International Financial Reporting Standards for Nestle - Essay Example

Finance and Accounting Table of Contents Introduction 3 Overview of Company 3 A. Important information on Nestle brands for Investors and Lenders 3 B. Financial Position and Performance 4 Profitability position and performance 4 Liquidity position and performance 5 Solvency position and performance 5 Efficiency position and performance 6 C. Accounting Policy Applied to Nestle 6 D. IAS 38 Intangible Assets Criteria 7 Conclusion 7 Reference List 8 Appendices 9 Appendix 1 9 Appendix 2 10 Appendix 3 11 Appendix 4 11 Appendix 5 11 Appendix 6 12 Introduction International Financial Reporting Standards (IFRS) are defined as a collection of accounting standards instituted by International Accounting Standard Board (IASB) which is the international benchmark for the arrangement of financial statements of public company (Ifrs, 2015). By adopting International Financial Reporting Standards, companies can present their financial reports on the similar basis as their overseas competitors, thus making comparisons simpler. Organizations with subsidiaries in nations that permit or require IFRS might be capable enough to make use of one accounting language across the company. Organizations also might require changing to International Financial Reporting Standards if they are a subordinate of an overseas organization that must apply International Financial Reporting Standards, or if they include an overseas financier that must employ IFRS. Organizations might also benefit through using International Financial Reporting Standards if they desire to grow capital abroad (Ifrs, 2015). The objective of International Financial Reporting Standards is to present an international structure on how the public companies disclose and prepare their financial statements. A single benchmark will provide auditors and investors with a unified vision of finances. Nestle is the leading wellness, health and nutrition company established in 1905. It is the main participant within the United Kingdom (UK) employing 8000 staffs across 23 sites (Nestle, 2015). The main objective of this report is to generate awareness of IFRS to the non-executive directors of Nestle who are unsure of the accounting requirements in relation to brands. Overview of Company Nestle is a global beverage and food company in terms of revenues. It offers wide range of products such as baby food, breakfast cereals, tea and coffee, bottled water, confectionery, ice cream, snacks, pet foods, frozen food, and dairy products. Nestle is also one of the main exporters of the UK’s food industry, exporting more than £346 million value of products each year around the globe. Their Corruption and Anti-Bribery Policy offers guidance for the customers and service providers in the UK (Nestle, 2015). A. Important information on Nestle brands for Investors and Lenders Nestle ensure commitment towards quality, nutrition, and taste across all their products. Kitkat is one of the United Kingdom’s bestselling brands of Nestle and their sale is over £170 million in the year 2004. The statistics represents total sales of the Nestle Nutrition internationally from the year 2010 to 2013 (See Appendix 1). In the year 2013, the sale which comes from the division of Nestle Nutrition is 1,742 million in Europe. The total sale which is generated from Nestle Nutrition in 2013 amounts to 9,826 million (Statista, 2013). The liquid and powdered beverages accounted for total sales of 20,248 million in 2012 which has increased to 20,495 million in 2013. The total sales from dairy products resulted to 17,344 million in 2012 and were increased to 17,357 million in 2013. Health care and nutrition’s total sales accounted for 9,737 million in 2012 and had increased to 11,840 million in 2013. The sales from frozen food were 14,171 million in 2013 and that from confectionery and pet care was 10,283 million and 11,239 million in 2013 (See Appendix 2) (Annual Report, 2013). Coffee is considered as the second largest traded goods in the world and is also the most expensive agricultural commodity. Nestle works strongly with different agencies, coffee research institute and with governments to support the growers as well as established a compilation of two hundred and fifty high quality varieties of coffee for the programmes of plant-improvement. A latest concern shared by the company is the low cost of the green coffee in the global market. Nestle closely supports the long term constancy in commodity prices which provide a sufficient return to farmers (Nestle, 2002). These information will be useful for the lenders and investors of Nestle as the key figures of different Nestle brands reflects the financial position of the company in terms of sales revenue. It also shows that the company has close relationship with different agencies and government to support the growers (Nestle 2002). The other important information for the investors is that the company supports the stability in commodity prices. This indicates that the low prices of commodity lead to the price volatility as well as high value in the near future which in return help to provide ample return to the farmers. The above information about brands indicates that the liquid and powered beverages is accounting for maximum sales followed by the dairy