Nick's Blog: January 2016

Draft Assignment #2

***UPDATED Step 3 12/01/2016

Step #1

Chapter 4 KCQ’s

I’ll start off by mentioning, I’m quite pumped to be working more in depth with my firms annual reports. I didn’t really learn anything too much when all I did was copy and paste the figures from the annual report into the spreadsheet for ASS#1. The first page of chapter 4 has me engaged, and pumped about learning more about how I can use my companies annual reports to make a financial decision today. I’ve personally never been an investor, have only looked at shares or investing things from time to time but then not pursued investing because I just haven’t had the time and level of knowledge needed to do so. I like my money, I look at investing sort of like gambling. Let me refer back to my previous SPA1 assignment about the current Dick Smith crisis and their shares dropping by ¾’s.. I don’t want that to happen to me! I feel at this stage, looking at a firms annual reports and statements with education behind me I will be in more of a position to do so and this is mainly what I’d really love to take out of this assignment. “A more in depth snapshot and understanding of my firm’s annual reports.”

4.1

Reading through 4.1, it’s very apparent that a firm wants to do the right by investors. What I find interesting, especially with Martins example of “building new retirement villages to add value to equity investors” indicates that investors really don’t have a say in how the company chooses to spend its money. An alternative to building new villages would be to pay dividends. If I were an equity investor, I’d want to be paid a dividend on the shares I have. This opens a can of worms for me and my questions, specifically about investing.

KCQ: Can an investor pull out at any time? How hard is this? How do they do this? Can a company keep operating if all the investors pull their shares? What would happen if a company went from 100 investors to 1 with only $1000 invested?

Investing in assets (or building more) to add value to equity investors is really intriguing. I’ve had a bit of a light bulb moment here where Martin is saying its not all about cash flow.. which is totally right, without cash flow of course the business won’t be able to add equity, but what the business chooses to do with that cash flow to build more cash flow in the future is really important. I’ve never really looked at this before. I’m going to tie this into a local example in Hobart. Strathayr is a company which originated in Hobart and sells ready to lay turf. They then expanded their business to Melbourne and have increased their profits quite substantially. Without the cash flow from the Hobart operations they would be unable to expand their business and purchase new equity in Melbourne.

This is really getting me thinking now, when I originally said – what interests me the most about my firms annual reports, I said the cash flow statement, after reading this I’m actually rethinking this and I want to look into more depth the asset/equity side of the business. I used to think cash flow was everything… not anymore! Come to think of it, I used to watch the Shark tank and I never understood why the sharks were always questioning about current assets instead of focussing on what the business was turning over. Now it makes complete sense!

I can put capital into my own example where I’ve invested capital into my house, and because of this I cant invest that money elsewhere! It’s little things like this, which you don’t really 100% understand the terms, for so long I’ve been operating on auto pilot and not realising what I’ve been doing. However, the capital invested into my house does not earn me any economic profit!

KCQ: If a firm fails to make any economic profit, does this indicate the business made a bad decision? Have businesses made negative figures in economic profit from investing in an expansion?

4.2

KCQ: Why do we need to restate the firms financials? If they are easier to read then why don’t the firms publish these reports in a split of operating and financial activities so we don’t have to do this?

I’m getting pretty confused at the moment with all the different equations. e.g: FCF = OI - ^NOA.. It’s the acronyms which get me. I’ve got a document typed up with all the acronyms but still can’t really follow. I’m definitely a do-er so I want to restate my firms statements then refer back to the text so I understand.

4.3

At the moment, I have concerns about putting an O or F next to my firms balance sheets. Mainly because I worry I will get something incorrect when O/F each line item in my annual report. Again, I just want to jump in and do my company so I can pick up what Martin is talking about in this section.

Reading through the Income Statement, I can totally relate to this section. Recently the ATO released a report which several companies in 2014 did not pay any tax at all.. Virgin Australia, Vodafone and Qantas as examples. I now have a brief understanding as to why they wouldn’t pay tax..

KCQ: If a company makes zero profit, does this mean they pay zero tax?

