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Analysis of Liabilities, Assets and Equity in the Balance Sheet of Agthia Group

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Analysis of Liabilities, Assets and Equity in the Balance Sheet of Agthia Group

Introduction

About the company

Agthia Group, formed in 2004, is based in Abu Dhabi. The SENAAT General Holding Corporation holds 51 percent of the company. SENAAT is an entity that is owned by the Abu Dhabi government. The remaining 49 percent of the company is held by other investors and individuals. Thus, it can be stated that the company is owned by the government of Abu Dhabi because it has majority control. Agthia Group is listed on the Abu Dhabi Securities Exchange. Its ticker symbol is ‘Agthia’. The company deals with the production of food and beverage. The products of the company are highly trusted and are of high quality. The four key brands of the company are Al Ain, Grand Mills, Crystal, and Capri-Sun. The company sells its products in four regions. These are, UAE, Middle East, GCC, and Turkey. However, the production plants are located in three regions, these are, Turkey, UAE and Egypt. The company has divided its operations in four divisions, these are, Agri Business Division, Consumer Business Division, Capri-Sun juices, and the business division that is based in Egypt (Agthia Group 3). Currently, the company engages the services of about two thousand employees.

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Summary of the financial performance

The company has reported growth in sales since 2008. However, the value of net profit fluctuated during the five years. Similarly, the rate of return on assets, return on net capital employed, return on equity, and the economic value added also fluctuated during the five years (Agthia Group 3). The table presented below shows a summary of financial data for the company.

2008 2009 2010 2011 2012
Net sales (AED millions) 854 921 1,006 1,144 1,327
Net profit (AED million) 74 106 116 86 125
Return on assets % 8 9 9 6 8
Return on net capital employed % 10 13 14 9 13
Return on equity % 9 12 12 8 11
Economic value added
(AED millions)
17 49 60 35 87

Source of data – Agthia Group 5.

Based on the values shown in the table above, it can be noted that the company experienced a decline in performance in the year 2011. The decline was caused by market volatility and uncertainty of the economic conditions in various regions (Agthia Group 8).

Aim of the paper

The paper seeks to carry out an analysis of liabilities, assets and equity in the balance sheet of Agthia Group. All the items under assets, liabilities and equity of the company will be reviewed. Specifically, the percentage increase or decrease from the previous year’s figures will be calculated and discussed. Finally, a recommendation will be provided at the end of the paper on the ways through which the company can enhance its position with regard to its assets.

Analysis of the various components of the statement of financial position

Assets

Non-current assets

Property, plant and equipment

The property, plant and equipment is a category of assets in the statement of financial position that a company will derive its economic benefit for a period greater than one year. “Agthia Group records its assets at cost less the amount of accumulated depreciation or impairment loss” (Agthia Group 47). “Property, plant and equipment that have different useful lives are accounted for as separate items” (Agthia Group 47). Further, subsequent costs that relate to the assets in this category are accounted for separately. Also, “the company uses the straight-line method of depreciation on the assets” (Agthia Group 47). The costs relating to “work in progress for buildings are entered in the capital work in progress account” (Agthia Group 47). After the completion of construction work, the amounts are transferred to the respective category of property, plant and equipment. As a policy, the company reviews the projected useful lives of the assets at the financial year end. The projected useful lives of the assets are summarized in the table below.

Item Useful lives
1 Building 20 – 40 year
2 Plant and equipment 4 – 20 years
3 Other equipment 2 – 3 years
4 Vehicles 4 – 8 years
5 Furniture and fixtures 4 – 5 years

Source of data – Agthia Group 47.

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The Group classifies the assets into five categories. The balances in these categories for the year ended 2011 and 2012 are presented in the table below.

Net book amount Land and building
AED’000
Plant and equipment
AED’000
Furniture and fixtures
AED’000
Motor vehicles
AED’000
Capital work in progress
AED’000
Total
2012 218,561 322,734 15,783 8,087 55,914 621,079
2011 204,743 310,379 12,013 8,567 62,435 598,137
Percentage change 6.75% 3.98% 31.38% -5.60% -10.44% 3.84%

Source of data – Agthia Group 47.

