Favalli,Dion.BX3011 report

Executive report – Harvey Norman Holdings Ltd. 2013 financial performance. Prepared by Dion Favalli

Executive report – Harvey Norman Holdings Ltd.

Prepared for: Karen Ness

Prepared by: Dion Favalli 11666813

Due Date: Friday 17-10-14 5pm

Subject Name: Company Accounting BX3011


Table of contents

Page

Executive summary ii

1. Introduction 11.1 Introduction to the report 1.2 Introduction to Harvey Norman Holdings Ltd

2. Financial standings 2-72.1 Equity composition2.2 Debt structure2.3 Provisions for income tax & deferred assets/liabilities2.4 Fixed assets2.5 Intangible assets2.6 Financial performance

3. Conclusions 84. Reference list 95. Appendices 10-14

List of figures

2.1 Components of equity 2

2.2 Notes to interest-bearing loans and borrowings 3

2.3 Notes to provisions 5

2.4 Non-current assets 6

2.5 Depreciation proceedings 6

List of calculations

1 Debt-equity ratio 4

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Executive summary

This report analyses the 2013 financial statements of Harvey Norman Holdings Ltd. It will first provide a background of the company followed by analysis of the different components of the financial statements. It will also discuss the different types of assets and the overall financial performance of the company.

Harvey Norman’s total equity equals $2 363 855 000 and consists of; shareholder’s contributed equity (10.98%), reserves (2.61%), retained earnings (84.98%) and non-controlling interests (1.43%). Their debt structure consists of total liabilities equating to $1 701 176 000. Of which current liabilities account for 49% while non-current liabilities make up 51%. Harvey Norman has increased their non-current liabilities and decreased current liabilities from the 2012 reporting period, which increases their liquidity. Their debt-to-equity ratio is well below industry norms at 0.72, while others in this industry have a ratio of more than double this.

Deferred tax liabilities ($194 353 000) far outweigh deferred tax assets ($28 395 000), meaning that they will have a greater tax expense in the future than tax income (deductions). This is largely due to gains on revaluations of property, plant and equipment other adjustments. Note 18 Provisions accounts for employee benefits and lease provisions, no income tax provisions are included here.

Harvey Norman’s fixed assets include; trade and other receivables, investment properties, intangible assets deferred income tax assets, other financial assets and property, plant and equipment. Also, they have a number of investment companies listed as subsidiaries. These subsidiaries deal with investment properties and as a result, investment properties are the largest figure in fixed assets ($1 694 744 000). Land and buildings are measured at fair value, while plant and equipment are measured at cost. The intangible assets figure on the other hand is much smaller ($59 256 000). These include current assets like Net Licence Property ($343 000), and non-current assets such as computer software (net book value $58 532 000), goodwill ($10 000) and licence property ($371 000). According to note 14b (pp95) of the financial report, computer software recognised impairment of $2.36million in the year ended 30 June 2012, but no further impairment was recognised in the current period.

Dividends paid in 2013 amounted to $90 297 000, a decrease of $26 558 000 from 2012. This is attributable to a $30 260 000 fall in profits in 2013. Due to the fall in profits, earnings per share fell from $16.24 to $13.38. While retained earnings for the year equal $2 008 880 000, a 3.6% increase from 2012.

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1. Introduction

1.1 Introduction to the report

The following report will delve into the 2013 annual financial report of Harvey Norman Holdings Ltd and comment on some of the key aspects with regard to company accounting. This report will discuss the nature of business of Harvey Norman. It will also explore the company’s capital structure by discussing their debt and equity composition, their provisions for income tax, their fixed assets, the intangible assets and the policies they use for recognising the impairment of these assets and finally, a summary of financial operations during the financial year will be provided.

1.2 Introduction to Harvey Norman Holdings Ltd

Harvey Norman is a public retail company listed on the ASX since 1987. Founded in NSW in 1982 by Gerry Harvey and Ian Norman, they now have more than 230 outlets and franchises across a wide range of countries. They also have a fully functional online store. Harvey Norman’s head office is located in West Homebush, Sydney. The specific nature of their activities includes the sale of; home wares, bedding, manchester, office furniture, white goods and other electronic devices such as computers, televisions, stereo systems, iPods, DVDs, etc.

