ACCT11081

Introductory Financial Accounting

Assignment 1

STEPS 3-6

My Company

When I found my company, I was actually quite happy with being given Downer EDI Limited.

I had heard of the company and had actually done a little looking around their website about

a year ago when I started thinking about investing in shares. I originally associated Downer

with being purely a mining company. As I did a little more digging, I realised they are far

more than just mining. Their website state that Downer ‘designs, builds and sustains assets,

infrastructure and facilities and we are the leading provider of integrated services in Australia

and New Zealand’. This made more sense to me as I thought back to my original research of

the company. At that time, they were on the cusp of acquiring Spotless, who are provide

integrated facilities services such as cleaning, catering and hospitality, asset maintenance

Downer are like an umbrella, the parent group of many other companies that provide a range

of different services.

Lisa O’Neill ACCT11081

Companies Downer has control over

Lisa O’Neill ACCT11081

What Downer does

‘Downer EDI Limited (Downer) is a leading provider of services to customers in markets

including: Transport Services; Technology and Communications Services; Utilities Services;

Rail; Engineering, Construction and Maintenance (EC&M); and Mining’. (Downer Group

website)

Lisa O’Neill ACCT11081

From roads to gas to mining and defence and a lot of things in between, it really seems a

though Downer has it going on when it comes to growth and success in their industry. This

leads me to wonder what they don’t do? When it comes to roads, Downer manages and

maintains more than 33,00 km of road in Australia and more than 25,000 in NZ. In terms of

renewable energy more than 2.3GW of renewable energy is generated by plants built or

currently being delivered by downer. The Department of Defence is one of Downers longest

standing customers. A few of the services they provide are professional and managed

services, project delivery and estate upkeep. It has been a coming together so to speak with

Downer now a having the majority of ownership of Spotless as they are Defence contractors

as well, so this benefits Downers revenue.

More than 56,000 people are employed by Downer mostly in Australia and New Zealand but

also including South America, Southern Africa and the Asia – Pacific region. What I did find

interesting is the number of employees in 2016 was around 19,000. Now one could assume

the acquisition of companies and success in business over the last few years has

contributed to the growth in employment numbers.

History

The history of how Downer came to be is actually quite interesting. Foundations of the

company were laid down in the 1800’s. Through a series of acquisitions and mergers

Downer Co came to be in 1933. The most fundamental point in the history of Downer Co

(still NZ based at this time) in my opinion was when they acquired Roche Brothers, which at

the time was one of the largest mining companies in Australia, in 1997. This formed the

Downer mining business that exists today, hence the heavy connection between Downer

Lisa O’Neill ACCT11081

and mining. Downer was then listed on the ASX in 1998. Downer has acquired numerous

companies since this time including Stork Electrical and Emoleum. Most recently they

became 88% stakeholders in Spotless (SPO) and Hawkins in 2017. Hawkins being one of

NZ’s largest construction firms. I wrote a blog post on the history of Downer, which I also

posted to our unit Facebook page. This is the link:

http://imaccountingonyou.home.blog/2019/07/24/mining-my-own-business/

An interesting fact I picked up on is that the EDI in Downer EDI stands for Evans Deakin

Industries who Downer merged with in March 2001.Evans Deakin Industries formed

Downer’s Rail business. Just a little fun fact for people who wondered what EDI was all

about.

Annual reports

The Downer website states that:

‘Downer reports its financial results under six service lines: Transport Services; Utilities

Services; Spotless; Rail; EC&M and Mining’

Seeing the scale of business run by Downer I assumed I would be reading some rather large

numbers in their annual reports. I wanted to know how all these companies under the

umbrella come together financially. Luckily for me the numbers were displayed in a really

easy to read way via the use of pie like charts. These charts displayed the contribution %

that each sector contributed to total revenue. I found the annual reports a lot easier to read

this time around. I’m not sure if it’s because Downer’s reports are set out so simplistically or

from the experience of reading my previous company’s annual reports. It seems like I know

what I look for now when coming up against these large documents. I found it interesting that