The net book value of land and buildings increased by 6.75% in 2012. The increase was caused by additions and transfers that the company made during the year. Further, there were disposals of land and buildings within the year. Plant and equipment increase by 3.98% in 2012. The Group made additions (AED7,549,000), transfers (AED51,331,000) and acquisition of a subsidiary (AED2,906,000) under this category during the year. The total disposal and write-offs amounted to AED23,287,000. This created a net increase of 3.98%. The value of fixtures and fittings increased by 31.38% in 2012. The massive increase was caused by additions (AED5,382,000), transfers (AED3,537,000), and acquisition of subsidiary (AED17,000) made by the company. The net book value of the motor vehicles declined by 5.60% in 2012. The decline was caused by disposal and write off that amounted to AED1,168,000 and currency translation that amounted to AED21,000. Finally, the capital work in progress decreased by 10.44% in 2012. The decline was caused by an outward transfer amounting to AED71,098,000 that exceeded additions that amounted to AED64,591,000.

In 2012, the total value of assets increased by 3.84%. The total additions during the year 2012 amounted to AED80,003,000. Further, the total value of the acquisition of subsidiary amounted to AED8, 980,000. Further, the disposals and write-offs amounted to AED24,470,000. In the year 2012, the depreciation charge amounted to AED54,773,000. Finally, the currency re-translation reduced the value of the assets by AED776,000. This arises from the fact that the company has production plants in different parts of the world. These changes in the property, plant and equipment account contributed to an overall 3.84% increase from 2011 to 2012. The increase in the value of property, plant and equipment is good for the company because it creates a good platform for growth of sales and profit.

Advance for property, plant and equipment

This account is used to record payment made in advance for the various categories of property, plant and equipment. The value of the advance for property plant and equipment increased from AED2,164,000 in 2011 to AED5,359,000 in 2012. The increase is equivalent to 147.64%. The assets in this account are moved to the respective groups once the payments have been finalized. The increase in the value of advance payment of asset is good for the company because it contributes to the increase in the asset base.

Goodwill

According to the policy of the company, the intangible assets are categorized into goodwill and acquired intangible assets. The goodwill is the positive difference between the cost of acquisition and the fair value of the net identifiable assets. The net identifiable assets relate to the share of the group. Besides, the value of goodwill is estimated on the date when acquisition is made. The Group tests for impairment loss yearly. Further, goodwill is reported at cost less impairment loss. The company allocates goodwill to each of its operating segments for monitoring and management. Thus, the balance of goodwill reported in the statement of financial position that was allocated to the divisions is presented in the table below.

2011
AED’000
2012
AED’000
Percentage change
Agri Business Division 61,855 61,855 0%
Consumer Business Division (UAE operations) 31,131 31,131 0%
Consumer Business Division (Turkish operations) 2,486
Total 92,986 95,472 2.67%

Source of data – Agthia Group 59.

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The management determined the recoverable amounts for Agi Business Division and Consumer Business Division (UAE) operations. The team “estimated that the recoverable amount exceeded the carrying amount” (Agthia Group 59). Thus, there were no impairment loss estimated for these two divisions. “The goodwill allocated to Consumer Business Division (Turkish operations) was not tested for impairment because the allocation was made in the last quarter of 2012” (Agthia Group 59). Thus, the total amount of goodwill increased from AED92,986,000 in 2011 to AED95,472,000 in 2012. This increase is equivalent to 2.67%. Even though it is not a tangible asset, an increase in the value of goodwill is good because it shows that the value of the company is increasing.

Intangible assets

This account is used to record intangible assets that are acquired by the company separately. The assets are initially recorded at the estimated fair value. This valuation is necessary because the fair value represents the future economic benefit expected from the asset. This category of asset is tested for impairment on a yearly basis. The table presented below shows make up of the intangible assets.

Spring water rights
AED’000
Others
AED’000
Total
AED’000
At 31 December 2011
Acquisition of subsidiary 12,488 12,488
Additions 263 263
Currency translation 711 711
At 31 December 2011 13,199 263 13,462

Source of data – Agthia Group 59.

The largest portion of the intangible asset relates to spring water rights. This was received through an acquisition that the company made during the year. Currency translation also had an impact during acquisition. In 2011, the Group did not have items that fall under the category of intangible assets. It increased the value of intangible assets. However, in 2012, the intangible assets amounted to AED13,462,000. An increase in the value of intangible assets is good for the company because it results in an increase in the value of assets.

In 2011, the non-current assets amounted to AED693,287,000. The value increased to AED735,372,000 in 2012. The increase is equivalent to 6.07%. The increase is good for the company because it creates an opportunity for growth.

Current assets

Inventories

The account is used to record balances of various types of stock at year end. The inventories of the group are “stated at the lower of cost and net realizable value” (Agthia Group 49). Besides, the company uses first-in-first-out method to value the inventory. The table presented below shows the inventory balance at year end.

