Finance report on Engro Corporation (Pakistan) - Essay Example

a) Engro Corp Financial Year End 31st Dec Industry Fertilizer, Chemical, Power Gen Country of Stock Exchange Pakistan of Stock Exchange Karachi Stock Exchange Web Address – Company http://engro.com/ Other http://www.bloomberg.com/apps/quote?ticker=ENGRO:PA. Annual Report Full FS Group Yes Yes Engro Corporation is one of the leading organizations in Pakistan- a developing country, involved in diversified range of businesses. Its primary business is that of fertilizer manufacturing however, over the period of time, it has diversified itself into other sectors such as Food, Energy, and Power Generation etc. (Reuters 2011). The financial year of the firm ends on 31st Dec of every calendar year. 1(b) Pakistan is one of the developing countries in South Asia region with relatively modest history of economic growth. Over the period of time, it has been able to register moderate growth and is currently facing strong energy crisis. The overall per capita income is approximately $1250 with low literacy rates and high population growth rates. Pakistan is considered as a developing country due to different factors such as higher mortality rates, low literacy ratio, high population growth rates, higher levels of poverty, lack of health care facilities, poor education system etc. It is however, important to note that Pakistan’s economy has suffered a lot in recent times due to war on terror which has created significant law and order situation. (CIA The World Factbook 2011) Pakistan has its own Institute of Chartered Accountants which is also affiliated with the major international accountancy bodies. 1Over the period of time, accountancy as a profession has evolved in the country and Pakistan also exports its accountants to GCC countries especially due to overall quality and strength of its accountancy profession. Engro Corporation is a diversified company engaged in fertilizer, food as well as energy sector. The primary markets of the firm are Pakistan where it mostly sells its output however, it also plans to expand its food business in North America also. (Najeeb 2011). Major competitors of firm include Fauji Fertilizer Limited, Nestle Limited, and Unilever Pakistan etc. Company Industry Assets Market Cap Employees Engro Corp Conglomerate 132,105M 55748.035M2 32023 Pak Packages Food, Beverage 39,625.0M 8.800Bn4 300 Unilever 5Pakistan FMCG 13,554.00M 75.2Bn NA Fauji Fertilizer6 Fertilizer 74,016.94M 131.8Bn 100-500 PSO7 Oil Marketing 202,247.7M 40.90Bn 2000 Lotte Pak8 Chemical 22,896.00M 16.80Bn 2279 The above data about the companies are present on the official website of the Karachi Stock Exchange where all these firms are listed. 2(a) Engro Corp is required to publish its annual audited report in compliance of various domestic as well as international legislation requirements. It prepares following financial statements10: 1. Balance Sheet 2. Profit and Loss Account ( along with statement of comprehensive income) 3. Cash flow statement 4. Statement of changes in equity The first three notes to the accounts discuss following: Legal Status and Operations: In this note the firm has discussed its legal status and operations while at the same time giving a bifurcation of its balance sheet to outline different segments of its business. Note 2 provides the summary of the significant accounting policies adapted by the firm and discusses different policies such as basis of preparation of the accounts, application and interpretation of different accounting standards etc. Note 3 provides critical accounting estimates and judgments and provides a comprehensive understanding of firm’s policies regarding depreciation, impairments, income taxes, fair values of employees investments etc. Appendix Attached 2(b) The basis of preparation of the accounts are the historical cost convention however, firm has disclosed that it also records some financial assets and financial liabilities based on their fair value. It is also to be noted that the financial statements have been prepared in accordance with the approved financial accounting standards for Pakistan while they also comply with the rules laid down by the Securities and Exchange Commission of Pakistan. The International Financial Reporting Standards have also been complied with however, only those standards are complied with which are duly approved and notified by the Securities and Exchange Commission of Pakistan. Special reference has been made to the IFRS which were directly applicable and relevant to the firm along with reference to the standards with no direct relevance to the firm. There is no direct mention of any close relationship with any major identified shareholder. Notes to the accounts also mention that the changes in the IAS 1 (Presentation of Financial Statements) have been adapted and the changes have been made in the financial accounts according to the changes prescribed in the standard. 3(a) Appendix attached 3(b) There is a wide range variation between the net asset backing as well as the share price at the balance sheet date. It is important to note that the share price is always determined by discounting the future expected cash flows of the firm however, net asset backing is just a numerical result of dividing total assets by the number of shares. As such the price to earnings ratio is more critical for the purpose of shareholders because it identifies as to how much the market is willing to pay for each dollar of earnings. (Investopedia.com 2011) There is a large variation in the share prices of the firm since at the time of the balance sheet date as on 31-12-2009, share prices were 183 per share however, it has declined to PKR 132 showing a net decrease of more than PKR 50 over the period of time. The differences between the net cash flows from operations as well as the net income is due to the fact that income statement is formed on the accrual basis wherein transactions are recorded regardless of the fact that whether cash has been received against such transactions or not. However, operating cash flows or the cash flow statement on a whole shows the movement of cash in different activities undertaken by the firm. The difference between the two therefore is due to the way both statements are prepared under the international financial reporting standards. (Stickney and Weil 2002) Regarding IFRS 8 on the segment reporting, it has been mentioned in the note 2.1.4(a) that the same will have no impact on the firm. Any post balance sheet event can significantly affect the financial accounts of the firm especially if the firm has disclosed any large contingencies. The impact of contingencies as well as the other events may therefore have an impact on the firm’s financial position. Resultantly, an adjustment is made into previous year’s equity to reflect the impact of such changes. Conclusion One of the key strengths of the financial statements prepared is their compliance with the international financial reporting standards as well as the local laws and regulations. As such, investors or shareholders as the users of these statements may be satisfied that the statements are prepared in accordance with acceptable practices and applicable standards. Another important strength of the financial statements prepared is the fact that they provide complete information to almost all the user groups. The reviews of management, complete description of the shareholding patterns, and compliance with the corporate governance statement are some of the key points of the audited accounts outlining the fact that organization has provided significant information to the shareholders. User groups such as government and other authorities will therefore find these disclosures more helpful and satisfying. (Stickney and Weil 2002) An important weakness of the financial statements is the fact that at times it has presented information which is more suitable for more sophisticated shareholders and investors. As such interpreting this information especially within the context of the investors from developing country may not be clear and simple enough to provide comprehensive and easy to understand information for ordinary shareholders and investors. It is also important to note that another weakness of the financial statements prepared is their inability to provide complete segment information. Since company is in diversified business however, financial accounts fail to provide complete segment information for all the business segments and subsidiaries of the firm. Government and tax authorities may not find this information as helpful. Bibliography CIA The World Factbook. Pakistan-Economy. 2011. https://www.cia.gov/library/publications/the-world-factbook/geos/pk.html (accessed August 12, 2011). Investopedia.com. Price-Earnings Ratio - P/E Ratio. 2011. http://www.investopedia.com/terms/p/price-earningsratio.asp (accessed August 13, 2011). Najeeb, Faryal. Engro purchases US-based firm’s food business . May 10, 2011. http://tribune.com.pk/story/165231/engro-purchases-us-based-firms-food-business/ (accessed August 13, 2011). Reuters. Engro Corp Ltd. 2011. http://www.reuters.com/finance/stocks/overview?symbol=EGCH.KA (accessed August 12, 2011). Stickney, Clyde P., and Roman L. Weil. Financial Accounting: An Introduction to Concepts, Methods, and Uses. 10th. New York: South-Western College Pub, 2002. Read More