairment of the plant and equipment in
USA segment. Impairment loss is identified and assessed by the firm when the asset's carrying
cost exceeds its recoverable amount. FLT recognizes its impairment loss in profit and loss
statement.
Disclosure Requirements of AASB116 and AASB 136
FLT group has prepared its financial report as per the Australian Accounting Standards
which helps the company to present true and fair view to their customers, competitors etc. In the

context of property, plant and equipment company has referred AASB116 which deals with the
accounting treatment of the assets so as to help the customers to infer information regarding the
depreciation charged on asset, recognition on sale of any asset, impairment losses etc (Cassell,
C.A., and et.al., 2012.)
AASB 136 deals specifically with the impairment of assets and this accounting standard
helps to ensure that no asset should be carried more than its recoverable amount but is its more
than recoverable amount then impairment loss must be recognized and the related disclosures.
CONCLUSION
FLT has followed all the accounting standards prescribed by AASB that is they have
stated their assets at historical cost less depreciation. Impairment loss has also been recognized
by the company which shows that their financial statements show true facts and figures regarding
property, plant and equipment.
Q.2. INTRODUCTION
An intangible asset can be defined as a non-physical asset and which are also considered
as non-monetary asset having a life greater than one year. FLT considers many intangible assets
and they are not subject to amortisation but they can be impaired therefore, impairment losses
must be recognized in the financial statements regarding goodwill and other intangible assets.
Categories of intangible assets of FLT group
Other than goodwill, FLT has also considered brand names and customer relationships
and other intangible assets which are related to software and these intangible assets are amortised
over their expected useful life. As the brand names have indefinite life , therefore company owns
these brands and use them on a continuous basis.
Net book amount of goodwill increases at the end of 2016 as no impairment loss is
considered in goodwill therefore, its value increases because of the acquistions inspite of some
portion is transferred to reserves. But in the case of brand names and other intangible assets,
impairment loss is recognized. In the financial year 2016, various brand names as well as other
intangible assets have been acquired by the company which results in increment in the net book
value of assets. FLT had not charged any impairment losses in the prior years. Impairment
charges of indefinite life intangibles are recognised in profit and loss statements other than
goodwill.

Their useful lives are estimated according to the class or group of intangible assets.
Goodwill and other intangible assets have an indefinite useful life but customer relationships are
amortized over their expected useful life but their expected useful life must not exceed seven
years. And the useful life of other intangible assets should not exceed 2.5-5 years.
Company is also considering impairment charges of intangible assets. An impairment
loss is recognised when an asset's carrying amount exceeds its recoverable value. This loss is
recognized in profit and loss statement. Other than goodwill, impairment loss must be reviwed
for reversal at the end of each financial period.
CONCLUSION
FLT group has amortised various intangible assets like goodwill, brand names and
customer relationships etc. They have followed different policies regarding impairment of
intangible assets.
Q.3. INTRODUCTION
As per Accounting standards, provision can be defined as an amount set aside from the
company's profits for an expected liability to be arised in future. Company specifies in its report
an accounting treatment of provisions in the financial statements.
Accounting treatment of provisions and policies in respect to long service leaves
Provision is an amount set aside from the profits of the company therefore, it becomes the
liability of the company. Provisions appear in the liabilities side of the balance sheet under the
head current liabilities.
As per accounting standards, company has followed accounting policies in respect of
long service leaves(LSL). Long service leaves can be defined as the leaves which are given to an
employee after working for a long period of time. As per the annual report of FLT Group,
employees who have completed the required service period are entitled for long service leaves
with an entitlement of pro-rata payments within next 12 months after the end of financial year.
LSL obligations which are expected to be settled within next 12 months is increased in 2016
which means that amounts are not settled within the given period of time. It is stated in an annual
report of FLT group in notes to financial statements F7 (Covas, F. and Den Haan, W.J.,

2012.)Value of long service leave obligation which appears in the balance sheet in the year 2015
was $21475 and in the year 2016 is $25634.
Accounting treatment of unrecognised dividend
Unrecognized dividends are considered as dividends which have been declared by the
company after the balance sheet date but they are not recognized. This unrecognized dividend
will come under the head of provisions as it will be considered as an obligation of the company
to pay in future to the shareholders. According to the IAS 10 “Events occuring after the balance
sheet date”, it will be considered as a liability for the FLT group (Taani, K. and Banykhaled,
M.H.H., 2011.)
CONCLUSION
As per the above assessment of Long service leaves and unrecognized dividends,
company has followed proper accounting policies and procedures to expand their productivity
and gives customers an accurate feedback about the company.
Q.4. INTRODUCTION
This section deals with contingent liabilities of the company and about the disclosure
requirements needs to be presented by the company in their financial statements. It also presents
about the contingent assets and their disclosure requirements.
Contingent assets and liabilities and their disclosure in financial statements
IAS 37 deals with the provisions, contingents assets and contingent liabilities. As per IAS
37, contingent liabilities can be defined as a present obligation for the company which depends
on some uncertain future events. It is required by the companies to disclose contingent liabilities
in financial statements even if they are not recognized by the company. They are to be disclosed
in financial statements as a footnote and not really shown in balance sheet as they are not
estimated by the company (Ahmed Sheikh, N. and Wang, Z., 2011)
Company is having its contingent liabilities regarding the rental expenses as it becomes
the present obligation for FLT group. FLT has also having contingent consideration regarding a
law test case against ACCC who further appealed to the high court for which the judgement was
anticipated at the end of the year 2016. therefore, this liability is regarded as contingent liability.

