Ass 1 Step 3 – Firm’s Annual Report KCQs:

Annual report:
Click the below links to access Power Assets annual reports: 
2015  
2016 
2017 
2018

KCQ’s:
Following the contents page is a table of “performance highlights”. This table contains the earnings per share and earnings per dividend. The earnings per share is down 8% from 2018 to 2019 and there has been no change in the dividends per share. I must be interpreting this wrong – Why would these to items be considered performance highlights when they show no increase at all? However, following on from these figures is some impressive numbers which emphasis the magnitude of this company – 18+ million customers, 111,500km of gas/oil pipeline and 397,800km of power network. I am also surprised to find that largest portion of the company’s profit contribution by reportable business segment is in the United Kingdom at 53% followed by Australia at 19%. This makes me wonder why I have not heard of this company before. When I initially started to look into my company I recall reading that this company invests in a utility provider in South Australia so could that possibly be why? Further, from what I have been reading my understanding so far is that Power Assets invest in other utility providers so possibly it is not the name “Power Assets” that I would be familiar with but the name of the provider they invest in.  

Power Assets lists “Maintain a strong balance sheet as a foundation for agility” as one of their long term development strategies. I look forward to looking at their balance sheet to see if I can make up my own mind about how strong it is.  

At this point I also reflect on what Martin said about a company’s annual reports being a tool for which a company markets and I wonder if I am being “fooled” or “deceived” by this report I am reading. It is beautiful presented and I imagine the company employs people with particular skills in design to direct the readers eye to favorable information and glance over unfavorable information. I have a feeling that I need to “stay sharp” while reading this report.  

In the chairman’s statement, I gain more understanding of the decrease in profits between 2017 and 2018, and I am relieved to know it does mean what I thought and that I am not just way to far out of depth for this course. The decrease has been attributed to a “one of gain on disposal of properties” in 2017. Would this mean the company has also had a massive decrease in capital in 2017? I will be interest to see which financial report this may be visible in. 

I have recently learned that the establishment and operating of a board of directors is an effective way to reduce and eliminate agency costs. This concept is brought to my attention by the introduction of the Board of Directors in the booklet. I am also studying Business Finance this semester and realised I actually learned about this in that unit not this unit. I am also studying Principals of Economics and am finding it surprising how much these three units interconnect. I am not sure if this is something Martin would like me to discuss as it is about another unit, but then consider that one of the most important outcomes of this unit is that I learn how to learn, so even if I am learning about another unit I am sure he will be happy. Agency costs are those cost incurred because there is a conflict of interest between the agent and the principal (company managers and the shareholders). These costs can be things such as lavish dinners or company jets. Therefore having a board of directors who represent the shareholder can ensure that the shareholders interests are the main priority of the company. So while I am reading the profiles I am thinking I would be happy with this board of directors as they all appear responsible and educated.  

I read about which financial statements are included in the report. I am anxious as I understand that their statements can be called all different names. I relate this to the industry I work in. I work at Ray White Singleton. In Ray White franchises we call the Receptionist, the Receptionist. We call the Property Manager, the Property Manager – it is pretty straight forward. However, at a competitors agency I have seen the Receptionist named the director of First Impressions and the Property Manager named the Asset Portfolio Manager. I always wonder why they do this, I would imagine it only makes it harder to find the person you are trying to talk to. Likewise with these statement, do different companies name them different things just to make the harder to find (maybe if they contain unfavorable information) or do they name them differently to make them sound fancier or more professional?  

Either way it seems like it just creates more work for the persons reading the report to find what they are looking for – just like the fancy names for real estate job positions. I am glad to read that the statements included in my report are the consolidated statement of financial position (balance sheet), the consolidated statement of comprehensive income (income statement – I hope!), the consolidated statement of changes in equity (statement of changes in equity – easy to identify), the consolidated cash flow statement (statement of cashflow – easy to identify). I am relived that I can find each of the four statements pretty easily.  

