Financial reporting definition - AccountingTools

Running head: FINANCIAL REPORTING
FINANCIAL REPORTING
Name of the Student
Name of the University
Author Note

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FINANCIAL REPORTING
Executive Summary
The report focuses on discussion of impairment of assets, financial instruments, and
defiend benefit pension plan as per the accounting stndards and policies dopted by
Reckittt Benckiser for the year ended as on 2018. The report highlight the treatment and
method of valuation adopted by them, and how it affects the financial position of the
group.

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FINANCIAL REPORTING
Table of Contents
Introduction:.......................................................................................................................3
Discussion:.........................................................................................................................3
a) Impairment as per IAS 36:..........................................................................................3
b) Financial instruments:.................................................................................................4
c) Defined Benefit Pension Plans:..................................................................................6
Conclusion.........................................................................................................................7
References.........................................................................................................................8

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Introduction:
The objective of this report is to conduct an analysis of the financial statements of
"Reckitt Benckiser." It is a “multinational company” which is engaged in the production
of consumer goods like home products related to hygiene and health. The organization
is listed on "London Stock Exchange" and also a component of the FTSE 100 Index.
The products range from disinfectant cleaners, automatic washing detergents, pest
control to acne treatment products. The company's segments are across various
regions, consisting of Europe, North America, including countries like Russia and other
segments, consists of North Africa, Middle EastAfrica, and South-east Asia. The brands
that the company has include Strepsils, Air Wick, Dettol, Harpic, Lysol, and Vanish. RB
Group Plc is holding 100% ordinary shares of RB Plc that are incorporated in England
and Wales. The financial statements are prepared in compliance with the EU endorsed
IFRS and interpretations issued by IFRIC. They have also followed the IFRS issued by
IASB. The report discusses the three items accounting treatment, accounting policies
used, and their impact on the financial statement.
Discussion:
The accounts are made under the historical cost method leaving few financial
assets and liabilities, which are accounted at “fair value through profit or loss” (Cristea
2017). The analysis is as follows:
a) Impairment as per IAS 36:
Based on cash flows generated by brand and other production assets and
depending on how management observes the business, the group CGUs
(GCGU) are identified for testing impairment. The company's goodwill and other
intangible assets that have indefinite lives are apportioned to either individual
CGU or to the group of CGUs. The assessment for allocation includes evaluation
of expected growth rates (short/long/medium - term) and calculation of discount
rates (pre-tax). The cash-generating units, as identified by RB Group Plc on the
basis of cash flow generation, are – Health, IFCN, Hygiene, and home. But from
now onwards, Home and Health will not be considered as distinct GCGU
(Rb.com 2020).
When the assets carrying value may not exceed its recoverable amount, then
these intangible assets will be tested for impairment. The recoverable amount is
higher of – (i) fair value (after deducting disposal costs), (ii) value in use. (Gros
and Koch 2018)
The cash flows for impairment purpose are determined on basis of followings:
 The gross margin derived from past experience after adjusting for the
impact of estimated production cost.
 Net revenue growth is established on anticipated sales quantity and
mix.
 PV of cash flows are computed using the discount rate (Maisuradze
2019)
 Marketing expenses and other expenditure
The management performed an impairment review for goodwill and other
indefinite-life intangible assets. After evaluating the management's analysis, the

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company established correctness of significant judgments, particular risk issues,
and sensitivities that are applied to separate CGU and GCGUS. The analysis
conducted by them showed that there was no impairment required on 31st
December 2018. For IFCN, recoverability of assets is evaluated by using
estimated financial information based on discounted cash flow model, which is
extremely sensitive to variations in assumptions. (Rb.com 2020).
There are deviations in those assumptions that will lead to recognition of
impairment. PPE is re-evaluated for impairment whenever carrying amount is not
appropriate, but on freehold land test for impairment is being conducted annually.
Recoverable amount is calculated for IFCN – by computing value in use taking
discount rate at 10% (pre-tax), and for Oriental Pharma, it is taken at 13%. The discount
rate is determined by management for each CGU and GCGU by performing a bottom-
up analysis of suitable WACC after combining with comparable companies' benchmark.
For health and hygiene home CGUs and also “Sexual Wellbeing” and “Brazilian Sexual
Wellbeing GCGUs”, any possible change, which results in rational and critical
assumptions for valuation, would not necessarily imply potential impairment. The
impairment loss is recognized in the income statement which is resulting from excess of
carrying value over its recoverable amount. The impairment loss results in lower profits
and also affects financial ratios. The assets WDV also reduces as it is deducted from
assets carrying value. The company has provided for impairment on PPE, goodwill, and
intangibles. Since they determine impairment based on historical operating results,
which is approved by the company's management, and it is either for a three or five year
period; hence they have historical impairment.
b) Financial instruments:
The company's financial instruments can be classified into the following category:
(i) Trade and Other receivables/payables
(ii) Equity Instruments
(iii) Derivative financial instruments
(iv) Cash and cash equivalents
(v) Borrowings/financial lease/term loans
(vi) Bonds
(vii) Senior notes
Due to the company's operations, it faces a lot of financial risks, including foreign
exchange risk, credit risk, liquidity, interest rates, and market price fluctuation. The main
financial risks can be classified as follows:
1) Market risk:
(a) Currency risk
(b) Price risk
(c) Interest rate risk
2) Credit risk
3) Liquidity risk
4) Capital Management