In conducting their business they invite customers into the store who then pick which goods they want. The primary method of payment is cash or credit card. However, it is worth noting that in certain promotions they collude with companies such as GE Capital Finance, who finance the sale for the customer. The customer then has a fixed interest-free period in which to reconcile their payable account before an inflated interest rate is charged. Harvey Norman Holdings Ltd is a parent company whose long list of wholly owned subsidiaries include; Calardu Pty Ltd, Domayne Pty Ltd, Joyce Mayne Pty Ltd and Home Mart Pty Ltd.

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2. Financial standings

2.1 Equity composition

As stated in Leo, Hoggett & Sweeting (2012, pp.92) “Equity is defined in the Conceptual Framework paragraph 4.4 as the residual interest in the assets of the entity after deducting all of its liabilities.” Typically, for a publically listed company, total equity is made up of contributed equity (from shareholders), reserves and retained earnings. Total equity for Harvey Norman is indeed comprised of these components. Shares in Harvey Norman Holdings are fully paid. As stated in the notes to the notes to the financial statements (pp. 100), fully paid ordinary shares carry one vote per share and carry the right to dividends.

Figure 2.1 is an excerpt from the statement of financial position for the year ended June 30 2013.

Figure 2.1 Components of equity

All amounts in this figure are in 000’s, meaning that shareholders’ equity contributions amount to $259 610 000 (10.98% of total equity). Reserves equate to 2.61%, while retained profits accounts for 84.98% of total equity. “Profits generated by a company that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific objectives (such as to pay off a debt or purchase a capital asset).” (Business Dictionary, 2014). According to the notes to the financial statements, profit for the period was $142 211 000 and dividends paid amounted to $90 297 000. Bringing about an increase to retained profits of $51 914 000 for the year.

As seen in appendix A, the ‘reserves’ section is comprised of many different dealings. “Perhaps reserve may be defined simply as a ‘direct adjustment to equity plus the retained earnings of the entity’.” (Leo, Hoggett and Sweeting 2012, pp.110). Broadly, Harvey Norman’s reserves account consists of building and land revaluations, currency conversions, interest-rate swaps and their associated tax effects. According to Macabacus (2014), “Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest (greater than 50% but less than 100%) and consolidates the subsidiary's financial results with its own.” What this means is that the $33

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566 000 is equity owned by subsidiaries who Harvey Norman own more than 50% of, but do not wholly own.

2.2 Debt structure

As required by the Australian Accounting Standards Board, liabilities have been categorized as current and non-current. As noted by Birt, Chalmers, Byrne, Brooks and Oliver (2012, pp.160) the distinction between current and non-current liabilities is based on the timing of the expected future sacrifices. If the outflow of resources attached to the liability is expected to be realised within the next reporting period, then the liability is classified as current. If the outflow is expected beyond the next reporting period, then it is classified as non-current.

As reflected in Appendix B, Harvey Norman has a relatively even weighting of current (49%) and non-current (51%) liabilities for the 2013 reporting period. When compared to the 2012 period, they have increased their external financing in the form of longer term debt and reduced short-term debt. This is significant in terms of liquidity as they have fewer short-term obligations to meet. In broad terms, the current liabilities have been stated as; trade and other payables, interest-bearing loans and borrowings, provisions, deferred income tax liabilities and other liabilities. However, the related notes further break down these current liabilities. Perhaps the most complex is interest-bearing loans and borrowings, as stipulated in Figure 2.2.

Figure 2.2 Notes to interest-bearing loans and borrows

The above figure clearly shows how complex Harvey Norman’s debt structure is, with 8 different components making up the current interest-bearing loans and borrows. Also depicted in figured 2.2 is the $62 000 (26.5%) decrease, which is largely attributable to note 16 c – Other short-term borrowings. This has caused the interest-bearing loans and

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borrowings element of current liabilities to move from 25.6% of total current liabilities in 2012, to 20.7% in 2013.

The debt to equity ratio that Harvey Norman currently has is indicated in calculation 1.

Calculation 1 Debt-equity ratio

Debt-Equity ratio = total liabilities/total equity

= $1,701,176/$2,363,855

= 0.72

This means that for every $1 of equity they have $0.72 of debt. “A debt to equity ratio of 1 or less is usually favourable in the eyes of shareholders as it indicates less risk being taken by the company” (Accounting explained, 2013). This ratio is consistent with that of the 2012 reporting period as both total liabilities and equity changed by an immaterial amount in the 2013 reporting period. A ratio of this proportion appears to be below the norm for this industry as some of their competitors have ratios of well over 1 or even 2. (See Appendix C).

