Iycee Charles de Gaulle Summary Financial reporting Essay

Financial reporting Essay

“The Group’s principal activities are carried out through three divisions, Passenger Services, Vehicle Rental and Bus ; Coach. Passenger Services operates bus and train services in the United Kingdom and seven countries, coach commuter services and private hire. Vehicle Rental provides corporate vehicle rental and personal self-drive hire. Bus ; Coach provides bus and coach distribution, rental and finance. It operates in the United Kingdom and mainland Europe. In January and February 2005, the Group acquired Sovereign Bus and Coach Company Ltd and Sippel Group.” (Alacra, 2006)

I. Balance Standards

Arriva in one of the most important transport services company in Europe, with train and bus operations in the UK, Denmark, Netherlands, Italy, Portugal, Spain and, Sweden; delivering more than one billion passenger journeys a year.

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As Moya and others stated in her paper “with the globalization of international financial markets, the idea of adopting a common language for financial reporting which allows international comparability has become widely accepted by European corporations.”[1] There were different choices to achieve this at the moment, but the International Financial Reporting Standards was the option that Europe selected.

The IFRS project, implemented by the International Accounting Standards Board, seeks to find a common “language” in a way that financial information means the same for each individual user. This is useful because it makes uniform the information; therefore this information is comparable achieving uniformity, transparency and reliability.

As a European Union listed company is required to prepare its financial information following the IFRS for the 2005 financial year.

Existing and potential investors demand for their resources efficient and productive destinies, but they also need to understand comprehensively the entire information that is given to them.

As the first year of in Arriva’s implementation of IFRS, some problems can appear due to the fact that 2005 is not the only year to be adjusted according to the new standards. Comparability requires that IFRS are applied to past statements and this can cause some problems in past years valuation and even might be inapplicable. Despite this it seems that the transition has not had a major influence on cash flows, although the changes which had to be performed in amortizations of goodwill and intangible asset. The changes in the Balance Sheet regarding the accounting of pension systems were more significant. The main effects were increase in profit before tax and in earnings due to goodwill values no longer depreciated; a decrease in net assets due to the change in valuation forms; decrease in net debt due to proportional consolidation of joint venture.

II. Financial position and performance

The balance and income sheets show adequate cash generation; in addition recent vehicle rental division disposal will contribute to increase cash availability.

Going deeply into the financial statements it can be mentioned that earnings before interest, tax, depreciation, goodwill impairment and intangibles amortization (EBITDA) increased relative to the year before around five per cent, increasing net cash inflows from operating activities. Analyzing some ratios, compared with the 2004 performance can give some additional information. Considering some liquidity ratios it can be seen that the ratio (current assets/current liabilities) has increased, related to 2004, from 51.25% to 58.21%; even though the non current assets/non current liabilities impairment has increased form 2.08 to 2.1, showing a small change in liabilities’ time extension. Going a little deeper in the analysis if  the (trade and other receivables + cash + financial instruments/current liabilities) is compared with the year before (0.534 – 0.463) illustrates a healthier position. Utilizing a solvency coefficient like (Equity/non current assets) shows also an increase form 0.33 to 0.35.

The increase in net debt reflects somehow the augmented acquisition and investments activity in trains and buses.

The group operating profit has decreased from £ 126.3 to £ 123.1; but the profit has increased from £ 83.3 to £ 86.3. The equity has increased from £ 429.8 to £ 503.7. If we make a ratio with these two values a little decrease can be seen going from 0.193 to 0.171.

II .a) Property, plant ; equipment

The group presents an usual strategy of investment in new vehicles and acquisitions, seeking to enhance the cash flows. The 2005 acquisition expenditure was £ 46.3 million, including investments in Germany, Italy and Portugal. An important fact, off balance sheets, is that in February 2006, the company completed the disposal of the vehicle rental business.

The accounting policies for these accounts are: Land and Buildings are stated at cost or cost less its residual value; therefore they are not valuated. Depreciation is calculated using straight line method.

Restoration or renovation work is capitalized and depreciated until subsequent related major refurbishment.

Interest costs incurred are capitalized where they are considered significant.

II. b)Intangibles

In this account the major facts that can be described are the increased charge in goodwill and the intangible asset amortization. This was due to the acquisitions made in 2004. Goodwill account has increased from £ 266.7 to £ 277.5 millions.

The companies’ accounting policies for these accounts are:

Goodwill on acquisitions of subsidiaries or joint ventures is in non-current assets; and acquisitions of associates are included in investments. Goodwill is not amortized but tested for impairment.

Intangible assets are incorporated at the fair value when possible (e.g. in some acquisitions). When acquired separately they are accounted at their cost. If they have a limited life they are amortized regarding its expected lifetime.

II. c) Leases

The group bus fleet is financed whether with medium term hire purchase or finance leases arrangements. The characteristic length of these arrangements is three to five years. The rolling stock in German, UK, Netherlands and Danish railroad business is provided through operating leases that cease on the end of franchises’ agreements.

The leases of property, plant and equipment are classified as finance leases in the balance sheets. These are capitalized at lease’s start at the lower of the lease’s fair value or the present value of lease payments. These payments are allocated amid the liability and finance charges. The rental obligations are allocated in other liabilities. The interest cost thus generated is charged into the income statement over the period. The depreciation of leased assets is calculated over the shorter of the asset’s use lifetime or the lease period.