I found myself being able to understand why things like an increase in assets were

happening during the years when other companies have been acquired. Downer’s most

significant recent acquisition has to be becoming the majority stakeholder of Spotless in my

opinion. This is what drew me to looking at Downer a few years ago, because I knew they

had laid down an offer to Spotless. This is what Downer Group had to say about becoming

the majority stakeholder of Spotless:

‘On 21 March 2017, Downer announced an offer, through its wholly owned subsidiary

Downer EDI Services Pty Ltd, to acquire all of the issued share capital of Spotless Group

Holdings Limited (Spotless) which it did not already own. Spotless employs over 30,000

people in Australia and New Zealand and provides outsourced facility services, catering and

laundry services, technical and engineering services and refrigeration solutions to its

customers in various industries.

Lisa O’Neill ACCT11081

The acquisition of Spotless delivers on Downer’s strategic objectives because it: – continues

Downer’s transformation towards a more services-focused business with resilient earnings; –

enhances the Group’s contract portfolio, with long-term contracts that provide high certainty

over revenues; – contributes a complementary, high quality customer base; and – creates an

integrated services provider with a comprehensive range of capabilities’

I knew they became the majority stakeholders, but as I ended up purchasing shares in

ARGO instead, I didn’t take much more notice of Downer after that. I find it ironic that I am

now able to see how the acquisition of 88% of Spotless has impacted Downer.

I wrote two blog posts on my initial findings whilst reading the annual reports.

https://imaccountingonyou.home.blog/2019/07/31/the-numbers-part/

https://imaccountingonyou.home.blog/2019/08/04/points-of-interest/

Interesting findings

Being such a big company, I wanted to see the ways that Downer gives back and tackles

sustainability. Their Website is full of interesting articles. Three that I found interesting are

below.

Downer has partnered with the ALNF since 2013 and continues to support the ALNF, who

with the aim that five out of five kids will learn to read works with Indigenous communities

and schools around Australia.

https://www.downergroup.com/downer-to-support-wall-of-hands-appeal-for-an

A $53 million-dollar upgrade was recently completed at the Sunbury recycled water plant

and will provide approximately 800ML of Class B water to irrigate local sporting fields, golf

courses, wineries and the like per year in Sunbury and Diggers Rest.

https://www.downergroup.com/sunbury-recycled-water-plant-opens

Lisa O’Neill ACCT11081

The sustainable facility is capable of producing a wide range of products including asphalt

containing recycled tyre rubber and Reconophalt, an innovative asphalt product that contains

high recycled content from materials such as reclaimed road, soft plastics, glass, and toner,

making the facility one of the most advanced of its kind in Australia.

https://www.downergroup.com/sustainable-hub-in-teralba

Opportunities and challenges

Downer has control over a significant amount of companies. One negative about being in

control of so many companies is it has to be ensured that they are all being well managed to

be sure they are adding value to the company. From what I have read, Downer isn’t afraid to

resolve relationships with firms they own. I can’t speculate on why they have dissolved

ownership of some of the firms they have had an interest in over the years, but one would

suspect it to be primarily because that company wasn’t not functioning in a way that

contributed to Downer’s success. They may see an area where they want to grow in or

invest into further and the letting go of another company could allow them the opportunity to

do this. Downer has a lot of opportunities to invest and acquire other companies that are

preforming well or aligned with their overall objectives, due to their ability to obtain funds in

order to secure their investments. However, the industries that Downer are invested in are

extremely competitive, take mining for example. It will be interesting to see how Downer

tracks when Adani is fully operational. Service companies rely on winning contracts in order

to generate revenue, now this can come with a whole set of problems. Contracts have to be

won to start with, so multiple companies would be engaging competitively for the same

outcome. It takes time and resources to quote on possible jobs so not being successful can

be costly. Then once a job is contracted, the contract has to be carried out according the

relevant costs and time frames. Weather can play a part in not completing contracts on time,

as too can many other things, such as not budgeting correctly and even the collapse of other

companies involved in projects which can delay project completions, resulting in further

losses. This has recently been felt by the way of a 45-million-dollar loss on its Murra Warra

wind farm project due to the Downers joint venture partner going into administration.