2.3 Provisions for income tax & deferred tax assets/liabilities

‘The future tax consequences of accounting transactions result in the recognition of deferred tax liabilities (assets).’ (Leo, Hoggett & Sweeting 2012, pp.224) As seen in Appendix D, the deferred tax liabilities of Harvey Norman are made up of many items. AASB112 Income taxes prescribes the accounting treatment of income tax. As per this standard, total deferred tax liabilities for the 2013 reporting period equated to $194 353 000, a 2.3% decrease compared to the previous period. It is primarily made up of revaluations of property, plant and equipment other adjustments. While deferred tax assets amounted to $28 395 000, a 3.3% increase compared to the previous period and is comprised of such things as employee benefit provisions, executive remuneration and other un-realised losses (see Appendix E). Deferred tax assets relate to items that have incurred deferred tax deductions and therefore, carry an expected cash inflow in a future reporting period.

Provisions for income tax relate to the best estimate of the company for income tax that will be payable during the year. Harvey Norman Holdings Ltd has made no provisions for income tax, as is evident in figure 2.3. This figure clearly shows that the provisions accounted for in the notes to the financial statements involve employee benefits and lease provisions only.

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Figure 2.3 Notes to provisions

2.4 Fixed assets

According to Accounting Dictionary (2014), “a fixed asset is an item with a useful life greater than one reporting period, and which exceeds an entity's minimum capitalization limit. It is not purchased with the intent of immediate resale, but rather for productive use within the entity.” In the statement of financial potions, fixed assets are found under the heading of non-current assets. Non-current assets are simply, “assets that are not expected to be consumed or sold within one year or one operating cycle.” (Birt, Chalmers, Byrne, Brooks and Oliver 2012, pp.160)

Categories of fixed assets in Harvey Norman’s case include; trade and other receivables, investment properties, intangible assets deferred income tax assets, other financial assets and property, plant and equipment. For most companies in this industry, property, plant and equipment is usually the largest figure in fixed assets. Harvey Norman however, has a number of investment companies listed as subsidiaries. These subsidiaries deal with investment properties and as a result, investment properties are the largest figure in fixed assets, as shown in figure 2.4.

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Figure 2.4 Non-current assets

All of the fixed assets listed in the above figure are typical of the industry; the one exception is indeed investment properties.

‘Property’ is broken down in the notes, to land and buildings. These are measured at fair value, while plant and equipment are measured at cost. Also included in plant and equipment is ‘lease make good asset’, which is also measured at cost. The 2012 figures also included buildings under construction which were subsequently finished in the 2013 period as no amounts were recorded. Figure 2.5 shows that a straight-line method of depreciation is used for these assets.

Figure 2.5 Depreciation proceedings

2.5 Intangible assets

“All firms have two kinds of assets: those we can touch and those we cannot. The kind that we can see, feel, taste, buy, sell, and so on are, of course, called tangible assets. Everything else is an intangible asset. Within intangibles, the distinction usually is made between identifiable intangibles and unidentifiable intangibles. Identifiable intangibles include intellectual property (IP), such as patents, copyrights, trademarks, and trade secrets, among others.” (Cohen, 2005 pp9) Harvey Norman has both current and non-current intangibles. The current intangible asset relates to Net Licence Property, amounting to $343 000. As seen in Appendix F, the non-current intangible assets include

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computer software (net book value $58 532 000), goodwill ($10 000) and licence property ($371 000).

These intangibles are subject to annual impairment tests which calculate the difference between the carrying amount and the recoverable amount. According to note 14b (pp95) of the financial report, computer software recognised impairment of $2.36million in the year ended 30 June 2012, but no further impairment was recognised in the current period. Additionally, note 14c (pp95) states that goodwill was not impaired in the current period. Net intangible assets equate to $59 256 000, an increase of $1 283 000 (2.2%) and making up just 1.46% of net assets ($4 065 031 000), meaning that tangible assets equate to 98.54% of net assets.

