Below Is the analysis of annual report of consumer product (Hub Seen) and instruction company (Sunday) in compliance to the financial reporting standard. FRR 107 statement of cash Flows Sunday is using direct method while Hub Seen is using indirect method in presenting their Cash Flow Statements in the respective Annual Reports. Direct Method is preferable since this method shows the cash payment and receipts which are this Information are useful to the users of the financial statement In predicting future cash flow.
Thus Sunday is using method that more relevance to the user while Hub Seen is using method that less relevance for the users. FRR 121 The Effects of Changes in Foreign Exchange Rates Both Sunday and Hub Seen are exposed to the foreign exchange difference. For Sunday, it is arises from operation of its subsidiary that located outside Malaysia. While Hub Seen foreign currency difference Is mostly due to the purchases that denominated In other currencies from Its functional currency.
But Hub Seen did not engaged with any formal hedging activities since the transaction is at an acceptable level where as, Sunday is applying natural hedging which is to reduce its risk in foreign currency by borrowing in the country they invested so that they can match he borrowing cost to the revenue earned. Therefore, the foreign exchange risk is reduced. So this information Is useful for the users since the Information Is relevant to predict the future In safeguarding their Investment In the respective companies.
FRR 118 Revenue Both companies recognized its revenue according to the approved standard to the extent that it is probable economic benefits flow to the companies. Similar revenues that recognized by both companies are sale of goods, dividend, interest and rental income. The deferent is that, Sunday have more source of income which is sales of repertories under development, land and property Inventories; sale of services, rights and enjoyment; club subscription fees and time share revenue.
It Is useful to the users of financial statement when they want to make decision in which industry to invest in or when they want to diversified their portfolios. FRR 119 Employee Benefits Both companies are compliance to the standard in disclosing the defined contribution plan and short term employee benefits to the users. But Sunday have another employee benefit that Is share based compensation that allows the employees to acquire share of Sunday at net of directly attributable transaction cost.
Sunday is volunteering in providing such benefit to the employees. So this kind of benefit may improve the motivation of the employees in discharging their duties exceed expectation. Thus, this motivation will lead Sunday in higher performance which is this relevant information is useful to the users in predicting future performance of the company. FRR 124 Related Party Disclosures Key management personnel are considered related party to the company.
Therefore, the companies need to disclose the total compensation paid to them. Hub Seen only provided short term employee benefit and defined contribution plan to their key management personnel while Sunday also providing share based payment in addition to the other two types of compensation. This shows that Sunday are more concern with the compensation paid to their key personnel since the key personnel are involving in decision making of the company which determine the company future performance.
Therefore, by providing extra compensation compared to other company like Hub Seen, the key management personnel will be happy and motivated n discharging their duties diligently and with due care. FRR 124 Inventories Both companies stated their inventories at lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. But Sunday is using weighted average method while Hub Seen is using first in first out method (FIFO) in determining their cost.
For Hub Seen, using this method will show the highest profit compared to weighted average method (WA) and last in first UT method (LIFO) because of the nature of inflation. Even though higher reported gross profit is seem to be favorable to the investor, still this will resulted in higher tax to be paid by Hub Seen. Maybe one of the reason Hub Seen adopted FIFO instead of other method is that, they are engaging in selling perishable item which is not suitable to use LIFO since the left inventories will be obsolete and thus, invaluable.
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