https://reneweconomy.com.au/downer-takes-45m-hit-on-troubled-murra-warra-wind-farm-

60499/

Lisa O’Neill ACCT11081

Business is risky but as Downer has a range of different service companies, I think it’s safe

to assume that they can expose themselves to a high level of risk in terms of revenue

generation.

Shifts in the economy can also prove challenging. The economy goes through cycles and

these cycles lead to contractions and possible recessions. Downer has to be extremely

careful in its business dealings to ensure they don’t face serious repercussions that come

with an economic downturn.

Peer Interaction

Our Facebook page is a little quieter than ACCT11059. I’m assuming this is do to the fact

that there are less students doing the course and a lot of them are possible on campus so

they would be having conversations about their companies in class and not necessarily on

their blogs. I did manage to have a read of Jen’s and Leigh’s blog posts on their company’s

annual reports. Jen has JB Hi-Fi, which is pretty cool. Whilst completely different companies

we have the same feelings towards being happy with the companies we got Jenn’s second

blog post about JB was extremely good, her style of writing is extremely fluent and

academic. Jenn raised the fact that she looked for information about her company externally,

which gives her a better insight into how her company is performing, rather than relying on

the work of the company itself. This prompted me to look outside of the box with my

company, which lead to some interesting findings that have been included in this step. I left a

comment on her blog and I look forward to reading more about her companies and

comparing things where possible.

Leigh has a pretty neat company by the name of Grammer, a German seat manufacturer.

Leigh included some interesting findings on her company. For starters, one of their annual

reports is 182 pages long with German currency, fortunately Leigh was able to convert the

company’s revenue to Australian dollars, which shows they generate a very high revenue

figure. The company also registered 367 patents in 2016. I find this so interesting because

no one can replicate their patented items once the patent is approved which gives them a bit

of a monopoly like structure in their industry. It appears Leigh has quite an impressive

company.

Bec commented on my blog that she enjoyed reading about my company as she had not

heard of them before. Her company made things easy in their annual reports by using pie

charts which our companies have in common.

Lisa O’Neill ACCT11081

Whilst there isn’t a lot of comparison for me to make with people of similar companies at the

moment, I have made sure to comment on the blogs of others and the unit Facebook page, I

have made sure to post all my blog links to the Facebook page to make sure I am reaching

all the students in our unit.

STEP 4

I will admit I was a little apprehensive about this step, but then I realised no one is going to

sit there and scrutinise my spending. I actually really enjoyed the process. I write down what

I spend regularly in a budget book anyway, so adding a chart of accounts and an income

statement was actually a great exercise to undertake.

I was keen to put my chart of accounts together. I knew I would have quite a few a few

classifications as I used my savings account which is our primary account that covers the ins

and outs of our finances. I looked forward to doing the income statement as I like to see the

numbers laid out in front of me. I wondered what the percentages of certain expenses would

be and how much the profit/loss figure would be.

In comparison to the example chart of accounts, there isn’t a huge difference. My chart of

accounts includes more expense times and one less revenue item as shown below.