4.4

I’ve found a few things so far a little confusing which I think once I get stuck into the restating it will make a lot more sense. One thing however, I do really wish I had knowledge about investing and I had gotten into investment 10 years ago. I’d be in a much better – hopefully – financial position and I would have knowledge about this stuff before studying it at uni!

Profitability seems like to marries straight to what I’m studying in economics. Equilibriums! Studying this has really helped me understand what Martin is talking about in profitability.

Conclusion:

I found this chapter to be quite in depth and a bit of information overload. I think it’s needed though as it tells me how to restate my firms financial reports and will make a lot more sense when I start doing this. I’m ready to restate my firms financials!

Step #2

Restating Financial Statements

I’ve had some trouble working out specifically what bits go where (e.g: whether items are financial or operational). Even after looking through the footnotes on my firms annual report it’s difficult. I’ve also had a look through the Financial Positive statement on Martins and the exemplar’s and their’s are balancing the exact same figure NOA = NFO + Equity but I can’t get mine to balance, is this meant to be the same? I’m having some difficulties understanding the Income Statements and how to best plot this out on my restated spreadsheet! I think I may ask for help.. No matter! I got it done. I’ve published my spreadsheet on the forums to get feedback from the other students in the course as I don’t feel 100% confident in the formulas, specifically the Tax and NOA sections. I’ve attempted to use the formulas from the exemplars to hep me a bit with the tax section, just to understand specifically how they are calculating everything. I’ve got the answers I needed thanks to Christyn and Christian. They have been really great in helping me out! I have to say, I’m really happy with how my restated annual reports came together. Meanwhile I have been back and forth on the forums over NOA = NFO + Equity and still not getting anywhere. I’ve added up my assets and liabilities from each tab on my document and these work out 100% - meaning I haven’t missed anything but they still aren’t the same. Unsure what I’ve specifically done here, 2014 is $-366, 2013 $21,848, 2012, $-13,819 and 2011 $-14,423. Apart from this figure, I’ve really happy with my restated statements! After receiving official feedback from Christyn and communicating with her via email, I’ve finally figured out what I did incorrectly to get these figures out so much! I calculated NFO = FA – FO when it should have been NFO = FO – FA. This fixed everything! However – in 2013, my NFO + Equity figure is still $694,000 NZD out. I’ve spent ages trying to figure this out, calculated all assets and liabilities between assessment 1 tab and this one, everything matches too.. I’ve no idea. I’m pretty angry I can’t figure this one out but it’s beaten me!

Discussion with others

My post on the forums:

Restatement help!

by Nicholas Gregory - Sunday, 27 December 2015, 3:32 PM

Excel spreadsheet Opus International Company Spreadsheet 2015.xls

hey everyone, needing some people to help me out with my restatement! I've gone through the guide and think I've done everything right but my statement of financial position doesn't balance and I think I may have incorrectly calculated the tax?

I also had some hard time figuring out where to put items from my annual reports (whether it was operation or financial)..

Any feedback would be great! Thank you!

Cheers, Nick

Re: Restatement help!

by Nicholas Gregory - Sunday, 27 December 2015, 9:13 PM

Excel spreadsheet Opus International Company Spreadsheet 2015.xls

you are 100% right, after re-reading the chapter 4 text I get it now. thanks mate.

I've changed this now so Tax Benefit = net financial expense before tax.. (difference between interest revenue and interest expense. still a negative value for mine!)

Post to Sam on his forum post:

Re: Question on restating

by Nicholas Gregory - Wednesday, 6 January 2016, 10:14 PM

hey sam, I didn't move any of my items in my equity statement from the original to the restated but I also didn't have a lot of individual items corresponding to "Other comprehensive income" (OCI).

For the individual line items on my changes of equity statements (the ones I did have), they were labelled under the "Equity Transactions" sub heading which I didn't move either. Unsure if you've figured this out yet or not but I think if it were me I'd be leaving them under the changes in equity as they technically aren't an income from your business doing what it does, does that make sense? This is how I understand it and I'm also pretty sure it's been covered in a lecture somewhere but I have no idea where!

check out this link, gives you a good idea of OCI. http://www.accountingtools.com/questions-and-answers/what-is-other-comprehensive-income.html

Someone correct me if I'm wrong?

