Analyzing Financial Performance: A Case Study of Procter and Gamble

Executive Summary

The process of financial reporting assists an organisation in order to represent the financial outcomes with reference to the requirements of different stakeholders. This report carries out a systematic evaluation of the financial results of Procter and Gamble’s performance and financial position. This assessment has determined that the company has employed a wide range of accounting norms and policies appropriately. Furthermore, the business entity has recorded downward in net earnings to increase in the company’s expenditure and increment in the capital expenditure of the company. It has determined that the organisation has maintained an appropriate balance between income and expenditure. Moreover, the new acquisition has played a key role to enhance the overall assets of the firm. For students who are seeking business dissertation help, understanding the intricacies of financial reporting and analysis is very vital.

a) Treatment of sales and other related activities

As per the annual report of P & G, the company acquires the revenue from different product ranges. The proportion of revenue from Fabric care, Baby care, Haircare, Homecare, Skin, and Personal Care, Family Care, Oral Care, Shave Care, Feminine Care, and others is 22%, 12%, 10%, 10%, 10%, 9%, 8%, 8%, 6%, and 5%. The revenue is mainly generated from the sales of finished products to consumers (P & G Annual report 2019, 2020). Therefore, revenue is recognised when the ownership, risk and other rewards transferred to customers. Moreover, the management of P & G has determined a provision for the payment of all types of discounts and product returns allowances that are recorded as the reduction of sales or revenue in the same period in which revenue is recognised.

b) Treatment of inventories

P & G has valued inventories at the lower cost or market value. Similarly, product-related inventories are handled on the first-in and first-out basis. Moreover, the average cost method is applied by the company to determine the value of spare parts. Therefore, the income statement also comprises the actual value of inventories that have used in the production of sold units. However, the balance sheet records inventories as current assets in three sections like raw material, work-in-progress and finished goods.

c) Intangible assets

For the treatment of other intelligible, P & G has adopted the impairment testing approach because all types of intangible assets are not amortised. It includes the brand value, product life cycle, and others. As per the annual report of the company, the organisation has recorded non-cash before and an after-tax impairment charge of $6.8 billion that was recognised as a reduction of the carrying amount of goodwill for the Shave Care reporting unit. It was emerged due to a change in grooming habits of people.

d) Treatment of Goodwill

In the context of P & G, the treatment of goodwill has been carried out as per the impairment testing annually which is carried out by comparing the estimated fair values of the company’s reporting units and respective carrying values of intangible assets (Flower and Ebbers, 2018). The company has mainly adopted the income method to estimate the fair value of these assets that are influenced by the forecasts of the expected value of the future cash flows. In the case of P & G, the organisation has recorded the reduction in goodwill value due to the emergence of Goodwill impartment and other charges that is near to $7.9 billion.

e) Purchase of Machine

As per the balance sheet of P & G as of 30th June 2019, the total value of Machinery and Equipment is reached to $32263 Million as compared to $30595 Million of 2018. This data has determined that the organisation has acquired the new Machinery and Equipment of $1668 Million that has played a key role to improve the overall organisational efficiency.

f) Capital expenditure and Depreciation

As per the annual report, the total value of the company’s assets of $43393 Million has incorporated accumulated depreciation $22122 Million. However, if the company would sell the Machinery and Equipment of $350 Million, then the calculation of amortisation and depreciation benefits would be carried with reference to the existing proportion which is carried out below:

The current proportion of the assets value and accumulated depreciation =

= Accumulated Depreciation/Total value of assets

= 22122/43393

=0.509

Benefits for the company for the selling of the assets of $350 Million

= Selling price of assets * Proportion of accumulated dep.

= 350*0.509 =$178 Million

The business entity would record the gains and losses in the cash flow statement so as P & G can evaluate net cash inflow.

g) Treatment of Lease

P & G has adopted the optional transition method through less accounting software. In this context, the company has adopted the new standards of FASB that have a significant impact of a balance sheet gross up on the company’s operating leases to show equal and offsetting lease assets and lease liabilities (Leuz and Wysocki, 2016). It would enhance the total value of assets by 1%. It has emerged as an important part of contractual commitments

h) Types of transactions influence the value of equity

The annual report of P & G has determined different transactions that affect the equity value of the company. It includes retained earnings, adoption of new standards, tax benefits, common, sell of treasury stocks, consideration of employee stock plan, preferred stock conversions, the impact of debt, and non-controllable interest (Flower, 2016). These changes are mainly incorporated the cash flow, balance sheet, and shareholder’s equity account.

i) Key components of comprehensive income

In the case of P & G, comprehensive income covers different elements such as sales of core products, foreign currency translation, unrealised gains or losses from different investments in different securities, unrealised gains on defined retirement plans and interest income. As per the annual report, P & G have recorded losses from foreign currency translations. The total value of the loss is $213 Million in 2019, which is lower than the company’s loss of $305 Million in 2018.

j) Implications of acquisition of Merck KGaA on P & G

The total value of the acquisition is $3.7Billion that, as completed in 2019, and it would be associated with the health care unit of P & G. It has adversely impacted the overall business profit. However, the total value of assets and liabilities within the new acquisition is respectively $4954 Million and $1087 Million. Moreover, the total value of intangible assets or goodwill has been increased by $2143 Million in which approximately $180 million is expected to be deductible for tax purposes, and all goodwill is allocated to the health care segment. Furthermore, the estimated time duration of definite-lived brand intangibles would be between 10 to 20 years.

k) Stock option compensation

As per the annual report, the company has adopted the stock options for the payment of dividends and the purchase of treasury stock. The total value of cash consumption through stock options has recorded $10 Billion in 2019. Moreover, the business entity has also considered the employee stock plan that has increased the equity capital of the company by $ 3874 Million. Apart from that, shareholders have identified a reduction in earnings per share due to an increase in the number of outstanding shares. In addition to that, the stock-based compensation program has awarded to key managers and directors in the form of a restricted stock unit (RSU) and performance stock unit (PSU). Currently, the organisation has 41 million shares to adopt the stock-based compensation plan in upcoming years. In 2019, the total value of stock-based expenses had reached $515 Million.

Reference

Flower, J. (2016). European financial reporting: adapting to a changing world. Springer.

Flower, J. and Ebbers, G. (2018). Global financial reporting. Macmillan International Higher Education.

Leuz, C. and Wysocki, P.D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of accounting research, 54(2), pp.525-622.

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