Critical Analysis: Xero Ltd Annual Report and Financial Performance

This report provides a comprehensive analysis of Xero Ltd's 2018 annual report, examining its financial performance through the lens of accounting theory. It critically evaluates the company's adherence to the conceptual framework, assessing how it recognizes, records, and evaluates financial data. The report compares Xero Ltd's performance with Wise Tech Global, a competitor listed on the ASX, highlighting key financial metrics such as gross profit margin, operating expenses, and net profit. The analysis culminates in a summary of investment results, considering earnings per share and dividend distribution, ultimately offering insights into the financial viability of Xero Ltd. The report concludes by emphasizing the importance of the conceptual framework in financial reporting and its role in enabling informed investment decisions.

ACCOUNTING THEORY
AND CONTEMPORARY
ISSUES

Contents
Introduction-...............................................................................................................................2
Critical analysis of Annual Report of Xero Ltd.........................................................................2
Comparison with other corporations listed on the ASX............................................................3
Summary of the Results for the investment in the companies...................................................6
Conclusion..................................................................................................................................6

Introduction-
Accounting is the procedure adopted by public companies in order to recognise, record, and
evaluate the financial performance of the company. The accounting theory studies include the
analysis of historical bases of accounting policies, along with the manner wherein the
accounting practices are altered and included in the regulatory structure, which regulates
the financial reports and financial statement. The financial reports are made by companies by
following the several accounting guidelines. It creates the easy way for the company and the
shareholders of the company to have the knowledge of business. It also helps in taking good
decisions in respect of the corporation’s performance. In the addition of this, the Conceptual
Framework can also support the preparers of financial statement to establish the
accounting policies for transaction or occasions not covered by the current norms.
In this report, the annual report, the accounting theory concepts, guidelines to prepare the
accounting reports have been reviewed of Xero Ltd. The following parts also state the
performance of company with the help of the comparison with other corporations listed on
ASX and whether the investment is to be made in this company.
Critical analysis of Annual Report of Xero Ltd
The conceptual framework can be describes as the concepts or purposes, which leads to the
businesses to standards set to make the good report. The Conceptual framework provides the
proper guidelines to every company to prepare the reliable and comparable reports. It helps to
create better way for the shareholders of the organisation to have the knowledge of annual
report of a corporation and relate it with other opponent companies to attain the conclusion
(Garrett, Hoitash and Prawitt, 2014). In case of Xero Ltd, it is analysed that the corporation
has made the annual report by making focus on the conceptual framework. The appropriate
guidelines have adopted by the corporation to accumulate, recognise, and evaluate the
financial performance of company (Chand, Patel and White, 2015).
Further, AASB define the conceptual framework as the practical tool, which assists the
people to know and understand the standards. The company has made the financial statement
on the basis of AASB rules. The financial statements and accounting of the company have
been made on the basis of conceptual guidelines (Deegan, 2014) .Together with the
appropriate financial statement, financial notes have made to develop the shareholder’s
understanding in respect of) the financial aspects. It states that every transaction has been

verified and stated based on AASB rule and conceptual framework to keep the consistency
and the enactment of the organisations. The company’s major conceptual framework has
evaluated based on the relevancy and fair presentation aspects of the company (Cayanan,
2016).
Furthermore, the true and fair representation states that the non-financial performance and
financial performance in annual report is required to be presented with proof and points so
that the shareholders can search it true (Zeff, van der Wel and Camfferman, 2016). All the
actions ad data have made the place in the company should be analysed and documented in
the annual report of company. In case of Xero Ltd, it is analysed that all upcoming
assignments, new functions, and modifications in the companies have been stated in the
annual report of the corporation concisely. Moreover, the companies are liable for
conforming to the relevant taxes, accounting, rules, regulations, and the law. It is stated in
annual report that Xero Ltd has accessed to the Data via Software and the site will comply
with applicable law (Abeysekera, 2013).
Comparison with other corporations listed on the ASX
The company chosen for the comparison is Wise Tech Global, which is an ASX listed public
company. The company belongs to the same industry, engaged in the development and the
provision of the cloud based business management software. The company Wise Tech Global
was founded in the year 1994, in Sydney, Australia. Currently, the company has worldwide
clients and the business operations. The company has currently around 40 offices in the
Australia, Europe, and America. The company is the competitor of Xero Ltd in terms of the
provision of the business management solutions. While the ASX symbol of Xero Ltd is XRO,
the ASX symbol of Wise Tech Global is WTC.