When I look at the profit and loss statement the first thing I take note of is the “as at” date which is the 31 December 2018.  When I read through the profit and loss stament I need to use my calculator to follow the math and understand how they are arriving at the operating profit figure. I note this is calculated by adding the revenue and “other net income” together and subtracting the “direct costs” and “other operating costs”. Comparing the 2018 figures to the 2017 figures I notice the biggest difference is in the “Other net income”, this must be the category under which the “one of gain on disposal of properties” in 2017 is accounted for. I go to the footnotes to check it out and find that this category includes “Gain on disposal of property, plant and equipment and lease hold land”. In 2017 $922 million was recorded and in 2018 $0 was recorded. That is a huge difference and the profit and loss statement act as evidence to the chairman’s statement that other than the disposal of this mentioned property 2018 was a better year in terms of revenue 

I understand that the income statement displays how the activities of the company effect the share price of the company. When I look at the income statement I am stumped at first. However I thought these “activities” would be more clear or easy to understand. I was expecting things such as installing 10,000km of powerlines across South Australia and the a figure of how much additional profit (still not sure if that is the correct term to use) this investment lead to. But instead I was faced with terms such as cost of hedging which I need to research further. My understanding is that the main outcome of the income statement is the bottom line. In my experience the bottom line is the evaluation  you are left with after you weigh up all the option/pros and cons, the bottom line is the key pearl of wisdom on which you can make a decision. In my workplace we talk about the bottom line as our profits less our overheads. I wonder if the bottom line Martin talk about is the same or different. The bottom line of Power Assets income statement is labelled “Total comprehensive income for the year attributable to equity shareholders of the company”. I try to simplify this for myself to make it easier to understand – Income for shareholders. Does this mean the dividends paid to shareholders? Well the figure for 2018 is far less than the figure for 2017, $6,523 million and $9,801 million respectively.  

Next I look at the Balance Sheet for Power Assets and note and as at date, also the 31 December 2018. From Martin’s teachings I have formed the idea in my mind that the balance sheet is a “screenshot” of the company’s assets, liabilities and equity because it is an insight on ONE day of the year. Similar to how if you screenshot anything on your phone it only shows you what you were looking at on that day. I notice the biggest assets are “interest in joint ventures” and “interest in associates” I think this must refer to the percentage of other companies which Power Assets holds. There is a huge difference in the “Bank deposits and cash” between 2017 and 2018, $5,229 million and $25,407 million. Why would they have so much less cash in 2018? Have they invested $20,000 million cash? I read in the achievements at the beginning of the document that they “acquired” an Australian utility company this year and that 100% of their debt was in AUD currency. Could they have spent all that money on this new company?  

The changes in equity statement looks very daunting. I read through it and almost every item looks foreign to me. The only thing I can seem to identify is that the total matches the total on the balance sheet so there must be some relationship here I need to figure out.  

By the time I get to the cash flow statement all the statements are starting to look the same and mush together and I think this statement looks like the balance sheet. Upon further inspection I remember what I thought when I read Martin’s explanation of the cashflow statement. I imagined it to be similar to a bank statement because it states and opening balance, transactions throughout the period and then a closing balance. Both the opening and closing balances are listed at the bottom of the page, maybe for easy comparison. I think this is one of the easier statements to understand.  

My understanding of the footnotes is that they are designed to support the financial reports and allow the financial reports to stay concise. However, I wonder to myself who would actually have the time to read to booklet cover to cover? Clearly it is only meant for skimming and finding the needed information.  

One of the challenges I identified that Power Assets continually faces year after year is the ever-increasing expectations of stakeholders. Stakeholders expect Power Assets to be more transparent each year and provide evidence that Power Assets are addressing their concerns including environmental sustainability, customer service and health and safety. Power Assets aim to provide stakeholders with open lines of communication to keep them engaged and eliminate this challenge. 

I was very anxious about reading Power Assets financial reports. It seemed like a huge task considering the booklet is 163 pages long. It reminds me of reading an insurance PDS – no one ever actually reads it. I was even more nervous about formulating my own ideas and questions surrounding these statement, however once I started my fingers typed at full speed for hours.