The Excess Options Awarded

Purpose: The (bi-weekly) fortnightly assignments will test your understanding and application of concepts learned in prerequisite courses and during Strategic Financial Analysis (ACG 37).

You will be required to draw on the considerable body of knowledge you have accumulated in.

There are three issues discussed here.

The Excess Options Awarded

Diligent believes its statement is based upon certain assumptions and it is not in a position to give assurances that it can attain these expectations. This forward-looking statement, although made by the top official of the company, also shows their reluctance to undertake any obligation, except the one which is mandatory by law and Listing Rules. Such forward-looking statements reflect circumstances which helped in the occurrence of these unanticipated events, assert Barker & Youngdahl, (2015).

The Unlicensed Auditor

DIL has applied to the Financial Markets Authority (FMA) for exemption from Sections 15 and 18 of the FRA which require its financial statements to be audited by a registered audit firm. This request for an Unlicensed Auditor by DIL has led FMA to believe that DIL may be taking this recourse to cover the breach in its accounts and fears that such breaches may occur again in the future, as per Barker & Youngdahl, (2015). DIL applied to NZX Regulator (nZXR) for waiving of requirements stated in Rules 10.5.1 and 10.6.1 for having its financial statements audited by an auditor fulfilling the criteria laid under the rules. It has asked to be relieved from submission of an audit report in accordance with FRA rules, and seeks permission that its financial statement for the year ended 31 December 2012 should be allowed to be audited by an unregistered auditor HRR, says Medland, (2014).

The Revenue Recognition Restatement

The Company, in consultation with its previous and the new, independent accounting firm and with the assistance of its new Chief Financial Officer, has been continuing to analyse the practices of its revenue recognition under its various customer agreements for determining whether these are in accordance with the GAAP rules and are applicable for accounting guidance. The Company is also continuing the review of the financial impact of these identified errors prior to arriving at a conclusion for any fiscal period, as per Medland, (2014).

The issue here is about the responsibilities which are part of the shareholders (Board of Directors) as well as the stakeholders (investors). The growing responsiveness of corporate sustainability agenda is evident from the level of engagement expected from the boards of directors. This leads to those corporate governance practices which define the role of board of directors and are critically because of important considerations such as economic, social, political and environmental implications, says KPMG, (2013). The board of directors is the corporate body in the entity which has the ultimate responsibility for governing the corporation and it must navigate the entities relationship with the stakeholders during the complex economic environment, whether by managing it through direct control of operations or through global connections. In this context, the sustainability issue becomes of critical importance for maintaining integration across the strategic policies of the board, as per KPMG, (2015).

The Unlicensed Auditor

This has been notably highlighted by Professor Robert Eccles of Harvard Business School, and I quote: “Until recently there have been two separate worlds. There are experts in the fields of corporate governance, those who focus on compensation and other boardroom issues — and there has been the sustainability universe, which includes investors” Unquote. More than 90% of the world’s big 250 companies by value of revenue are involved in presenting their annual sustainability report as well as their corporate governance agenda, as per KPMG (2013). Experts are beginning to observe see a form of convergence of shareholders and stakeholders interests.

But this convergence still is not complete as more than half of these large companies do not reveal their targets for carbon reduction. Although, the 2016 Global Risk Report states that a failure towards climate change mitigation must top the list of the most important long term risks globally. This inaction of corporate governance in the case of climate change may point towards a breach of the directors’ duty, as per Eccles & Youmans, (2015). Hence this convergence of the initiatives and resources of corporate sustainability and corporate governance gathers importance. This paper recommends two inter-related approaches. The first recommendation concerns how sustainability can be effectively integrated into the systems and processes of the board. This can ensure that key issues are taken into account in a systematic progression of standard governance process. The second recommendation concerns certain specific tactics to be adhered by the boards and the individual directors.

Profit and Loss Forecasts

To determine the performance of Quantas in this segment, firm’s activities should be taken into account. Passenger revenues of Qantas represent 80% of its total revenues, balance 20% coming from freight. It is predicted that rate of long-term growth in international passengers shall be 6.3% p.a. and 5% p.a. for domestic passengers. Revenues of Quantas have shown an increase at an average of 4.8% p.a. in the current year. This growth is expected to be retained in the next FY provided there is no major international economic disturbance to effect this growth. Another major factor in this industry is that it remains sensitive to domestic economic conditions and the level of competition at international level, as per iata.org, (n.d.).

Among the expenses, the most significant category is staff costs, which have been shown as 24.4% of total revenues in the current FY. Looking at the general trend in the domestic economic conditions, this can be expected to be around 25.0% of the total revenues in the next FY. This is based on the industry assumption and analysis which has put these in the range of 24% to 26%, asserts iata.org, (n.d.).