Step #3

Identify 3 products from firm

I’ve emailed Opus regarding the 3 products. The company is a planning, design and consultancy company and at an assumption without being commercial or an idea of work I want in mind I can’t really ask them for a quote.. I think I’d be pushing it asking for a quote on a new freeway straight through the middle of Wellington, NZ from a Gmail email address! I’ve also spent time going through the firms annual report and website to attempt to locate anything which they have done with a price attached to it, however no luck. So what I’ve done is I’ve sent them an email requesting anything they can send me, acknowledging I understand it could be confidential information. Here is a copy of the email:

Hi Opus International, I'm currently studying "Using accounting for decision making" at the Central Queensland University in Australia by distance and I've been allocated to your company! I have to say I've enjoyed reading through your web-site, annual reports and really getting to know your company! I really hope you can help me out on a step in my assignment please. I understand this may be sensitive information and I may not be able to obtain this however, I'm up to a step in my assignment where I'm asked to identify 3 products in my firm and estimate their selling price and variable cost, and then go on to calculate the contribution margin. Now - after being quite familiar with your work, trying to nail this down, or at least 3 specific products seemed quite difficult. It's certainly not like you're a small corner store selling dim sim's, fries and salad rolls! Are there any products, projects, quotes or work that you have completed which you would be able to provide me for my assignment please? Many thanks, Nick Gregory.

I received a response from someone in the Opus International NZ office saying they have forwarded my email to the Vic/Tas Manager, which I found a little strange and I have not received a response. Oh well.

I decided to write back to Opus, asking a few questions whether the VIC/TAS manager would be the right one to speak to about what I’m after so I clarified a little more. I was really happy with the end result! However, still didn’t really give me exactly what I was after, but they were more than helpful to point me in the right direction! Here is the email trail.

From: Nicholas Gregory [mailto:nicholas.gregory@cqumail.com]

To: Information Centre <info@opus.co.nz>

Subject: Re: Opus online enquiry

Hi Opus, Will the Vic/Tas Manager be able to help me on this? I am studying the NZ side of your company. All the same, looking forward to any insight I can be provided with !

Thanks, Nick

From: Information Centre

To: Mistelle Jack <mistelle.jack@opus.co.nz>

Subject: FW: Opus online enquiry re: Using accounting for decision making

Hi Mistelle

Are you able to give Nick a hand with his project? Or suggest someone who may be in a good position to help??

Many thanks

Viv

Mistelle Jack <mistelle.jack@opus.co.nz>

to me

Hi Nick,

Thank you for your enquiry.

Just a couple of questions, to see if we can assist you;

· In what context/paper are you studying our company for?

· What is your time frame for this information?

· From our website information, (including the annual report – hint!) can you identify what it is that we actually “sell”; 3 products or services? And then by looking at our Profit & Loss account, and the commentary in the annual report surrounding the worth of our products/services, can you estimate what they would be worth?

Kind regards

Mistelle Jack

Senior Financial Accountant

Nicholas Gregory <nicholas.gregory@cqumail.com>

to Mistelle

Hi Mistelle.

Appreciate the speedy response here!

I'm half way through the "using accounting for decision making" subject currently, so unsure what is coming up however, what I've done so far is view your annual reports, ensure the changes in equity, statement of financial position and statement of income all calculate correctly and talk to each other. In the assessment I'm working on at the moment I had to restate these three reports. e.g: for financial position statement, I broke everything down into operational or financial assets/liabilities.

The time frame on the information is quite short, I've only just gotten up to this next step around the services Opus provide. The assignment is due on the 18th. Sorry it may be a little short notice!

I understand that you provide consultation services, apart from that, I haven't dug deep into specifics so tomorrow night I will take on your advice and check out the profit and loss account, where or what would this be filed under on your website? I had a look in the Note 1 under revenue and shows consultancy fees, joint ventures and government grant. Is there further specific information on consultancy fees than this? I'd assume that that may be getting into your internal records.

