Accounting for Managerial Decisions Assignment Sample

Company Background

LEND LEASE CORPORATION is a multinational company based in Sydney Australia. It has operations all over the world. It has been very instrumental in building many projects in Asia, Europe, America and Australia and has played an instrumental part in development. Lend-lease is an international property and infrastructure group with core expertise in shaping cities and creating strong and connected communities. The company was established by Dick Dusseldorf in 1958 to provide finance for building contracts. It started with 35 people and now is one of the leading developers of Australia and has a headcount of 13000 people working (lendlease.com, 2020).

It has a broad variety of projects. It is known for making significant buildings and structures all over the world. To name a few, it has constructed a Sydney opera house in Australia. It has also made the National September 11 memorial and museum in America (lendlease.com, 2020). It is also known for restoring and restructuring and renovating historic buildings such as London’s Tate Britain and National theatre. Lend Lease corporation pursues an integrated business model where two or more of the operating segments of development, construction, and investments engage on the same project to create major precincts, new communities, and important civic and social infrastructure.

The business model of Lend-lease is unique and appealing in many senses. They focus on 6 key factors and try to solve the key problems in the construction and infrastructure sector. The first focus of their business is Urbanization. They have 21 major urbanization projects located across 10 global gateway cities. There has been a meteoric rise in the urbanization project pipeline and it has seen a growth from $25 billion to approximately $80 billion which includes more than 30000 residential units and huge commercial space. Its 2nd focus is on global infrastructure and they are securing an increasing number of projects. 81% of the total project of gateway cities is outside Australia for Lend Lease Corporation. They have been instrumental in the development of Sydney metro martin and Victoria Cross. They have been an important player in numerous sectors like health entertainment, civic and defense. They have been increasing there presence in telecommunication assets as well. They manage an immense amount of funds and approximately 80% of the funds are derived from global urbanization platforms. The primary reason for this upliftment of funds is due to existing pipelines in traditional asset classes such as office, retail and industrial as well as new asset classes such as residential for rent and telecommunications.

The emergence of the 4th industrial revolution has been instrumental in opening up new opportunities to create new virtual experiences supported and informed by the ease of access to data and technology. The ageing population of china and Japan has also been the main concern. Therefore lend-lease saw an opportunity of making Retirement villages and they have implemented this model in Australia as well but now they are trying to implement and execute it in Japan and China. Lend lease is one of the largest operators of retirement villages. These are custom made with great healthcare support and health care facilities. Last but not the least lend lease is also focusing on building up sustainable projects by keeping in mind the climate impact.

Therefore lend-lease is one of the most important players in the infrastructure segment not only in India but across the world. They are trying to disrupt the construction and infrastructure segment by

Inculcating and embracing technological changes. They aim to build projects and aspire to continue creating places people want and care about and providing value for security holders and the broader community.

Therefore to conclude is that we can segregate the business model of lend lease corporation in 3 segments.

  1. Development:  this focusses on making the developments of communities, apartments and retirement villages. The key earnings from this segment are of development margins and management fees

  2. Construction: this segment provides project management, construction of commercial and residential sectors. The project management fees and construction management fees are the main earnings potential and also the construction margin.

  3. Investments: this segment includes a leading wholesale investment management platform and also includes the group’s ownership interest in property and infrastructure co-investments, retirement living and US military housing. Fund and asset and property management fees are important earnings from this segment.

Accounting Disclosures

From the annual report (other significant accounting policies) we get to know that there have been some changes in accounting policies.

Foreign currency translation: the group entities items are measured using the currency of the primary economic environment in which the entity was operating (the functional currency) of the region where it was operating.  But the consolidated financial statements are being made and is presented in the Australian dollar, which is the company functional and presentation currency. Therefore now the foreign currency transactions are being translated into Australian dollars using the exchange rate on the date of the transaction.

The impact of this accounting policy is that the monetary assets and liabilities like receivables and payables are being changed. Foreign currency gains or losses are recognized in the income statement. Translation differences on non-monetary items such as equities held at fair value through profit or loss are reported as part of the fair value gain or loss.

Therefore there had been many changes after adopting the foreign currency translation:

  1. The revenue and expenses are being recorded at average exchange rates.

  2. Assets and liabilities are recognized and translated at the closing rate at the balance date.

  3. All the resulting exchange differences are recognized in other comprehensive income in the foreign currency translation reserve.

Goods and services tax: revenue, expenses and assets are recognized net of the number of Goods and services tax. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable or payable to Taxation authority is included in current asset or liability in the statement of financial position. The GST recoverable or payable is included in the operating cash flows.

