British Airways Financial Statement - Essay Example

British Airways Financial Statement British Airways (BA) Financial Statement cover sheet for the Independent Auditor Report states, "despite ferocious trading conditions we achieved record highs in our operating performance for the year" (, Nove), This paper examines how British Airways statement conforms to accounting theory and compliance with International Auditing Standards (IAS) and International Financial Reporting Standards (IFRS). The examination will focus executive pay packages in regards to shares of the company; certification of BA's audit committee and that of the Independent Auditor certification of the statement, how the corporation reports international revenue from its overseas operations, depreciation of property, plant, and equipment,. Revenue from passenger and airfreight are the main revenue flows of BA. The costs of doing business will examine, fuel cost, employee costs, rental of aircraft, Restructing, currency difference, and maintenance, catering, and administrative and IT costs. The first question in any financial statement does it conform to Generally Accepted Accounting Principles (GAAP)? BA is an international corporation and must comply with International GAAP. (Skousen, Stice, & Stice, 2000). (Meigs, Williams, Haka, & Bettner, 1999). Accuracy of financial data published by corporation is ensured by internal controls; a series of steps designed to control how revenue is recognized and reported. An internal audit committee monitors internal controls for British Airways. (, Nove). Outside auditors are hired to certify the work done by the internal audit committee. When the outside audit is completed, a statement certifying that the financial statement is free of material misstatement in the income statement, that the financial statement was prepared in accordance with IAS standards. The corporation uses notes that explain what aspects in the statement are reported. Preface material list the standards used in the preparation of financial statement. Notes to the Financial Statement The preliminary note describes the amended and revised IFRS 1 that details how the financial statement is prepared. This standard clarified how current and non-current liabilities not earned by the owners that could be settled through equity are reported separately after January 1, 2010. (Schroeder, Clark, & Cathey, 2005). Note 2 describes how the statement was prepared and how revenues, cash equivalents and other operating expenses are accounted for in the financial statement. Accounting policies BA's financial statement is prepared in accordance with International Accounting Standards Board (IASB). The company exercised a privilege of Section 408 of the Companies Act 2006 not publish its individual income statement and notes. The ISAB issued new standards known as International Financial Reporting Standard. The IFRS left many of the IAS in place. (Mirza, A.A. Orrell, M & Holt, G.J. 2008). Revenue In analyzing a financial statement the cash flow of the business indicates how the cash and credits are accounted for and what amounts sales, investment, purchases, and operating costs. IAS 18 deals with Revenue recognition. Revenue is income a company accumulates on its own account (Mirza, Orrell, & Holt 2008) Cash Flow Statement Cash generated from operating activities listed an operating loss of negative (231) million pounds and realized a gain of 732 million pounds from depreciation, amortization, and impairment. The statement shows 501 million pounds from operating cash flow before working capital changes. The working capital is the cash needed to operate the corporation on a day-to-day (Schroeder, Clark, Cathey 2005). Cash flow from investment activities posted a negative (337) million-pound loss. Income flows come from Income from Passenger and Cargo Transaction The policy notes contains how the company recognizes revenue from passengers and cargo is recorded when the transport of passenger and cargo occurs. Passenger discount tickets are recorded as current liabilities as sales in advance of carriage. Schroder defines income as psychic income, satisfaction of a want, real income, an increase in wealth, and money income the realization of monetary valuation. The corporation recognizes other income when it occurs. Commission charges are recognized at the same time as the revenue it represents is recorded as operating budget expense. Airlines use frequent flyer miles as an advertising ploy to fill aircraft seats. BA's frequent flyer program operates through its Executive Club. Besides free air travel, the company offers other rewards. BA records these as deferred liabilities until the owner exercises the option to cash in miles accumulated when the miles are recorded as revenue at the fair value of ticket prices at the time the revenue is recorded. Intangible assets such as Goodwill are recorded at cost or amortized on a straight-line basis. Cash and Cash Equivalents Cash is cash on hand and deposit in any financial institution payable on demand or maturing within three months after they were acquired and subject to an insignificant risk in change in values. Funds deposited and held to maturity are amortized cost. Gains and losses are recorded in income. Employee benefits recorded The corporation reports its employee benefits in accordance with IAS 19 Employee benefits. Employee benefits are recognized as defined contribution plans or defined benefits plan. The corporation reported that in the prior year 2009, it adopted IFRIC 14 basically set limits for defined benefit plans. This change allows BA if the plan exceeds the assets in excess of plan needs, BA can record the excess as an asset. IFRIC 14 resulted in an increase of 235 million pounds and this increase applied to opening shareholders' equity in April 2008. Employee contribution and benefit plans is one facet of employee