Financial Report: Domino's Pizza Enterprises Limited Analysis

This report provides a financial analysis of Domino's Pizza Enterprises Limited, focusing on the Australian operations. It examines the sources of financial data, including the annual reports and website publications, and critiques the quality of available information. The analysis delves into provisions and contingencies, including onerous contracts, make-good obligations, and contingent liabilities related to franchise loans and leases. It also explores the accounting treatment of leased items, classifying them as current or non-current assets/liabilities, and discusses the reclassification of lease payments and non-current lease payments. The report highlights the importance of quantitative and qualitative reporting and compares Domino's Pizza's financial statements with those of other companies like BMW AG to assess the investor-friendliness and decision-making utility of the provided information. The report concludes by emphasizing the need for improved data accessibility and more comprehensive reporting, including currency exchange risks and quarterly financial statements, to enhance the overall quality of financial disclosures.

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Contents
Introduction.................................................................................................................................................2
Source of Data.............................................................................................................................................2
Provisions and Contingencies......................................................................................................................2
Contingent liabilities and Contingent Assets Acquired in a Business combination......................................3
Leased Items................................................................................................................................................4
Reclassification of a Lease Payment............................................................................................................5
Non Current Lease Payments......................................................................................................................5
Conclusion...................................................................................................................................................5
Introduction
Dominos Pizza Enterprise Ltd. operates in Australia as a franchisee of Domino’ s Pizza Enterprise Ltd.,
USA. (Dominos Pizza Enterprises Limited, Australia, 2017) The financial Statement of the preceding year
was obtained from the Annual Report of 2017, which is easily accessible from the website. In addition,
the website also publishes presentations of some concise financial figures on the website. This report
further analyses the financial data obtained from these sources, in order to understand the financial
performance of the Company. The objective of this report is to critique the quality of financial data
available for the Company in public domain, especially regarding the provisions and contingencies in its
financial disclosures (in this case, annual report).
Source of Data
The Dominos Corporate website publishes a consolidated Annual Report for several countries. It is
difficult to locate these reports on the website as compared to the data published by other multinational
Companies such as Microsoft Inc, Apple Inc.. and Volkswagen.
The data published for Australia for this source is contained in the consolidated Annual Report of
Dominos Pizza Enterprise Ltd. in various geographical regions. The Annual Report provided on the
website is a half yearly annual report which provides consolidated financial statements for all the
various subdivisions of the Parent Company of Dominos Pizza Enterprises Private Ltd. (Dominos Pizza

Enterprises Limited, 2018) Financial information for Australia is recorded under the ANZ (Australia and
New Zealand Division). Moreover, the accounting period that the report is based on does not coincide
with the Australian financial year or accounting year which ends on 30th June, every year. Hence, the
financial statements were perused using the audited Annual Report provided by the firm to the
Australian Securities Exchange. (Dominos Pizza Enterprises Limited, Australia, 2017) It is expected that
the data used from this report (contains data only for Australian operations) is of high quality since it has
been audited and provided by the firm in line with legal provisions. However, the consolidated report of
the parent Company has been used for reference in some cases, to get a better understanding.
Provisions and Contingencies
Provisions to accounting are recognized when the firm has an obligation in the present that was accrued
in the past. . There is a probability that the firm would be required to settle the present obligation at the
reporting date. Hence, an estimate must be made to understand the dollar value of that obligation. It is
important to understand that the amount is an estimate and there is just a probability that a settlement
will happen. (Dominos Pizza Enterprises Limited, Australia, 2017)
The amount that is used as an estimate is calculate using various financial methods and must take into
account all the risks and uncertainties surrounding the obligation. The present value of the cash flows is
used where the provision is made using the cash flows for the settlement expected.
If the provision is being made for a settlement that is expected to increase the amount of cash
receivable, then it is assigned as an asset. Similarly, if it is to be expected as a payable, it is accounted for
as a liability.
Some of the provisions made in the financial statements for the firm are:
Onerous contracts: Onerous contracts are contracts whose economic benefits were over estimated and
as a result, the firm may have to fulfil the aggregate cost. Such contracts drag down profitability and are
usually, accounted for under liabilities. Dominos Pizza has made provisions for onerous contracts in the
current statements for the value of the present obligations that might arise as a result of onerous
contracts.

Make Good Obligations: Make Good Obligations are obligations that the firm may accrue in the process
of dismantling, removing or restoring items on any plant, property or equipment. Reliable estimates
must be made to account for the present obligations . In making these estimates, Dominos Pizza uses
the historical data. Make good obligations , generally, become present obligations when there are store
closures or when the Company vacates the premises as tenants.
Contingent liabilities and Contingent Assets Acquired in a Business
Combination
These are liabilities that a business acquires when it enters into business with another firm. These
business combinations may include joint ventures, acquisitions etc. Similarly, assets are assets that were
accrued during the given period. These are , generally , measured at “’fair value’ at the date of the
formation of the business combination and are re-measured at higher than the original value. Provisions
have been made in the statement for the same. (IFRS Foundation, 2018)
Make Good Obligations led to the accrual of liabilities, according to the annual report. However, these
were not included as contingencies since these were incurred at actual. However, these are being
depicted here, in order to demonstrate that these liabilities are big enough to be included and hence,
provisions must be included for the same.
Table 1 Make Good Liabilities (incurred as expense, not as provisions)
Additionally, liabilities for the contingencies regarding guarantees for franchise loans and leases paid by
the firm have been mentioned. It is important to include provisions for these liabilities since Dominos
Enterprise has a legal obligation to pay them, in case of failure of payment by franchisees. However,
these expenses can be recovered from franchisees. Hence, there is also, a case for non inclusion of these
provision of these liabilities. (ACT Government, 2011)
Make Good liabilities 2017 (‘000) AUD 2016 (‘000) AUD
Current 173 192
Non-Current 1540 2339