Thanks Nick.

Mistelle Jack

to me

Hi Nick,

The Annual Report is your best port of call, and you will find one for 31 Dec 2014, and 30 Jun 2015.

As per our website, our products/services are; http://www.opus.co.nz/about-us/

· “We offer fully integrated asset development and management services at all phases of the lifecycle including concept development, planning, detailed design, procurement, construction, commissioning, operation, maintenance, rehabilitation and upgrading.” I.e. we plan, design and actively manage projects in each of the following sectors; buildings, transport, water, environmental, energy, resources, research and telecommunications.

Referring to our 30 June 2015 half year report; http://www.opus.co.nz/investor-centre/annual-and-half-year-report/

· Page 2, under “New Zealand”; contracts won include “These include the Huntly Section of the Waikato Expressway and the Auckland Southern Corridor, with capital values of $458m and $220m respectively.” In laymen’s terms, these are ‘transport’ projects with an average term of completion of 3 years, and the value is gross revenue (selling price).

· Page 7, “Income Statement” (Profit & Loss); shows the operating revenue of $256m, with a operating surplus of $17.6m, which would be your contribution margin. From there, you can work back to calculate the cost of the project.

· Page 13, “Operating expenses”; shows the detail of costs (fixed and variable) that contribute to the project consultancy and the running of our day to day business. From here you can pick out those costs which would be likely to vary, at a project level.

In summary, what you are doing is what a number of analysts do to any company every time a public announcement is made. It’s about digging into the financial statements (and especially associated commentary – annual report) and cutting and dicing information to delve into the underlying working of the company. I hope the information supplied above is sufficient assistance.

Kind regards

Mistelle

Nicholas Gregory <nicholas.gregory@cqumail.com>

to Mistelle

Hi Mistelle, thank you for taking the time to reply and get back to me so quickly. This information is fantastic, it's interesting that analysts do this each time a public announcement is made. I've really enjoyed working on your companies financials so far during this subject. I'll be working on this section today. Thank you again!

Many thanks, Nick

Mistelle Jack

to me

You’re welcome!

We are currently working on the 31 Dec 2015 report; for your information this will be available February 18th on our website.

Kind regards

Mistelle

After the back and forth with the email, I was a little disappointed in myself specifically around how I claimed to be reading the companies annual report and also in assignment one a “know your company” and I was still unable to illustrate back to Mistelle what Opus did for a service.. I knew that they were a consultancy end to end for projects, but the more important information I must have read right at the beginning which formed my opinion of what they actually do. I tried to

Here are my 3 products and assumptions around their costs per product. I’m doing this a little backwards as I have no idea what sort of costs involved. I looked at the 2015 half year report and 2014 annual report and calculated the companies contribution margin percent (total surplus divide by total revenue times by one hundred). For 2015 half yearly is was 6.68% and for the 2014 annual report it was 7.86%. Here are my assumptions below with the average in mind of 7.27%:

Product 1: Maintenance Services,

Value of Service $237,000

Variable Cost $219,770.10

Contribution Margin $17,229.90

Product 2: Construction,

Value of Service $420,000

Variable Cost $389,466

Contribution Margin $30,534

Product 3: Concept Development

Value of Service $39,000

Variable $36,164.70

Contribution Margin $2,835.30

This section Step really challenged me, as my company was not straight forward in terms of the services or products they provide and to a certain degree I feel like I haven’t correctly calculated this for my three products. I really do wish I could I could illustrate my understanding of working out a contribution margin with the normal sales minus variable cost equation.

Through my entire investigation into Opus, I believe their constraints would come from a difference source than any usual business selling products and services – this would be a constraint on the amount of work they receive and contracts they win. From assignment one they lost a big contract which obviously impacted their projected year. I believe that the consultancy type of business which Opus is, they would need to run their business with a smaller Contribution Margin than other businesses in the same field to win more contracts and receive more business. An impact of this constraint is not knowing what others charge!

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