Example Chart of Accounts

1 - Revenue1-1 Interest Income1-2 Income - salary and wages2 - Expenses2-1 Private Health Insurance Expense2-2 Income Protection Insurance Expense2-3 Telephone Expense (mobile)2-4 Vehicle Expense (registration)2-5 Expense - Donations/Gifts2-6 General Living Expenses (Food, fuel)3 - Assets3-1 - Cash at bank4 - Liabilities5 - Equity

Lisa O’Neill ACCT11081

My Chart of Accounts

1 - REVENUE1-1 Income - salary and wages2 - EXPENSES2-1 Expense - Donations/Gifts2-2 Expense - Groceries 2-3 Expense - Rates payments2-4 Expense - Retail2-5 Expense - Car Expenses 2-6 Expense - Mortgage Payments2-7 Expense - Electricity 2-8 Expense - TV subscriptions 2-9 Expense - Cash Withdrawals2-10 Expense - Sports 2-11Expense - Animals2-12 Expense - School Expenses 2-13 - Expense - Phone, Mobile and Internet2-14 - Expense - Home and Content Ins2-15 Expense- Water Bill3- ASSETS3-1 Cash at bank4 - LIABILITIES5 - EQUITY

I could have added more detail but adding more classifications into my chart of accounts.

For instance, I classified both school fees and a uniform purchase under school expenses. I

could break down the expense category for our pets into food, registrations, vet fees etc. I

could also add more detail to the car expenses classification and break it all down to

individual expenses. It may be practical to do that if I wanted to track certain expenses more

carefully, in this case I was happy with the chart of accounts, but if I were to do it again in the

future, I would consider a more detailed classification process.

I was happy with my income statement. I really liked seeing the percentage values. I knew

our mortgage payments would be one of the largest expenses, but it was interesting to see

how car expenses and school expenses contributed overall in that month. The car expenses

included a rego payment which is paid annually. The school expenses also included the

payment of school fees which gets paid every term. So, these two expenses wouldn’t occur

Lisa O’Neill ACCT11081

every month. This is where a more details chart of accounts could come in handy. It would

allow for more itemised tracking of certain expenses.

There are many transactions I could apply to the accrual basis of accounting. For instance,

our car registration is paid annually for the next 12 months. Similarly, so are home and

contents insurance and tv subscriptions which we pay monthly for the next month. We pay a

set amount off our electricity and rates each week, but this amount isn’t exactly what is being

incurred. This amount is balanced when Ergon and our local council send out our bill. The

income that is accounted for in this chart of accounts is paid on a cash basis, but if I were to

have used our business account it would have been different as we use the accrual method

for the business, so the amounts of revenue are accounted for when the amounts are

invoiced, not when the funds are actually received. In terms of expenses, the chart of

accounts would need to recognise expenses as they are billed not when they are actually

paid as we have done in this step. If the accrual method was required there would be more

expense accounts to be added in and accounted for being actually being paid.

STEP 5

Everything was pretty straight forward in this step, up until it wasn’t. I had no problem

balancing my debits are credits for the balance sheet. The income sheet was also fine, until

it didn’t balance and I assumed I did something wrong. I then came to my senses and

realised it would only balance if my company had zero profit/loss. I didn’t put two and two

together that the difference in the two amounts would be the profit for the year, but I did a

little face palm when I realised it’s pretty obvious why. I wanted to do as much as I could

without needing to watch the lecture. Then I planned on watching the lecture after to confirm

I had done the right thing. When it came to the trial balance, I kind of got struck with a bit of

confusion when seeing the balances as I wasn’t sure how to account for the amounts that

had been already included. Once I watched the lecture and went over my accounts again, it

was such a relief when the trial balance actually balanced. I was slightly wary of how to

account for the comprehensive income that had already been taken into account. The

calculation to adjust Downers retained earnings was easy enough, but then it took me a little

while of looking around on the statement in changes of equity to realise the reserves needed

adjusting. I had to change the formula to account for the fact that this amount was a debit as

it was a negative amount.

All in all, I know I have balanced but I need to do a little more work this week regarding the

closing of balances. It was good to complete this step not 100 percent sure if I have done it

correctly as it made me realise, I need to get a bit more of a deeper understanding of it all.

Lisa O’Neill ACCT11081

After this I posted my draft work to my blog and I look forward to now giving and receiving

feedback.

STEP 6

Lisa O’Neill ACCT11081