Table 2 Contingent liabilities
There are some contingent liabilities that were acquired by the Company but have not been made
provisions for. These liabilities are accrued for the consolidates entity of Dominos Enterprises Ltd. and
relate to a lawsuit in France against the firm’s subsidiary. However, no economic loss is expected owing
to this. Hence, no provisions for the same are made either. (Dominos Pizza Enterprises Limited,
Australia, 2017)
Leased Items: Current and Non- current Assets or Liabilities
Current and Non Current assets are classified based on whether they have been accrued in the current
period or non-current assets. (Ittelson, 2009) For example, good will is a non current asset. It is
measured as “the sum o consideration transferred”. (Dominos Pizza Enterprises Limited, Australia,
2017)
The Leased items mentioned as leased assets in the report and could classified as non –current assets.
Leased assets include leased store spaces, eased equipment and leased motor vehicles. The leased items
are considered as assets, in accordance with General accounting principles. The lease payments are
accounted for as liabilities only when the economic benefit has been consumed within the year.
(Dominos Pizza Enterprises Limited, Australia, 2017)
Lease Payments, in the report, have be estimated on a straight lined basis over the term of the lease
agreement and have been introduced as present liability for each year to the tune of the lease payments
within the year. If the economic benefits of the rented property is greater than the liability accrued from
the lease payment, then it is accounted for as reduction in rentals. This may be the case when some kind
of incentives have been received for the lease. An example of a incentive for lease is tax benefits.
(Dominos Pizza Enterprises Limited, Australia, 2017)
Table 3 Lease Payments under different Lease Agreements
Lease Arrangements 2017 (‘000) AUD 2016 (‘000) AUD
Not longer than 1 year 64672 53685
Longer than 1 year and not 153598 126,194
Contingent liabilities 2017 (‘000) AUD 2016 (‘000) AUD
Guarantees – Franchise loans and
leases
6,0003 5463

longer than 5 years
Longer than 5 years 62460 51517
280730 231396
Additionally, lease incentive liabilities have been accounted for in the statement along with the interest
to be paid towards borrowing to fulfill lease liabilities. In the givem year, there were no liabilities
incurred due to interest payments over lease arrangements.. However, there was a deduction of 121000
Dollars towards fulfillment of incentives to lease liabilities.
Reclassification of a Lease Payment
Currently, Dominos Pizza does not have the right to purchase the leased assets once the period of leased
assets has expired. However, hypothetically, if the firm were to allowed to purchase the leased asset
(such as real estate) owing to a change in policy, then the leased asset would be classified as an
immovable asset and payments would be made towards amortization instead of lease.
Non Current Lease Payments
Non Current Lease Payments are payments that have arisen due to a contract made in the past. In
generally, fair value of lease payments is judged using the current prevalent market value with
provisions of an increase every year. In general, inflation is not accounted for. The underlying
assumption here, is that the market value or the lease value of the property will increase every year.
However, this assumption may not be true in every case. Alternative methods of valuation of lease
agreement could be to recalculate the base rate every year based on the current market value.
Additionally, lease payments could also, make adjustments for inflation in the contract. Similarly, leased
properties require plenty of upkeep and maintenance and generally, these costs increase as the age of
the property increases. Hence, the age of property must be accounted for while making the contract for
lease payments.
Conclusion
Financial statement for the Australian Operations of Dominos Pizza Enterprises Limited are not easily
accessible and do not contain all the data presented well. This can lead to confusion regarding the
financial performance of the firm.
Quantitative indicators:

There are several important quantitative indicators that should have been presented such as an an
understanding of the currency exchange and arbitrage risks, change in arbitrage and more.
Qualitative Reporting:
In order to understand the quality of reporting, the financial statements were compared to those of two
other Companies, Microsoft Inc, and BMW AG. For example, there is more information presented in
terms of the percentage change achieved in the annual reports of these firms.(See Figure 1). Quarterly
Financial Statements for Domino’s Pizza are not available.
Figure 1 Glimpse of the Statement of BMW AG
Source: (BMW Group, 2018)
Overall, the qualitative presentation of Domino’s Pizza is not very investor friendly and helpful in making
decisions.
References
ACT Government. (2011, April 06). Accounting forProvision for Make Good Clauses within a Lease
Agreement. Retrieved from ACT Government:
https://apps.treasury.act.gov.au/__data/assets/pdf_file/0015/604311/Accounting-for-
Provision-for-Make-Good-Clauses-within-a-Lease-Agreement.pdf
BMW Group. (2018). ANNUAL REPORT 2017. Retrieved from BMW Group:
https://www.bmwgroup.com/content/dam/bmw-group-websites/bmwgroup_com/ir/
downloads/en/2018/Gesch%C3%A4ftsbericht/BMW-GB17_en_Finanzbericht_ONLINE.pdf
Dominos Pizza Enterprises Limited. (2018, Februrary). Investors. Retrieved from Domino's:
https://www.dominos.com.au/inside-dominos/corporate/investors/reports-presentations
Dominos Pizza Enterprises Limited, Australia. (2017, September 29). Annual Financial Report for the
fianncial Year End 02 July 2017. Retrieved from Australian Securities Exchange i:
https://www.asx.com.au/asxpdf/20170929/pdf/43msc08vrrp76l.pdf

IFRS Foundation. (2018, February 1). International Financial Reporting Standard 3: Business
Combinations. Retrieved from International Financial Reporting Standard:
http://www.frascanada.ca/international-financial-reporting-standards/resources/
unaccompanied-ifrss/item45582.pdf
Ittelson, T. R. (2009). Financial Statements: A Step-by-step Guide to Understanding and Creating
Financial Statements. USA: Career Press.