2.6 Financial Performance

For the year ended 30 June 2013, Harvey Norman paid a total of $90 297 000 in dividends. As seen in Appendix G, this included a final dividend for the 2012 reporting period which was paid on 3 December 2012. This figure is less than the previous year, where dividends equalled $116 855 000. This reduction could be due to profits falling by $30 260 000 in 2013. Directors of a company have fiduciary duties to act in good faith in the best interests of the company and to ensure their actions do not cause the company to become insolvent (Lipton, Herzberg and Welsh, 2012, pp.342). Since profits fell in 2013 it is smart practise to also reduce payment of dividends so as not to jeopardise retained earnings. The balance of retained earnings for the year ended 30 June 2013 is $2 008 880 000, which is a 3.6% increase from the previous year. For Harvey Norman, only profit after tax (attributable to owners of the parent) goes into retained earnings and dividends come out.

There was no issue of new shares nor any buybacks in 2013 as share capital remained the same as in 2012. However, earnings per share did drop from $16.24 in 2012 to $13.38 in 2013. This is attributable to the reduction experienced in gross revenue. Overall Harvey Norman has performed well in 2013; they remain in a strong position to carry on operations well into the future. Profits experienced a decrease; however, through good investment decisions equity experienced an increase.

3. Conclusions

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Over all, Harvey Norman Holdings Ltd has a financial structure that is more diverse and complex than is usually ‘normal’ in their industry. Through intelligent investment decisions and management, they have steered themselves into a strong financial position allowing them to continue rewarding shareholders with fair dividend payments. Although they have a complex debt structure, they have been careful not to ‘over-extend’ there borrowings, mostly using equity and long-term rather than short-term debts for financing. They are in a secure, solvent position and appear to be able to stay that way into the foreseeable future thanks to large amounts of current and non-current assets which dwarf liabilities by comparison. This has helped in giving them a lower than average debt-to-equity ratio for their industry.

4. Reference List

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Accounting explained. (2013). Debt-to-equity ratio. Retrieved from:

http://accountingexplained.com/financial/ratios/debt-to-equity

Accounting tools. (2014). Fixed assets. Retrieved from:

http://www.accountingtools.com/definition-fixed-asset

Birt, J., Chalmers, K., Byrne, S., Brooks, A. & Oliver, J. 2012, Accounting business reporting for decision making (4th edition). Milton, Australia: John Wiley & Sons Australia Ltd

Business dictionary. (2014). Retained-earnings. Retrieved from:

http://www.businessdictionary.com/definition/retained-earnings.html#ixzz3BYu6ETSG

Cohen, Jeffrey (2005). Intangible Assets: Valuation and Economic Benefit. Retrieved from:

http://books.google.com.au/books?hl=en&lr=&id=GHWQNQmmt5YC&oi=fnd&pg=PT10&dq=Intangible+Assets:+Valuation+and+Economic+Benefit.&ots=sQs_EHNHS5&sig=_XmBWOG_XSbMatTOalbwlIpfrhI#v=onepage&q=Intangible%20Assets%3A%20Valuation%20and%20Economic%20Benefit.&f=false

Leo, K., Hoggett, J., & Sweeting, J. 2012, Company Accounting (9th edition). Milton, Australia: John Wiley & Sons Australia Ltd

Lipton, P., Herzberg, A. & Welsh, M. 2012, Understanding company law (16th edition). Sydney, Australia: Thomson Reuters Australia Ltd

Macabacus. (2014). Non-controlling interests. Retrieved from:

http://macabacus.com/accounting/noncontrolling-interest

5. Appendices

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http://macabacus.com/accounting/noncontrolling-interest

http://books.google.com.au/books?hl=en&lr=&id=GHWQNQmmt5YC&oi=fnd&pg=PT10&dq=Intangible+Assets:+Valuation+and+Economic+Benefit.&ots=sQs_EHNHS5&sig=_XmBWOG_XSbMatTOalbwlIpfrhI%23v=onepage&q=Intangible%20Assets%3A%20Valuation%20and%20Economic%20Benefit.&f=false



http://www.businessdictionary.com/definition/retained-earnings.html%23ixzz3BYu6ETSG

http://www.accountingtools.com/definition-fixed-asset

http://accountingexplained.com/financial/ratios/debt-to-equity


Appendix A

Appendix B

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Appendix C

Dick Smith Holdings Ltd. Debt to equity ratio = 1.70

Appendix D

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Appendix E

Appendix F

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Appendix G

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