2011
AED’000
2012
AED’000
Percentage change
Raw and packaging materials 108,822 113,309 4.12%
Work in progress 13,632 12,684 -6.95%
Finished goods 43,893 59,133 34.72%
Goods in transit 62,971 60,676 -3.64%
Spare parts and consumable materials 30,034 33,193 10.52%
259,352 278,995 7.57%
Provision for obsolescence (5,459) (13,384) 145.17%
Total 253,893 265,611 4.62%

Source of data – Agthia Group 60.

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Based on the data in the table above, raw and packaging materials makes up more than 40% of the inventory followed by goods in transit, finished goods, spare parts, and work in progress. The value of raw and packaging materials increased by 4.12% in 2012, work in progress declined by 6.95%, finished goods increased by 34.72%, good in transit decreased by 3.64% while spare parts and consumable materials increased by 10.52%. In 2012, the closing balance of inventory increased by 7.57% before subtracting the amount of provision for obsolescence. The net inventory balance increased from AED253,893,000 in 2011 to AED265,611,000 in 2012. This increase is equivalent to 4.62%. An increase in the balance of inventory is bad for the company because it implies that a large proportion of working capital is tied in inventory. This reduces cash flows for the company. Besides, it can also increase the liquidity ratios. This increase may not be favourable for the company.

Trade and other receivables

“The account is used to record the amount due from customers at year end for goods sold on credit” (Agthia Group 49). The proportion that the company estimates that it will collect within a year is recorded under current assets. The company records the receivables initially at fair value. In subsequent measurements, the company uses the effective interest method after deducting the provision for impairment. The table presented below shows the make up of trade and other receivables.

2011
AED’000
2012
AED’000
Percentage change
Trade receivables – net 109,813 139,571 27.10%
Prepayments 21,635 19,944 -7.82%
Other receivables 10,435 10,207 -2.18%
Total 141,883 169,722 19.62%

Source of data – Agthia Group 60.

The account is made up of three items, these are, trade receivables, prepayments, and other receivables. Trade receivables makes up the largest proportion of the account. Trade receivables increased by 27.10%. However, prepayment and other receivables declined by 7.28% ad 2.18% respectively. These changes resulted in a net increase in the value of trade and other receivables from AED141,883,000 in 2011 to AED169,722,000. The increase is equivalent to 19.62%. An increase in the balance of trade and other receivables is bad for the company because it implies that a large proportion of working capital is tied in receivables. This reduces cash flows for the company. Besides, it can also increase the liquidity ratios. This increase may not be favourable for the company. It may also indicate that the company is not efficient in collecting debt.

Government compensation receivable

This account is used to record amount due from the government for the sale of flour and animal feed at a supported price. The subsidised sale is made in the Emirate of Abu Dhabi. The table presented below shows the make up of the balance.

2011
AED’000
2012
AED’000
Percentage change
Receivable at beginning of the year from Abu Dhabi Government 114,998 74,110 -35.56%
Compensation for the year 271,438 328,108 20.88%
Received during the year (312,326) (307,123) -1.67%
Balance as at 31 December 74,110 95,089 28.31%

Source of data – Agthia Group 60.

The Group arrives at the closing balance the receivable by adding together the beginning balance and compensation for the year and subtracting the amount received during the year. There was an increase in the value of compensation for the year (20.88%) and a corresponding decline in the amount received during the year (1.67%). This resulted in an increase in the balance of the receivable from AED74,110,000 in 2011 to AED95,089,000 in 2012, an equivalent of 28.31% increase. As mentioned above, an increase in the balance receivables at year end is bad for the company because it implies that a large proportion of working capital is tied in receivables. This reduces cash flows for the company. Besides, it can also increase the liquidity ratios. This increase may not be favourable for the company.

Available for sale financial assets

This account is made up of “non-derivatives that are either designated in this category or not classified in any of the other categories” (Agthia Group 48). This category of assets often falls under non-current liabilities unless the management expects to realize its value within a year. The value recorded in the statement of financial position is made up of cost and transaction cost. In 2011, the company did not have any asset under the category of available for sale financial asset. However, in 2012, the company bought an investment in Sukuk certificates worth AED10,000,000. It will be realized within a period of twelve months (Agthia Group 60). An increase in finance asset is good for the company since it increases the asset base. However, financial assets which are short-term in nature might increase the liquidity of the company. This makes them not suitable when they are in large amounts under current assets.

Cash and bank balances

This account is used to record “cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities not more than one year” (Agthia Group 49). The table presented below shows the make up of cash and bank balances during the two years.