costs. One method of funding pension plans is share-based payments. Employee Costs IFRS 2deals with shared-base equity payments. Shared based payments are defined as one in which entity receives or acquires goods and services for equity instruments of the entity or incurs liabilities for amounts based on the value of the entity's share or other equity instruments of the entity (Mirza, Orrell, & Holt, 2008). Share-based payments are usually used as part of an directors. In the employee, cost balance sheet is a two-part statement. The first section labeled "a" deals with all employee costs; segment "b" titled "Directors' emolument" deals with pay for the corporate officers. (, Nove) This is misleading as the notes on the bottom announce that detailed information on directors' compensation is found in note 37 " related party transactions". (, Nove). Analysis of this section of the financial statement provides no real information on the shared-based benefits senior executives receive as part of their wage packet. Rather, an examination of employee cost notes is a statement that directors' emoluments are included in the overall employee costs. There is ongoing debate on shared-base payment revolving around the valuation method for estimating value of the plan. How the entity accounts for share-based payment is addressed in IFRS 2. The standard requires that vested share-based payments use fair value method for cost accounting. The fair value used to fix the price per share is the date the option was granted. The fair value is charged to income spread over the period of the vesting period. Companies also use stock options to compensate employees who earned a bonus and as a method to pay into retirement funds (Skousen, Stice, & Stice, 2000). How the entity accounts for share-based payment is addressed in IFRS 2. The standard requires that vested share-based payments use fair value method for cost accounting. The fair value used to fix the price per share is the date the option was granted. The fair value is charged to income spread over the period of the vesting period (Peelo, 2004) (Mirza, Orrell, & Holt). If the shares are not charged as income, they are charged as expenses. Segment Operation Costs British Airways operates its passenger and cargo operations as a single business interest. BA 's management board allocates resources on route profitability. In addition to this, BA also operates business segments OpenSkies SASU (Open Skies) and BA Cityflyer Limited (Cityflyer). They operate as separate segments, but for financial statement they are similar to BA's flight operations to be included with the passenger and cargo balance sheet. The remaining segments of the business The Mileage Company Ltd, British Airways Holiday Ltd, and Speedbird Insurance Company Ltd. These segments are below the reportable income threshold (Mirza, Orrell, & Holt, 2008). Examination of the financial statement will discuss operating costs, property, plant, and equipment, financing operations, and taxation. Property, Plant, and Equipment British Airways' property, plant, and equipment accounts fall under IAS 2 Inventory and IAS 11. Property, Plant, and Equipment are reported for Group and company. The largest asset for British Airways is its aircraft. National and international hubs require passenger terminals, hangars, and the ancillary vehicles and tools required to maintain these assets. An investigation of the balance sheets for BA's air fleet reveals That BA reported April 2008 was 11,389 million pounds in its fleet, 1,508 million in property, and 804 million pounds in equipment for total of 13,701 million pounds invested in property. Plant and equipment (, Nove) the problem is accounting for property, plant, and equipment. Which costs should be counted as assets and what costs expensed? BA biggest asset are its aircraft. The problem is they are both assets operated for a fixed number of years and obsolesce, which should be expensed (Skousen, Stice, & Stice, 2000). IAS 2 Inventories section 5 defines inventory as cost of inventory to include costs of purchase, conversion, and other costs involved in bringing the asset to its location. If an entity purchases an asset the cost includes purchase price, import duties to bring the asset to its main base of operations; handling costs to include costs with handling costs (Mirza, Orrell, & Holt, 2008) (Skousen, Stice, & Stice, 2000). BA's statement of account for property, plant, and equipment as of 31 March 2010 lists net book amounts for fleet 5,523 pounds, plant 871 million pounds, and equipment 239 million pounds. An interesting point in the Auditor's finding is fleet cost; BA owns fleet assets valued at 2,472 pounds leased assets of 2,004 million pounds. British Airways list under "hire purchase" agreements of 770 million pounds, costs related to hire purchase of 66 million pounds, and assets not in use 121 million pounds. This expense is the book value of 8 747-400 aircraft down for maintenance and are expected to return to service. Capital Expenditures Bank and other loans are secured using the aircraft of the Group. The current value as of year ending 31 March 2010 1,500 million pounds. The use of corporate assets to secure loans is a common practice in financial transaction (Davies, T. & Pain B.2002). The group disposed of property, plant, and equipment with a book net value of 118 million pounds during the year ended 31 March 2010. The group recorded a loss of 16 million pounds on the disposal of these assets. Capital expenditures are covered under IAS 11. The year ending March 31, 2010 authorized and contracted for is 4,267 million pounds for group commitments. These commitments include 4,253 million pounds to buy 54 aircraft of various models the purchase spread form 2010-2016. The four Embraer aircraft were delivered in 2010. BA capitalizes all the majority of capital purchases in U.S. dollars (Nove). Depreciation