II. d)Revenues

Regarding the revenues recognition accounting policies, Arriva’s revenue is measured at the fair value of the consideration received or receivable. In the case of the provision of contractual services is measured as a percentage of completion; calculated as a proportion of the service provided vs. the total contract or by the comparison of costs incurred with the total expected costs.

     Incomes from disposal of assets, including short term rentals, are excluded form revenue.

III. Some Operational Issues

     The group’s seems to have a healthy financial position, despite the fact of important increases in fuel costs and the finish of an important contract that highly contributed to companies’ financial performance. Despite this, there are several threats to the company and, the fuel prices increase is a major issue. Due to constant changes in prices the company had to set a strategy to keep prices still though the use of derivatives financial instruments. This strategy while giving some certainty to the company’s future, it also rises some financial costs and requires adequate management. Coupled with this the company, to offset this issue, has introduced targeted price increases to help compensate cost pressures.

In addition Arriva was the world’s first company to employ bio-diesel for rail services. This is an important issue looking forward into the future, allowing the company to depend less on fuel prices and, in the other hand, gaining new customers that value the use of environmental non-aggressive technologies. Being the first mover within an industry may produce good results when high-quality management is behind of this.

     The other strategy to counteract these costs increases is to increase the passenger numbers, although slightly menaced by July-2005 events, is achieved true a large efficiency and effectiveness program in the bus operations, which is one of the company’s core division; and through marketing programs and building relationships with local governments. Arriva habitually measures its operational performance alongside budgets, but it also measures its operations against non financial indicators (e.g. customer comments, staff turnover or keeping on time schedules); thus it may implement other procedures as increases in prices as well as costs reductions.

The sale of the vehicle rental business gives the opportunity to focus on the company’s main expertise and businesses, in accordance with the whole company strategy.

     As it can be seen in the statements sheets, revenues decreased in 2005 from £1,759 million to £1,626.8 million in 2004, due to Arriva Trains Northern franchise expiration which had important revenues contribution in 2004. Going further, each division has contributed as follows:

UK Trains division revenues are £239.4 millions, representing 14.7% of income; UK Bus operations achieved revenues for £697.5 millions, 42.8% of income; Mainland European division revenues are £621.2 millions, which represent 38.3% of income; Bus and Coach achieved revenues for £13.1 millions, attaining 0.8 % of income and; Vehicle rental business achieved £55.6 millions revenue, representing 3.4% of income. This reflects that Arriva’s UK bus operations and UK trains division accounts more than 80% of the group’s revenues, making clear which are the companies’ main business. Therefore, focusing in this expertise can be convenient.

Another important issue is the nature of the business. In a regulated market relationships with local authorities and governments are crucial. Well established in the UK the company seeks to expand its activities to the rest of Europe. There are plenty of opportunities as well as menaces in this sector. The liberalization of transport markets in Europe is a fact. More than ten years ago the council of Ministers of Transport stated that “… the elaboration of common rules and documents for coach services in passenger transport, including the liberalization of such services starting with occasional coach services, would equally facilitate the movement of persons and the utilization of public transport”[2].

In an attempt to show demonstrate long-term commitment to Wales, Arriva Trains Wales is the Welsh arm of Arriva plc.  Clearly, Arriva Plc is reaffirming its position as one of the leading transport services organizations in Europe. With a Welsh fleet of more than 116 trains covering more than 2,600 miles of routes, the firm employs over 1,860 people.

The company operates 788 services a day on weekdays.  Totally their trains travel distance to 16.5 million miles each year.

On average, Arriva Trains Wales’ service handles about 60,000 passenger journeys a day, with the ability to carry over 12,000 customers at any one time.

They operate 235 stations throughout Wales of which 48 are staffed. (BARRY, 2005, 28)

This past intention is now being reflected in all European Markets.

Political and financial pressures on each market are making governments to take the decision to outsource their transportation services. Therefore the company is well aimed, selling its divisions which are not important and focusing in this opening. But, by the same token, that pressures governments to open their markets, once liberalized, operates in the opposite direction. Thus regulations and timings are often unpredictable.

As a final issue it might be said that the company’s is well conducted but it can not disregard the fact the type of market in which it operates as well the international situation, beyond its own operating limits.

Appendix

References

2006 Alacra, Inc., 100 Broadway, Suite 1100, New York, NY 10005 The Alacra Store is an e-commerce website offering http://www.alacrastore.com/companysnapshot/1004387 Searched November 29th, 2006

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Damodaran, Aswath. “Damodaran on valuation”. John Wiley and Sons, Inc.

Van Horne, James. “Financial Management and Policy”. 10 edition. Prentice Hall.

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Moya, Soledad; Perramon, Jordi and Constans, Anselm. “IFRS ADOPTION IN EUROPE: THE CASE OF GERMANY”. Available at<http://ideas.repec.org/p/bbe/wpaper/200501.html>

[1] Moya, Soledad; Perramon, Jordi and Constans, Anselm. “IFRS ADOPTION IN EUROPE: THE CASE OF GERMANY”. Available at <http://ideas.repec.org/p/bbe/wpaper/200501.html>

[2] European Conference Of Ministers Of Transport. Resolution No. 95/1 On Access To The European Transport Markets”. The Council Of Ministers Of The Ecmt. June 1995.