2011
AED’000
2012
AED’000
Percentage change
Cash in hand 680 617 -9.26%
Cash at bank:
Current and savings account 47,934 58,924 22.93%
Fixed deposits 220,043 377,695 71.65%
Cash and bank balance 268,657 437,506 62.85%

Source of data – Agthia Group 61.

The account is made up of cash in hand and cash held in bank (current, savings and fixed deposit accounts). The value of cash in hand decreased by 9.26% in 2012. However, cash in current and savings account increased by 22.93% while cash in fixed deposit account increased by 71.65%. The amount in the fixed deposit accounts is expected to mature in less than twelve months. The changes resulted in an increase in the value of cash and bank balance from AED268,657,000 in 2011 to AED437,506,000 in 2012, an equivalent of 62.85%. The increase in the amount of cash is not good for the company because it indicates that a lot of the resources of the company are tied in non-income generating assets. Besides, it increases the liquidity of the company and reduces working capital.

The changes discussed above resulted in an increase in the value of current assets from AED738,543,000 in 2011 to AED977,928,000 in 2012, an equivalent of 32.41%. The increase is large and bad for the company because it shows that a large proportion of working capital is tied up and cannot be used to generate revenue. Besides, it reduced the cash flows for the company.

Current liabilities

Bank borrowing (current portion)

The Group uses the account to record amount borrowed from various sources such as banks and other financial institutions. The items in the account are expected to be in arrears within twelve months. The composition of the account is presented in the table below.

2011
AED’000
2012
AED’000
Percentage change
Short-term loan 81,198 20,497 -74.76%
Credit facility 128,491 98,704 -23.18%
Term loan 5,044 39,549 684.08%
Total 214,733 158,750 -26.07%

Source of data – Agthia Group 61.

The account is made up of short-term loan, credit facility, and term loan. The short-term loan and the credit facility declined by 74.76% and 23.18% respectively. However, the value of term loan increased by 684.08%. These changes resulted in a decline in the value of bank borrowing (current portion) from AED214,733,000 in 2011 to AED158,750,000 in 2012, an equivalent of 26.07%. The decrease is bad for the company because it reduces working capital cash flow.

Trade and other payables

The account records the amount that the Group owes suppliers for goods delivered on credit. The payables are recorded under current liabilities because the company expects that the balances will be in arrears within a year. The Group records them initially at fair value and estimates their subsequent values using the effective interest approach. The table presented below shows the composition of trade and other payables.

2011
AED’000
2012
AED’000
Percentage change
Trade payables 98,988 150,591 52.13%
Accruals 36,758 72,559 97.40%
Other payables 13,926 20,455 46.88%
Total 149,672 243,605 62.76%

Source of data – Agthia Group 62.

The trade payables, accruals, and other payables increased by 52.13%, 97.40%, and 46.88% respectively. These changes resulted in an increase in the total value of trade and other payables from AED149,672,000 in 2011 to AED243,605,000 in 2012. The increase is equivalent to 62.76%. The increase is suitable for the company because it increases cash flow and working capital.

Due to related party

This account records transactions entered by the Group with businesses and individuals who fall under the category of related parties as defined by the International Accounting Standards (IAS) 24. The table presented below shows a summary of the transactions in the account.

2011
AED’000
2012
AED’000
Percentage change
SENAAT – General Holding Corporation
Opening balance 1 January 306 1,839 500.98%
Directors’ and committee members’ fees charges (2011) 1,400
Directors’ and committee members’ fees charges (2011) 1400
Purchase of foreign currency 249,222
Payment for foreign currency (249,222)
Profit receivable on hedging (9,881)
Profit received on hedging 9,881
Other expenses 133 176 32.33%
Payment (2,015)
Closing balance 31 December 1,839 1,400 -23.87%

Source of data – Agthia Group 62.

The account presented above, comprises of various components that were counterbalanced by other transactions that took place during the year. There was a decline in the closing balance in the account from AED1,839,000 in 2011 to AED1,400,000 in 2012. The decrease is equivalent to 23.87%. A decrease in the value of due to related parties reduces working capital and cash flow.

The changes discussed above resulted in an increase in the value of current assets from AED366,244,000 in 2011 to AED403,755,000 in 2012, an equivalent of 10.24%. The increase is good for the company because it increases working capital that can be used to generate revenue for the company. This in turn increases the working capital.

Non-current liabilities

Provision for end of service benefits

The provisions are measured “at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects the current market assessment of the time value of money and the risk specific to the obligation” (Agthia Group 50). The table presented below shows the composition of the end of service benefits.

2011
AED’000
2012
AED’000
Percentage change
Balance at 1 January 16,702 20,521 22.87%
Charge for the year 5,087 7,260 42.72%
Paid during the year (1,268) (1,683) 32.73%
Total 20,521 26,098 27.18%

Source of data – Agthia Group 63.

