Financial Reporting for Businesses

Financial Reporting for
Businesses

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
a. Calculation of financial ratio for 2018 and 2017....................................................................3
b. Analysis of financial performance..........................................................................................8
c. Evaluating changes related to Lease Accounting rules.........................................................10
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
The term financial reporting is related to the process of making full disclosure of all the financial
as well as non financial information of the company in its own final report as prepared for every
accounting period ending. With the help of financial reporting, the management of the company
can have overview of overall solvency as well as liquidity aspects of business and measures to be
undertaken by the management for making improvement in it. It assists many stakeholders in
getting deep insight about how the company is performing in a particular accounting period. The
present report is based on the Unite Group Plc of which financial assessment will be done with
the help of financial ratio analysis. Also, explanation will be made about its financial
performance and position for the year 2018 and 2017. At last, emphasis will be made on defining
changes in the Lease accounting rules from IAS 17 Leases to IFRS 16 Leases.
MAIN BODY
a. Calculation of financial ratio for 2018 and 2017
A. PROFITABILITY RATIO
Ratios 2018 (in £m) 2017 (in £m)
Profitability Analysis
Gross profit
ratio =
(Gross
Profit/Reven
ue from
Operations)
x 100
Gross profit 163.5 155
Revenue
form
operations
128.3 119.3
Gross profit ratio 127.44% 129.92%

Return on
Assets
(ROA) = Net
income/
Total assets
Net income 237.3 223.8
Total assets 2849.5 2431.6
Return on Assets 8.33% 9.20%
Return on
Equity = Net
income/
Shareholders
equity
Net income 237.3 223.8
Shareholders
equity 2073 1729
Return on Equity 11.45% 12.94%
B. LIQUIDITY RATIO
Ratios 2018 (in £m) 2017 (in £m)
Liquidity Analysis
Quick ratio
= (Total
current
assets –
Inventory –
Prepaid
expenses)/
Total current
assets
220.8 138.6

Current
Liabilities
Inventory 9.1 4.5
Prepaid
expenses 0 0
Current
Liabilities 147.4 157.5
Quick ratio 1.44 0.851
Current
Ratio =
Current
Assets/
Current
Liabilities
Current
Assets 220.8 138.6
Current
Liabilities 147.4 157.5
Current Ratio 1.5 0.9
Working
capital ratio
= Current
assets/
Current
Liabilities
Current
Assets 220.8 138.6
Current
Liabilities 147.4 157.5

Working capital ratio 1.5 0.9
C. EFFICIENCY RATIO
Ratios 2018 (in £m) 2017 (in £m)
Efficiency Analysis
Inventory
Turnover
ratio = Cost
of goods
sold /
Average
Inventory
Cost of
goods sold 40.2 41.1
Average
Inventory 6.8 2.25
Inventory Turnover ratio 5.91 18.27
Asset
Turnover
ratio = Net
Sales/
Average
Total Assets
Net sales 128.3 119.3
Average
Total Assets 2640.55 1215.8
Asset Turnover ratio 4.86% 9.81%
Day's Sales Ending 9.1 4.5

in Inventory
= (Ending
Inventory/C
ost of Goods
Sold) * 365
Inventory
Cost of
goods sold 40.2 41.1
Day's Sales in Inventory 82.62 39.96
D. GEARING RATIO
Ratios 2018 (in £m) 2017 (in £m)
Gearing Analysis
Debt to
equity ratio
= Total
liabilities /
Shareholder
s equity
Total
Liabilities 750.7 677.4
Shareholders
equity 2073 1729
Debt to equity ratio 0.36 0.39
Debt ratio =
Total
assets /
Total debt
Total debt 609.2 525.3

Total assets 2849.5 2431.6
Debt ratio 0.21 0.22
Equity
Ratio =
Total
equity/
Total assets
Total equity 2098.8 1754.2
Total assets 2849.5 2431.6
Equity Ratio 0.74 0.72
b. Analysis of financial performance
With the help of financial ratio, overall financial position as well as performance of the
company can be easily evaluated. The final accounts, statements of the company depicts about
financial activities as well as business transactions as undertaken by the company during an
accounting period (Liang and et.al., 2016). It is the formal records with the help of which it
defines the financial stability and liquidity position of the business, company or any other person.
For every business organisation, it is very much important to make disclosure of all the relevant
as well as material information in its final report, which is having influencing impact on the
decision making process of the stakeholders.
In case of the Unite Group Plc, the financial analysis has been done with the help of
financial ratios. Thus, financial ratios are those mathematical tools which can be used by the
company for making comparison among the financial statements of the last two period. With the
help of this analysis and detailed interpretation, all the investors, creditors, stakeholders as well
as internal management of company can have better understanding that how effectively the
company is carrying on its business operations and what measures to be undertaken by the
company so as to makes improvement in the performance level.