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FINANCIAL REPORTING
The 'risk management program' of organization utilizes those financial instruments
which are in foreign currency, including debt and other instruments, to minimize risks on
financial performance of RB. Its financing as well as risk management activities are
integrated into the "Group Treasury" to derive scale and control benefits. Group
Treasury manages risks and flows that are produced from commercial activities, and
those speculative transactions that are not undertaken. BOD agrees and analyses these
policies and guidelines for all Treasury activities, and they approve significant activities
individually. Treasury of the group functions under the CFO's control and is subjected to
“periodic independent reviews” and audits.
The currency risk impact on the financial statement is that as of 31st December 2018,
4486 million pounds is payable as “outstanding forward foreign exchange contracts”
notional amount. A net loss of 44 million pounds was recorded due to the investment
hedge. The financial instruments are measured as follows:
Trade and Other receivables/payables,
Cash and cash equivalents
Borrowings/financial lease/term loans
Bonds
Senior notes
Trade and other Payables
Other non-current liabilities
Amortized cost
Equity Instruments FVOCI
Derivatives financial instruments Hedging instruments at fair value /FV
through P/L
IFRS 9 has presented new principles for the “hedge accounting” and for financial
assets impairment (Singh 2018). On last date of every reporting period, financial assets
that are valued at amortized cost are tested for impairment. The impairment loss is
recognized in OCI or as an expense. There are provisions for impairment on financial
instruments by the RB group as well. It is their policy to monitor and when it is required
to hedge their “foreign currency transaction exposure”. The currency exposures result
majorly from receipts and payments and from remittances of dividends and loans (all in
foreign currency). Whenever the group enters into the hedge, hedge accounting is being
applied for recording and measuring. It is used for cash flow hedges, economic
relationships, and expected effectiveness are examined at inception (Andrzejewski,
Dunal and Ożga 2018). The portion that is not effective and not material is recognized in
Income Statement. The gain of 6 million pounds is recognized in hedging reserves in
OCI on forward exchange contracts in 2018 are recorded in the Income statement of
company in the year during which the hedged forecast affects income statement of RB
group. The hedge relationships identified under IAS 39 (31/12/17) fulfilled the hedge

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accounting criteria under IFRS 9 (1/01/18) and were hence considered as hedging
transactions (Gornjak 2017).
The company conducts sensitivity analysis for each assumption to evaluate the
changes in those assumptions in comparison with previous estimates and then identify
the most sensitive assumption. The principles of IFRS 9 were adopted by RB Group,
and there were no material changes in the classification of income and expenses to the
P/L as well as all liabilities and organization’s assets in the Balance Sheet including
measurement for the same. The classes of financial assets and liabilities have a similar
carrying value under IFRS 9 as it was under IAS 39. There is no material impact of the
changes, and there is complete disclosure.
c) Defined Benefit Pension Plans:
The members of defined contribution plans are the employees of the organization
and these are provided with pension, and that pension is being charged to Profit /Loss
Statement (Glaum, Keller and Street 2018). It is recorded as contributions that are
made to such members. RB group has no other payment liability once this contribution
has been paid. For the defined pension plan, any gain or loss is the Present value less
fair value of plan assets as on the last date of accounting year. Present value is
computed by discounting the probable and prospect cash-flows at the yield on similar
“corporate bonds” that are denominated in the currency in which the pension benefits
are rewarded to the employees.
Yes, obligations for the “defined benefit pension plans” are based on assumptions
regarding the upcoming mortality experience, which are set as per the published
statistics and overall experience. And for their UK plan, assumptions are based on the
standard 'SAPS mortality table.' The assumption (UK) includes a 5.4% increase in rate
for pensionable salaries, a discount rate of 2.7%, 3% increase in pension payments
(Rb.com 2020). The assumptions are realistic as they are based on the overall practice
and experience considering every region. The impact of such assumptions on the
financial statement is such that gains are occurring from deviation in demographic
assumptions and surplus from such deviations in all the assumptions.
For defined plan discount rate is used to compute the liabilities, and the rate is
determined according to the yield on corporate bonds. When plan assets’ performance
falls below this bonds’ yield, it will lead to a deficit. There is a sensitivity analysis for
changes in assumption and changes in “defined benefit obligations” which are :
2018 Changes in assumption Changes in defined benefit
obligations
Discount rate .1% ↑ 1.8% ↓
RPI .1% ↑ .6% ↑
Life expectancy Members live one year
more
.4% ↓