The value of the provisions increased by 27.18% in 2012. In as much as provisions increase the accuracy of the values reported in an accounting period, it is bad for the company because it reduces the value of shareholders’ equity and the total amount of capital of the company.

Bank borrowing (non-current portion)

The Group uses the account to record amount borrowed from various sources such as banks and other financial institutions that the company expects will be in arrears after twelve months. The account is made up of a term loan whose value increased from AED8,500,000 in 2011 to AED152,790,000 in 2012. The increase is equivalent to 1697.53%. The increase is bad for the company because it increases the proportion of debt in relation to the amount of shareholder’s equity. It results in an overall increase of risk.

Deferred tax liability

Deferred tax liability is an amount that is taxable in the future. It arises from timing differences.

2011
AED’000
2012
AED’000
Percentage change
Balance at 1 January
Acquisition of subsidiary 991
Tax credit for the year (220)
Currency re-translation 55
Total 826

Source of data – Agthia Group 63.

In the year 2012, the deferred tax ability amounted to AED826,000. In 2011, the company did not have a closing balance of the deferred tax liability. The increase is bad for the company because it reduces the value of shareholders’ equity. It results in an overall increase of leverage risk.

Other liabilities

The account is used to record the value of other liabilities that do not fall into the three categories discussed above. The value of other liabilities decreased from AED1,098,000 in 2011 to AED900,000 in 2012. The decrease is equivalent to 18.03%. The change is good for the company because it releases the capital that was tied up in other liabilities.

Equity

Share capital

The account records authorized, issued, and fully paid shares. The par-value of a share of the Group is AED1 while the total number of authorized shares of the company is 600,000,000. The balance in the share capital account in 2011 and 2012 was AED600,000,000, equivalent to 0%. The value is made up of 526,650,000 shares that were paid for in kind. The balance in the account is not good for the company because growth in share capital contributed to growth in the financial position of the company. Besides, it makes the company to seek other risky sources of capital such as debt.

Legal reserve

The Group transfers ten percent of the profit earned every year to this account so as to comply with the Federal Law. “The amount in this account is not available for distribution” (Agthia Group 64). Besides, “the transfer stops once the balance in this account equals to half of the paid-up share capital” (Agthia Group 64). The balance in this account increased from AED50,477,000 in 2011 to AED62,951,000 in 2012, equivalent to 24.71%. An increase in legal reserve is good for the company because it increases the value of equity.

Translation reserve

At the end of the year, the Group prepares consolidated financial statements that incorporate the results of operations for all its subsidiaries and other forms of business combination. The results of the subsidiaries are often in different currencies. Thus, the problem of translating them to one currency comes up. The differences in rates are recorded in the translation reserve account. The value of translation reserve decreased from AED3,809,000 in 2011 to AED3,683,000 in 2012, equivalent to 3.31%. The decrease is good for the company because it increases the amount of shareholder’s equity.

Retained earnings

The account is used to record the proportion of income that is not distributed to shareholders. The value of retained earnings increased from AED388,799,000 in 2011 to AED469,663,000 in 2012, equivalent to 20.80%. An increase in the value of retained earnings is good for the company because it increases the value of shareholder’s equity.

The changes resulted in an increase in the value of total equity from AED1,035,467,000 in 2011 to AED1,128,931,000 in 2012, equivalent to 9.03%. The increase is good for the company because it increases the value of shareholder’s equity.

Recommendations on how the company can improve the situation

The table presented below shows a summary of the various balances.

2011 2012 Percentage change
Non-current assets 693,287 735,372 6.07%
Current assets 738,543 977,928 32.41%
Current liabilities 366,244 403,755 10.24%
Non-current liabilities 30,119 180,614 499.67%
Shareholders’ equity 1,035,467 1,128,931 9.03%

The figures in the table above shows that the company reported growth in the balance sheet values. To improve on operations, the management needs to come up with efficient ways of handing current assets. It can be noted that the current assets take a large proportion of the capital of the company. These assets do not generate income instead they tie capital. The balances of current asset are higher than non-current assets. There are several ways that can be used to reduce the value of current assets. The first way entails implementing efficient ways of handling raw materials such as just-in-time. The second way entails reducing the debtors’ collection period. The third way entails investing the cash and bank balance in long-term investments. Also, the management should focus on increasing the value of property, plant and equipment. An increase in asset base is necessary for growth of sales revenue and profit.

References

Agthia Group 2011, Annual and Quarterly Reports. Web.

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