Depreciation is used to expense corporate assets to measure the value of the asset over a fixed term (Skousen, K.F. Stice, E.K. & Stice, J.D. 2000) (Hunton, 2000). BA depreciates its fleet on 18-25 year basis after adjustment for any residual value. The depreciation decreased by one million pounds that resulted from the decision to extend the useful life of the 747-400 aircraft and this change is reflected in the 31 March 2009 statements (Nove). Operating Loss BA classifies operating loss from a combination of depreciation, amortization, and impairment of non-current assets. BA realized 732 million-pound credit for owned assets, leased assets, finance lease, amortization, and impairment of goodwill. Cost of inventory amount consists mainly of fuel charges and recognized as an expense. The category of exceptional items deal with an 85 million pounds restructuring cost due to staff cuts announced earlier in the year. Income derived from finance cost and income IAS 23 treats costs associated with borrowing costs and how the cost is recognized in the balance sheet. The corporation posted a loss on finance cost and interest income of (65) million pounds and (157) million pounds for the year. The company acknowledged a gain of 20 million pounds from bank interest not at fair value. This means that the interest bearing notes are valued below the current fair value of the instrument. The incomes expected from these instruments are recorded at the future value of the notes when due (Meigs, Williams, Haka, &Bettner, 1999). As noted above in share-based payments, BA invests its pension funds to grow the fund to pay obligations owed to its retirees (, Nove). The finance costs for administering the fund is a loss of (116) million pounds. The corporation worldwide operations subject it to taxes from the nations where BA employees work and live. The property owned or leased in these nations are also subjected to real estate taxes Taxes IAS 12 covers how a company accounts for taxes. BA pays a corporation tax in the United Kingdom. Taxes balance sheet records both current tax paid and deferred taxes on various sections of the Group's activities. BA recorded an overall loss from income and deferred taxes of (106) million pounds. BA paid air passenger duty, other taxes related to ticket sales and payroll taxes of 636 million pounds. BA tax base on air passenger duty increased on November 1, 2009; this duty will rise after November 1, 2010. BA suffered an overall loss on UK taxes of (189) million pounds and losses on foreign taxes paid posted a loss of (44) million pounds. These taxes have an impact on BA's stock. Stock Portfolios Corporate finance dealing with investments and stocks are covered under IAS 33, 36, 37, 39 and 40 Earnings per share The earnings per share posted a negative (425) million-pound loss for the year; non-controlling interest losses amounted to (18) million-pound. Diluted shares had a loss of (422) million-pounds. BA uses weighted average to calculate earnings per share. This average is arrived at by taking an average number of shares issued after deducting shares reserved for Employee Share Ownership Plan that includes Long Term Incentive Plan. Dividends The financial climate for the year ended 31 March 2010 has led the Directors to recommend no dividends be paid. The company paid five percent dividend (58) million pounds in 2008. The dividend was recognized in the 31 March 2009 statement as a reduction in shareholders equity. Investments The company posted a gain of 197 million pounds. The corporation has 13.5% interest in Iberia Airlines ordinary shares. The group accounts for its shares of Iberia as an associate even though BA holds less than 20%. Its voting strength in the company leads the company to term it an associate of the Group. The company posted a gain of 3,387 million pounds. Company uses the cost method to account for its investment. Reconciliation The reconciliation of net cash flow with net debt the group posted an increased of cash and cash equivalents of 344 million pounds. The group's cash outflow on from decrease of debt and leasing totaled 769 million pounds. The company posted a deduction of (51) million pounds and took on an additional (1,053) million pounds from new loans, hire leases and new purchase agreements. The company posted a decrease of (9) million pounds in net debt resulting from cash outflow and (85) million pounds from exchange movements and other non-cash movements. The overall result for the year ending 31 March 2010 debt increased to (2,288) million pounds. An examination of cash and cash equivalent and other current interest -bearing deposits Cash and Cash Equivalents interest-bearing deposits IAS 39 deals with recognition of financial instruments. IAS 39 deals with how a financial is recorded as either an asset or liabilities and when the instrument is amortized. (Mirza, Orrell & Holt 2008) The corporation posted a loss of (2,382) million-pound loss for its interest-bearing accounts. This loss comprises current and non-current borrowings less cash, cash equivalents, and interesting-bearing deposits. Long -term borrowing records current loans at 536 million-pounds. Non-current costs are 3,446 million-pounds. Long-term borrowing is recorded in U.S. dollars, Japanese yen, Euros, and pounds sterling. These amounts are incurred in the nations where BAC has assets and personnel employed. Conclusion British Airways Company's financial statement adheres to accounting theories and the International Financial Reporting Standards. The independent auditor tested and certified the statement after conducting its tests of the group and company's internal controls for recognition of revenue, depreciation, assets for sale, and its investment activities. References , B. (November 2010). British Airways Financial Statement Punctuality and performance. 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