In terms of the performance, the financial highlights of both the companies have been
provided as follows.
(Source: XERO, 2018)

(Source: Wise Tech Global, 2018)
As seen from the comparison of the Income Statement of both the entities for the financial
year 2018, while the gross profit margin of the company Wise Tech Global was 83 percent,
that of the company Xero Ltd was 81 percent. Thus, the operating results of both the entities
are almost equal, as depicted after the deduction of the cost of revenues. The total operating
expenses of the Xero Ltd accounts for around $ 359 million, which accounts for 88 percent of
the total operating revenue. The total operating expenses of the Wise Tech Global accounted
for $ 124.6 million, which accounted for about 56 percent of the total revenue. Thus, while
there is an operating profit in the case of Wise Tech Global, there is an operating deficit in
the case of the company Xero Ltd. The reason for the main difference of in the operating
results is because of the expenses on account of “product design and development,” which
accounts for the major share in the operating expense of the Xero Ltd.
In addition to the above, there is an overall net loss in the case of the company Xero Ltd, as
against the net profit of $ 40.8 million for the company Wise Tech Global. On comparison it

has been found that the results of the company for the financial year 2018 have not been
strong. Accordingly, stakeholders must compare the results of various corporations before
deciding for the investment.
Summary of the Results for the investment in the companies
From the point of view of the investment in the companies, it can be stated that the Basic
Earning Per Share for the company Wise Tech Global as stated for the year 2018 was 13.9
cents. While the Basic Earning Per Share for the company Xero Ltd., came to $ 0.20 (New
Zealan Dollars). The difference is wide and is attributed to the overall net loss for the
financial year 2018 in the case of company Xero Ltd.
While the total operating revenues increased for the company Xero Ltd by around 38 percent
form last year, the revenue increased by 44 percent for the Wise Tech Global form the last
year. The revenue growth has further led to the 27 percent increase in the net profit
percentage for the entity, and it has trickled down to the EPS as well for the investors.
It is significant to note that as the company Xero Ltd has incurred loss in the financial year
2018, it has failed to distribute dividend to the investors. This is in contrast to the dividend
distributed of 1.65 cents per share, in the case of the Wise Tech Global for the year 2018.
Thus, for the investor’s point of view, investment in other company shares seems to be more
lucrative. The conclusion is based on the factors that there is a net loss in the company, and
an overall zero dividend yield for the financial year 2018.
Conclusion
As per the above analysis, it can be concluded that the main reason for establishing the
agreed conceptual framework are that this renders the structure for developing accounting
standard, the base for solving accounting clashes, essential principles which don’t have to be
recurring in accounting standard. It also give support to auditors, preparers, and user of
financial statements to have the knowledge of approaches to standards. It has been found that
the main purposes of the accounting guidelines and policies are to render the true, substantial,
and relevant financial data to the shareholders of the company so that they may have good
decision. To conclude, the annual report of Xero Ltd has been made by focusing on relevant
guidelines and points to achieve and enhance complete performance of the companies. It is

recommended that the conceptual framework policies must be followed by all companies to
enhance the performance of company.
In addition to the above, the report demonstrated a contrast of the financial performance of
anther ASX listed corporation belonging to the same industry, i.e. digital technology and
software. The company chosen for then analysis was Wise Tech Global. The comparison
shed the light on the fact that as the company Xero Ltd has complied with the conceptual
framework and applicable accounting regulations, while the preparation of the financial
statements, its results can be easily compared with that of another Australian public company.
The comparison enables the investors to get extra insights about the financial viability of the
company.

References
Abeysekera, I. (2013) A template for integrated reporting. Journal of Intellectual
Capital, 14(2), pp. 227-245.
Cayanan, A. S. (2016) An assessment of the financial reporting practices of listed Philippine
banks in 2003. Philippine Management Review, 11(1).
Chand, P., Patel, A., and White, M. (2015) Adopting international financial reporting
standards for small and medium‐sized enterprises. Australian Accounting Review, 25(2),
pp.139-154.
Deegan, C. M. (2014) Financial accounting theory, 4th ed., North Ryde, N.S.W. McGraw-
Hill Education (Australia) Pty Ltd
Garrett, J., Hoitash, R., and Prawitt, D. F. (2014) Trust and financial reporting
quality. Journal of Accounting Research, 52(5), pp.1087-1125.
Wise Tech Global. (2018) 2018 Annual Report. [online] Available from:
http://ir.wisetechglobal.com/FormBuilder/_Resource/_module/aQGWYiQKCEe9gcmOsTiU
KA/file/WiseTech_AR18.pdf [Accessed on 13 December 2018].
Xero Ltd. (2018) 2018 Annual Report. [online] Available from:
https://www.xero.com/nz/about/investors/financial-info/annual-report-2018/ [Accessed on 13
December 2018].
Zeff, S. A., van der Wel, F., and Camfferman, C. (2016) Company financial reporting: A
historical and comparative study of the Dutch regulatory process. New York: Routledge.