 Profitability Analysis – It is a tool which helps in measuring the amount of profit as
earned by the company because of its overall business operational efficiency. It analyses
how effectively the Unite Group is working so as to capture market share.
In case of Gross profit ratio, there has been increase in the gross profit because of improved
sales margin from 2017 to 2018 i.e. from 119.3 £m to 128.3 £m. But when it comes to gross
profit ratio, there has been decline from 129.92% to 127.44% this is because of loss which has
incurred on property disposal.
As per the return on Assets which defines that how effectively the Unite group has make use of
its available business assets in making profit (Naseem and et.al., 2019). There has been decrease
from the year 2017 to 2018 i.e. from 9.20% to 8.33%. It depicts that company is not earning
much profit from the investment made as it is having more emphasis on invested capital only and
not on earning profits from sales.
With the help of Return on equity, the Unite group has been making efforts to earn high profit
margins from improving its sales level with the help of shareholders investment. The main
reason behind decrease in the value of return on equity is that the company has shifted its capital
requirement from equity sources to debt financing. As a result there has been increase in debt
level thereby declining in return from 12.94% to 11.45%.
 Liquidity Analysis – It defines whether the company is capable enough to makes
payment of its current obligations or which is going to arises in the coming year with the
help of current assets.
As per Quick ratio, current liabilities of Unite Group has decreased from 157.5 £m to 147.4 £m
which defines that company is having sufficient cash as well as quick assets o retire its current
obligations on immediate basis (Pech, Noguera and White, 2015).
In relation to Current ratio and Working capital ratio, the Unite Group is having better
liquidity aspects in the year 2018 as compared to 2017. It is because of increase in the level of
current assets from 138.6 £m to 220.8 £m which states that it is company is capable enough to
make payment of its short term obligation if arises.
 Efficiency Analysis – It states that how efficiently the company is making use of its own
available business assets as well as liabilities part i.e. equity section so as to generate high
sales margin.

In case of Inventory Turnover ratio, it helps the Unite Group Plc in defining that how
efficiently it is having control over its inventory as well as merchandise level so as to gain high
sales margin along with increased market share. There has been increase in the value of its
efficiency of converting its inventory into sales as compared to 2017 ratio (Goyal and Bhatia,
2016). This states that the company with its sound and effective business policies and strategies
in respect on marketing, it has been able to increase its customer base.
As per the Asset Turnover, there has been decline from the last year i.e. from 9.81% to 4.86%
which states that the company is not making proper use of its business assets as well as of other
business resource in generating sales. It is because of the reason that the company is either
having some management issues related to the production or manufacturing function of business
or it can be because of out dated or inefficient business processes or techniques being used by the
company for sales.
Days Sales in Inventory defines the times period within which the Unite Group will be able to
completely sell its present inventory or stock. In case of the Unite Group it has been assessed
with the help of ratio, that the company is having enough inventory which will last to 83 days
and will get converted in to cash thereafter. It states that the company is not having strong
marketing techniques as well as plans or low customer demands to move out its stock present in
business premises in form of sales.
 Gearing Analysis – It helps stakeholders as well as financial analyst in gaining better
understanding about the overall capital structure format which the company is having
therein. It defines how much the company is relying on debt sources for its financing
purpose along with equity sources.
In case of Debt to equity ratio, the Unite Group is having a ratio of 0.36 in the year 2018 which
is lower than 2017 and is considered as the better part on behalf of both the stakeholders as well
as investors. It helps the lenders as well as investors in protecting their interest even if the
company is having adverse business situation.
In the context of Debt ratio, it defines the total percentage of the total assets which has been
financed with the help of debt sources and the level to which it is considered as suitable as well
as stable for the business (Davis, 2019). The decline in debt ratio from 0.22 in the year 2017 to
0.21 in the year 2018 states that the company is having lower debt ratio and is having more