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FINANCIAL REPORTING
This analysis is conducted on the basis of change in the assumption while
keeping various other assumptions at constant, which is not realistic and not likely to
occur. Few assumptions are made on the basis of historical events and experiences.
The current financial status is that – “Liability on Balance Sheet” is (318) million pounds.
The assets on the Balance Sheet are 191 million pounds and hence net pension liability
(127) million pounds.
Fair value of Plan Assets Total (UK and others) of 2151 million
pounds
Present Value of Obligation UK – (1472), US – (126)
The level of pension contribution with respect to any fresh hire is in accordance
with the broader labour force in the United Kingdom, which is 10% of pensionable
salary, which reflects the decline in current levels. Remeasurement gain of 78 million
pounds.
Conclusion
However, it is to be concluded that the disclosures give the users of the Financial
Statements an overview of the accounting and valuation processes. These disclosures
provide the users with the relevant information which is not present in the ‘Financial
Statements’. The accounting disclosures related with impairment of assets, financial
instruments, and defined benefit pension plan will provide RB group's stakeholders and
other users with the accounting policies that are used to determine the valuation of
these items in Balance Sheet. These disclosures give them insight on how these are
valued, how they affect the financial statements, and what relevant assumptions are
made for calculation. The IASB's “conceptual framework” recognizes 'relevance' and
'faithful representation' as qualitative and central characteristics that make the economic
information more useful (Ifrs.org 2020). Financial information helps the users to make
an economic decision for the utilization of resources. The four enhancing qualitative
features are – understandability, comparability, timeliness, and verifiability. The
disclosures that are discussed above in analysis parts must be such that they help the
user to make more accurate and appropriate decisions. The impairment of assets, post
benefit pension plans, and financial instruments disclosures reflect the basis of
valuation, the accurateness of cost, and are provided timely to enhance the value of
decisions of users. These are relevant and useful as well, which is the whole purpose of
disclosures.

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FINANCIAL REPORTING
References
Andrzejewski, M., Dunal, P. and Ożga, P., 2018. True and Fair View of Derivative
Instruments in Hedge Accounting Model under IFRS 9. Folia Oeconomic, 6(339),
pp.185-201.
Cristea, VG, 2017. ACCOUNTING HARMONIZATION AND HISTORICAL COST
ACCOUNTING. Challenges of the Knowledge Society, pp.697-700.
Glaum, M., Keller, T. and Street, D.L., 2018. Discretionary accounting choices: The
case of IAS 19 pension accounting. Accounting and Business Research, 48(2), pp.139-
170.
Gornjak, M., 2017. Comparison of IAS 39 and IFRS 9: The Analysis of
Replacement. International Journal of Management, Knowledge and Learning, (1),
pp.115-130.
Gros, M. and Koch, S., 2018. Goodwill Impairment Test Disclosures under IAS 36:
Compliance and Disclosure Quality, Disclosure Determinants, and the Role of
Enforcement. Corporate Ownership & Control, 16, pp.145-167.
Ifrs.org, 2020. IFRS. [online] Ifrs.org. Available at:
<https://www.ifrs.org/groups/international-accounting-standards-board/> [Accessed 17
March 2020].
Maisuradze, M., 2019. BASIC ASPECTS OF MEASUREMENT OF IMPAIRMENT OF
LONG-TERM ASSETS OF AN ENTITY. Ecoforum Journal, 8(3).
Rb.com, 2020. RB | Annual Report 2018 | Investors. [online] Rb.com. Available at:
<https://www.rb.com/investors/annual-report-2018/> [Accessed 17 March 2020].
Singh, J.P., 2018. On hedge effectiveness assessment under IFRS 9. Audit
Financiar, 16(149), pp.157-170.