products. The investors and lenders will find it useful in order to make their strategies and objectives regarding the sale of products. They can now focus more on other brands which are contributing to low sales revenue and can make strategies about how to increase the sales of such products. B. Financial Position and Performance Profitability position and performance The total sales revenue from all brands of Nestle accounts for 89,721 in the year 2012 which has increased to 92,158 in 2013 but the net profit from all brands has slightly decreased from 10,677 in 2012 to 10,445 in 2013. The net profit ratio has slightly decreased from 11.90% to 11.33%. The operating profit ratio has also come down from 14.92% to 14.18% (See Appendix 3). The information on the net profit ratio will help the investors and lenders of Nestle to evaluate the profitability position of the company. This ratio will give them the clues to the cost structure, production efficiency, and the pricing policies of the company (Mohana, 2011). Net profit and the operating profit ratio will help the lenders and investors to know how competent the company is as well as how efficiently they are managing the costs. The slight decrease in both the ratios of Nestle indicates low margin of security and high risk for the company. Liquidity position and performance Total current assets have risen from 34,020 in 2012 to 30,066 in 2013 and the total current liabilities have come down from 38,597 to 32,917. The rise in current assets and the fall in current liabilities indicate the good liquidity position of Nestle. The current ratio has risen from 0.88 to 0.91 and the liquid ratio has also increased from 0.65 to 0.66 which is a slight change (See Appendix 4). This information will be useful to the investors and lenders of Nestle as it will help them to evaluate whether or not the company has adequate resources to compensate the debt over the following years. The information about the rise in the current assets as well as current ratio will help the investors and lenders to make their decisions about payment of bills. It signifies that the company will not face any difficulties in paying the bills on requisite time. The information about the liquid ratios will help the investors to evaluate the ability of Nestle towards utilizing their liquid assets in order to recompense the current liabilities. The liquid ratios signify whether the assets which could be quickly changed into cash are enough to cover the current liabilities (Khan and Jain, 2010). The increased liquidity ratios help the lenders and investors of Nestle to understand that they do not depend greatly on inventory to pay their liabilities especially of short term. Solvency position and performance The long term debt of Nestle is 9,008 in 2012 and has increased to 10,363 in 2013. Total equity has also increased from 62,664 to 64,139, which is a good sign of company’s solvency situation. The debt to equity ratio for the year 2012 is 0.14 raised to 0.16 in 2013 and the equity ratio has risen from 0.50 to 0.53(See Appendix 5). The debt to equity ratio signifies the percentage of Nestle financing which comes from investors and lenders. The long term debt as well as the debt to equity ratio has increased in comparison to previous year, which shows that the company is more risky to the investors and lenders. Therefore, it indicates that more bank loans will be used than investors financing. The equity ratio will assist the lenders and investors to identify the entire financial strength of Nestle. An increase in the equity ratio shows the higher contribution of lenders towards the capital and consequently it signifies the enhanced solvency position of Nestle. Efficiency position and performance The sales revenue has increased from 89,721 in 2012 to 92,158 in the year 2013. The average debtor and total assets has decreased in 2013 as compared to 2012. The average debtor had fall from 13,048 to 12,206 and total assets has decreased from 125,877 to 120,442. However, the asset turnover ratio has risen from 0.71 to 0.77 and the debtor turnover ratio has also increased from 6.88 to 7.55 (See Appendix 6). This information will be useful to investors and lenders of Nestle because computation of asset turnover ratio will give them a thought on how the company will be administered as well as how they will make use of the assets in order to produce sales (Hussain, 1989). The increase in the asset turnover ratio assists the lenders and investors to know that the company is making use of its assets more resourcefully. The increase in the debtor turnover ratio will help the investors and lenders to know that Nestle has more liquid debtors and they may also be collected promptly. C. Accounting Policy Applied to Nestle The financial statements of Nestle comply with the International Financial Reporting Standard issued by IASB along with the explanations issued by IFRS Interpretations Committee (IFRIC) as well as with Swiss Law. The accounting policies which are applied to the brands of Nestle especially on amortisation are the Brands and Intellectual Property Rights and the Operating Rights. The accounting treatment for the amortisation of intangible assets is justified in terms of their appropriateness. They have been arranged under historical rate convention method and