Contingent liabilities are disclosed as a footnote below the balance sheet and not shown in the
financial statements (Marks and Spencer’s Balance sheet. 2016. [Online].)
Contingent assets are defined by the IAS 37 as whose existence will be confirmed only
on the occurrence or non occurrence of any future event. Contingent assets are also disclosed in
notes to financial statements like contingent liabilities and they are also not shown in balance
sheet as an asset.
Q.5 INTRODUCTION
Ratios are considered as a very famous tool for analysing financial statement of a
company. Shareholders can view true and fair position of financial statements of the company
that whether company is able to repay its debts or not, assessing the liquidity position of the
company etc.
calculation of financial ratios of company
Ratios formula
calculation for
year 2016
calculation for
year 2015
Results(
2016)
Results(
2015)
current ratio
current
assets/current
liabilities
2263233/156672
4
215270/14525
00 1.44 0.15
rate of return
on total assets
EBIT/total
assets
345043/3001316
*100
366297/27879
66*100 11.50 13.14
times interest
earned
EBIT/interest
earned 345043/27004 366297/29449 12.78 12.44
Debt-equity
ratio debt/equity
429858/1345945
*100
531924/12701
21*100 3.22 4.24
price earning
ratio
market
price/earning
per share 31.58/242.4 31.58/254.7 0.13 0.12
Analysis of the financial ratios
Current ratio includes current assets and current liabilities. It measures the liquidity of the
company. In 2016, current ratio is increased as compared to 2015, that is company's current

assets are 1.44 times more than current liabilities which shows the company's better financial
position (Industrial benchmark ratios for UK Retail Industry. 2016.)
Rate of return on total assets indicated that how effectively a company is using its assets.
Company's capacity of using its total assets in 2016 in comparison to 2015 is decreased by
approximately 2%.
Interest is earned on operating profit is higher in both the periods which shows the better
financial position of the organization.
Debt-equity ratio is used by the company to see that how much debt a company is using
to finance its assets. High debt equity ratio indicated that company is undertaking high debt and
thus has high risk. Here, FLT is not undertaking high risk as they have lower debt-equity ratio.
Price earning ratio indicates that how much an investor can expect to invest in a company
in order to receive company's earnings. Companies with higher P/E ratio are expect to grow in
future as compared to the lower P/E ratio.
CONCLUSION
As per the annual reports of the company, company's financial position is sound and it is
able to repay its debts. Ratios indicates the performance of the company and its growth which
helps the investors to decide whether to invest or not.

REFERENCES
Books and journals
Acharya, V.V.,and et.al., 2013. Corporate governance and value creation: Evidence from private
equity. Review of Financial Studies, 26(2), pp.368-402.
Ahmed Sheikh, N. and Wang, Z., 2011. Determinants of capital structure: An empirical study of
firms in manufacturing industry of Pakistan. Managerial Finance. 37(2). pp.117-133.
Al-Najjar, B. and Hussainey, K., 2011. Revisiting the capital-structure puzzle: UK evidence. The
Journal of Risk Finance. 12(4). pp.329-338.
Cassell, C.A., and et.al., 2012. Seeking safety: The relation between CEO inside debt holdings
and the riskiness of firm investment and financial policies. Journal of Financial Economics.
103(3). pp.588-610.
Covas, F. and Den Haan, W.J., 2012. The role of debt and equity finance over the business cycle.
The Economic Journal. 122(565). pp.1262-1286.
Taani, K. and Banykhaled, M.H.H., 2011. The effect of financial ratios, firm size and cash flows
from operating activities on earnings per share:(an applied study: on Jordanian industrial
sector).International journal of social sciences and humanity studies. 3(1). pp.1309-8063.
Wei, C. and Yermack, D., 2011. Investor reactions to CEOs' inside debt incentives. Review of
Financial Studies. 24(11). pp.3813-3840.
Online
Basha, A. D., 2014. Capital structure theories. [Online]. Available through: <
https://www.slideshare.net/ShahidAfzalSyed/5-capital-structuretheories-32694984>.[Accessed
on 29th March 2017].

Industrial benchmark ratios for UK Retail Industry. 2016. [Online]. Available through:
<http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?s=1300>.[Accessed on
29th March 2017].
Marks and Spencer’s Balance sheet. 2016. [Online]. Available through:
<http://financials.morningstar.com/balance-sheet/bs.html?t=MKS&region=gbr&culture=en-
US>.[Accessed on 29th March 2017].