stable and sound business operations having the potential of running in effective manner for long
run time frame.
As per the concept of Equity ratio, it has been evaluated that the company is having a total asset
of 2849.5 £m which has increased as compared to the last year time period. There has been
increase in the ratio which depicts that the Unite Group Plc is having its more stake in equity
sources as it is much cheaper than debt financing source. It is because of the factor that with the
debt financing option, the company is required to make payment of interest to its investors every
year which is considered as an expenses for the company and thus declines its profitability
aspects for that year.
c. Evaluating changes related to Lease Accounting rules
The term Lease Accounting is considered as one of the most important part of accounting
section as it wholly differs which its emphasis on the end user. Lease is defined as an
arrangement as per which the lessor agrees and allow the lessee to have control as well as right
of using identified property, plant as well as equipment for a definite time period in lieu of
payments of either one or more instalment (Sacarin, 2017). Every business organisation requires
assets for conducting business operations in effective as well as efficient manner which can
either be acquired or taken on lease option.

IAS 17 Lease accounting rule of lease defines the accounting treatment of standardised
format along with requisites disclosure to be made about assets held under lease by the Unite
Group Plc (Hanif, 2016). It works on the norms of substance over form concept which is
applicable for only specific areas of lease accounting.
IFRS 16 Lease is developed by the International Accounting Standards Board which has
replaced IAS 17 Lease. The key difference in between both the accounting rule of Lease is
related to the manner in which the operating leases will be brought on the Balance Sheet of the
company.
Basis IAS 17 Lease IFRS 16 Lease
1. Authority Body It is developed by the
International Accounting
Standards Committee.
Is formulated by the
International Accounting
Standards Board.
2. Recognition of Lease Under this accounting rule
of lease, finance lease is
recognised as assets and
operating one is shown as
expenses (Wilkins, 2015).
All the leases as
undertaken by the
company are recognised as
an assets.
3. Emphasis Is more on who is bearing
risk factor and having part in
reward of lease.
Focus is made on that one
who is having the right to
make use of lease asset.

4. Accounting treatment Operating lease being
having complex accounting
treatment as compared to
finance lease with higher
volume as well. This
provides the accounting
department with lower
challenging calculation to be
made.
All the types of leases will
have same accounting
treatment (Sari, Altintas
and Taş, 2016). As well as
the department of
accounting will have high
volume as well as complex
nature of calculation
related to amortisation.
Advantages and disadvantages of IFRS 16 approach:
As per the IFRS 16 Lease, there has been development of a single accounting model for
all the leases having a term period of more than 1 year to recognise and present all the assets and
liabilities of the balance sheet from the perspective of leasing contracts. Following are the
benefits and drawbacks of this new accounting model:
Advantages -
1. It helps in providing improved quality of financial report for company having the
material off balance sheet leases.
2. Makes improvement related to the information as provided to the investors for making
effective decisions about investment factors.
3. It ensures better improved comparability as well as transparency in respect of the balance
sheet which provides end users with clear impact of operating lease thus making its easy
to make comparison among companies.
4. Provides ease in making comparison of companies who lease with those companies who
has buy the option of lease.
Disadvantages -
1. It will have impact on the financial report of the company because of such model. As
under this rule, operating lease will be capitalised and will create a shift in business
financial metrics having large number of such lease.
2. Aspects such as asset turnover, equity, operating expenses will decreases with an increase
in the liability, EBIT, reported debt amount, asset of recorded nature (McFie, 2016).

3. The Unite Group has to take care of its disclosures while explaining about such shift and
its related figures so as to maintain good relationship with covenants and shareholders for
their effective decision making process. Non compliance of which can result in breach of
financial based agreements as well as contracts to both the internal and external party of
the Unite Group.
Because of IFRS 16 Lease, the Unite Group is required to recognize its right of using
assets as well as lease liabilities in the consolidated balance sheet which was measured at the
present value of future minimum lease payment at the initial stage.

CONCLUSION
From the above report it can be concluded that with the help of financial report, every business
entity, management and its investors can gain in depth knowledge about its overall financial
position for a specific period of time. In case of the Unite Group Plc, it has been assessed that its
profitability aspects is not much strong and is not having sound return from sales done. Also, it is
having enough capability to convert its inventory into sales very easily with maximum utilization
of present business assets with low stake in debt financing sources. Furthermore, it has been
evaluated that the company is having sufficient amount of current assets in the business so as to
meet its current or upcoming business obligations. Also, with development of IFRS 16 Lease
changes has been made in respect of Group accounts for leases which was previously recognised
as operating lease under IAS 17 Lease.