on an accrual base. The amortisation of the intangible assets is assigned to the suitable headings of expenses in the income statement. It is also shown in the cash flow statement and is included under the non-cash items of expenses and income. The intangible assets of the company are amortised by methodical charges to the expense over its useful life (Annual Report, 2013). D. IAS 38 Intangible Assets Criteria IAS 38 Intangible Assets explains the accounting prerequisites for the intangible assets which are exclusive of physical substance as well as identifiable (Ifrs, 2012). An intangible asset is defined as a non-financial asset which is devoid of physical substance (Icap, 2015). The purpose of the IAS 38 Intangible Assets is to set accounting treatment for the intangible assets which are not in agreement with especially in another International Financial Reporting Standard. The standard indicates how to assess the carrying sum of the intangible assets as well as necessitate certain revelations regarding the intangible assets (Ifrs, 2012). Internally generated brands shall not be identified unless they meet the following criteria: The technical feasibility is necessary to become available for sale or use; cost of asset shall be measured consistently; should have the ability to sell or use the intangible assets; should have the accessibility of adequate financial, technical, as well as other resources in order to complete the growth and to sell or use the intangible assets; and should arise from legal or contractual rights (Friedrich, 2015). I totally agree with this standard as it will provide basic standards to the brands of Nestle, by providing the intangible assets the authority to obtain the upcoming economic benefits and will have the legal rights which are enforceable in the court of law. Conclusion Having a global standard is very vital for large organizations that include subsidiaries in various countries. Implementing a particular set of universal benchmark will simplify the accounting method by permitting a company towards using one accounting language throughout. The boost in the efficiency ratios shows that the company is employing its assets more resourcefully. An increase in the equity ratio indicates higher contribution of lenders towards the capital of Nestle. The fall in the profitability ratios show low margin of safety for Nestle. However, the increased liquidity ratios in comparison to previous year indicate that the company is keeping a proper cushion of the liquid resources. Reference List Annual Report, 2013. Nestle Annual report 2013. [pdf] Available at: < http://www.nestle.com/asset-library/documents/library/documents/annual_reports/2013-annual-report-en.pdf> [Accessed 31 Jan 2015]. Friedrich, B., 2015. International Accounting Standard 38 (IAS 38), Intangible Assets. [pdf] Available at: < https://www.cga-pdnet.org/Non_VerifiableProducts/ArticlePublication/IFRS_E/IAS_38.pdf> [Accessed 1 Feb 2015]. Hussain, A., 1989. A Textbook of Business Finance. Westlands: East African Educational Publishers Ltd. Icap, 2015. Intangible Assets – IAS 38. [pdf] Available at: < http://www.icap.org.pk/wp-content/uploads/QA/SMPworkshops/PPT_%20IAS_38.pdf> [Accessed 1 Feb 2015]. Ifrs, 2012. IAS 38 Intangible Assets. [pdf] Available at: < http://www.ifrs.org/IFRSs/IFRS-technical-summaries/Documents/IAS38-English.pdf> [Accessed 1 Feb 2015]. Ifrs, 2015. International Financial Reporting Standards. [online] Available at: < http://www.ifrs.com/ifrs_faqs.html#q1> [Accessed 31 Jan 2015]. Khan, M.Y. and Jain, P.K., 2010. Management Accounting. New Delhi: Tata McGraw Hill. Mohana, R.P., 2011. Financial Statement Analysis and Reporting. New Delhi: PHI Learning Pvt. Ltd. Nestle, 2002. Nestle: The Nestle Sustainability Review. [pdf] Available at: [Accessed 31 Jan 2015]. Nestle, 2015. Nestle Good Food, Good Life. [online] Available at: < http://www.nestle.co.uk/aboutus> [Accessed 31 Jan 2015]. Statista, 2013. Sales of Nestle Nutrition worldwide from 2010 to 2013, by region. [online] Avaialble at: < http://www.statista.com/statistics/255228/sales-of-nestle-nutrition-worldwide-by-region/> [Accessed 31 Jan 2015]. Appendices Appendix 1 Worldwide sales of Nestle nutrition (Source: Statista, 2013). Appendix 2 The values are in millions of CFH (Swiss France) (Source: Annual Report, 2013) Appendix 3 Profitability ratios Nestle Formula 2012 2013 Profitability ratios Operating profit 13388 13068 Net Profit 10677 10445 Sales 89721 92158 Net Profit ratio (Net profit/sales)*100 11.90 11.33 Operating profit ratio (Operating profit/sales)*100 14.92 14.18 Appendix 4 Liquidity ratios Liquidity Ratios Inventory 8939 8382 Current assets 34020 30066 Current liabilities 38597 32917 Current ratio Current assets/current liabilities 0.88 0.91 Liquid ratio ((Current assets – inventory)/current liabilities) 0.65 0.66 Appendix 5 Solvency ratios Solvency Ratios Long term debt 9008 10363 Total equity 62664 64139 Total assets 125877 120442 Debt to equity ratio (Long term debt/(Equity) 0.14 0.16 Equity ratio (Total equity/total assets) 0.50 0.53 Appendix 6 Efficiency ratios Formula 2012 2013 Efficiency Ratios Sales 89721 92158 Average debtor 13048 12206 Total assets 125877 120442 Asset turnover ratio (Sales/total assets) 0.71 0.77 Debor turnover ratio (Sales revenue/Average debtor) 6.88 7.55 Read More