The Revenue Recognition Restatement

In the current FY, the aircraft operating costs have been shown as19.5% of the total revenues. Looking at the international trend of fuel costs, which are based on long-term contracts and other fixed operating requirements of the company, this can be expected to stay at 19.5% of the total revenues in the next FY too, as per iata.org, (n.d.).

Volatility in international economic conditions in recent years, especially in the current FY have pushed up the non-operating costs but Quantas has been able to keep them within manageable limits as compared to its total revenue collections. However, if the trend continues, forecast for the next FY is that these costs may not remain within the long-term average of the total revenues. These expenses have been less than 10% of Quantas’ total revenues and it is forecasted that they remain at present levels. Interest is expected to remain at 3% of net borrowings and tax at the present marginal corporate tax rate of 30%, asserts iata.org, (n.d.).

Operating Assets

Keeping the established trend at Quantas, the current operating assets are expected to remain at the current level of 36% of total revenues. Although liabilities in the current FY have been volatile, the company is confident that they shall remain stabilised at 35% of total revenues, although non-current operating liabilities are forecast at 16%. Quantas’ other non-current operating assets have been constant in the current FY at 10% of total revenues and are forecast to remain at the same level in the next FY too, says iata.org, (n.d.).

Borrowings are not expected to change as they are calculated as a balancing item in the financial statement. Quantas has forecasted dividends at 25% of its operating profits after tax and this is in line with the current FY trend, as per iata.org, (n.d.).

Increased international competition will make an impact on the revenue yields of Quantas and the company may not register a substantial revenue growth in the next FY. But the company is set to maintain its level of revenue growth, at the level of growth set as a standard in the industry. Industry estimates predict that other revenues are set to increase at the same rate as those of passenger revenues. However, in the case of Quantas, these shall not create a significant impact on its forecasts as the other revenues are relatively of minor % of Qantas’ overall revenue collections, as per Barker & Youngdahl, (2015).

Although the management of Quantas has been making efforts towards reducing the operating and non-operating expenses during the current FY, there have been few minor variations in this segment, but the company has stabilised expenses over long term and expects them to remain around this level, says Barker & Youngdahl, (2015).

Aircraft Operating Costs

Quantas expects that AUD retains its strengthening trend against the USD in the next FY as this will offset any increase in oil prices. The company though expects that in view of the uncertainty in exchange rates, the level of fuel expenses shall remain between 23% and 25% of total revenue, as per KPMG, (2015).

Non-Operating Costs

Because of the hedge positions which have entered at historic rates, the management is confident that fuel expense shall not touch the forecasted position in the next FY and hence there is no immediate expectation of increase in these costs, says KPMG, (2015).

Operating Assets

The balance sheet of Quantas reflects the changes in the company’s level of business activity. Historically, the company has maintained its current operating assets at 36% of its total revenues. As a result of aircraft acquisitions, Quantas ratio of PPE (Property, Plant and Equipment) to sales showed an increase to 0.879 in the current FY. The management expects further increases as more acquisitions are planned, projecting the ratio of PPE to turnover 1.00, as per iata.org, (n.d.).

If the above trend continues, Qantas shall require to raise its equity but with the company’s current level of profitability, it may be a difficult achievement, asserts iata.org, (n.d.).

List Of References

Barker, S. and Youngdahl, J. 2015, ‘From ethical fringe to investment mainstream: Governance law and climate change risk management.’ Governance Directions, 67(9), p.525.

Eccles, R. and Youmans, T. 2015, ‘Why Boards must look beyond shareholders.’ weblog, MIT Sloan Management Review, viewed 1 August 2016.

https://www.iata.org/publications/pages/wats-passenger-carried.aspx, viewed 1 August 2016.

https://www.iata.org/publications/Pages/wats-passenger-km.aspx, viewed 1 August 2016.

Kiron D., Kruschwitz, N., Haanaes, K., Reeves, M., Fuisz-Kehrbach, S.K. and Kell, G. 2015, ‘Joining forces: collaboration and leadership for sustainability’, MIT Sloan Management Review, Vol 56, no. 3.

KPMG. 2013, Corporate Responsibility Reporting Survey 2013. Viewed 1 August 2016.

KPMG. 2015, Survey of Corporate Responsibility Reporting 2015. Viewed 1 August 2016.

Medland, D. 2014, ‘Protecting Long-Term Interests of Stakeholders Is Fiduciary Duty.’ weblog, Forbes. Viewed 1 August 2016.