An operating segment in financial statements means a profit centre has discrete financial information and is reviewed regularly by the top management and analyze whether all the individual segments of the business us growing or not. It helps in decision making for the purposes of performance assessment and resource utilization.

Here for Lend-lease corporation, the operating segment can be distinguished into 4 segments. The 4 segments are development, construction, investments non-core activities. The financial statements provide us with the discrete figures of individual operating segments.

 

operating segment

revenue

%

profit after tax

%

development

3355

20%

554

76%

construction

9680

59%

141

19%

investments

348

2%

368

51%

non-core

3141

19%

-337

-46%

 

16524

 

726

 

 

 

 

 

 

 

 

 

 

 

Table 1: Percentage of the contribution of each segment

(Source: created by author)

Therefore from the above table, we can conclude that the construction segment has the highest revenue % which is around 59% of the total revenue but contributes only 19% to the overall profit after tax. This makes us believe that the margin of the construction segment is not so great and the company should try and improve their margin in this segment. Development is the segment which contribution 20% of the overall revenue but has the highest share (76%) of the overall profit after tax. Investments are in its early stages and just contributes 2% of the overall profit but the interesting part here is that it contributes whopping 51% of the total profit after tax which is absolutely amazing in terms of return on investments and thus the company should focus more on this segment and should expand this segment to achieve more profit for the company.

Figure 1: Net profit and tax paid for the last 5 years

(Source: created by author)

Analysis:

From the above figure, we can see the values of net profit and tax paid for the past 5 years. From the figures, we can conclude that the profits have been increasing at a steady rate from 2015 to 2018, but in 2019 we can see a fall in profit.

Accounting and Market Valuation

There are many metrics for investors for determining the valuation of a company’s stock, book value and market value are two among them. This helps in calculating whether a stock is fairly valued, overvalued or undervalued. A company’s book value is the number of money shareholders would receive if assets were liquidated and liabilities paid off whereas market value is the value of the company according to the markets, based on the current stock price and the number of outstanding shares.

The book value of the company is theoretically the amount of money that would be paid to shareholders if the company was liquidated and paid off all its liabilities. Therefore it is calculated by total assets less total liabilities. As per the annual report of 2019 the book value of the company was 6.357 billion AUD (lendlease.com, 2020).

The market value of a company is calculated by multiplying the current stock price by the number of outstanding shares. As per 2019, the market value of the company was 12 billion AUD (lendlease.com, 2020).

It can be concluded that the Market value is greater than the book value of the company. There are various reasons for the difference. This interprets that the stock market is valuing the company higher than the book value due to the earnings power of the company’s assets. Consistently profitable companies typically have a higher market value than the book value.

The bottom line is that the book value and market value are two fundamentally different calculations that help us to know a story about the company and whether an investor should be investing in that company or not.

Additional Disclosures

name

cash salary

STI cash

non-monetary

superannuation

other long terms

subtotal

lit

deferred STI

total

Stephen McCann

2155

 

 

25

33

2213

2375

875

5463

Johannes Dekker

1191

125

287

11

230

1844

708

318

2870

Tarun Gupta

1166

125

 

21

 

1312

757

635

2704

Denis hickey

1558

324

251

 

 

2133

588

467

3188

Daniel lobbed

1311

273

284

113

 

1981

669

519

3169

Anthony Lombardo

1094

227

291

 

 

1612

655

425

2692

kylie Rampa

1149

250

3

21

18

1441

538

593

2572

David Andrew Wilson

1287

125

 

21

18

1451

735

278

2464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 2: Remuneration of KMP (Key management Person)

(Source: lendlease.com, 2020)

An independent auditor is a CPA by profession who examines the financial records and business transactions of a company with which he is not affiliated. An independent auditor is typically used to avoid conflicts of interest and to ensure the integrity of performing an audit. They are often mandated to protect shareholders and potential investors from the occasional fraudulent or unrepresentative financial claims made by public companies.

 

2019

audit services

7141

other assurance services

495

total audit and other assurance services

7636

non-audit services

714

total audit , other assurance and non-audit services

8350

 

 

Table 3: payment for audit services

(Source: lendlease.com, 2020)

There are many shareholders of Lend lease corporation. The highest 2 shareholders or investors are HSBC custody nominees( Australia ) limited who owns 29.43% stake of the company and the second-highest shareholder is J.P Morgan Nominees Australia Pty limited who owns approx. 16.95% (lendlease.com, 2020).

 

Financial Statement Analysis

YEAR

NET PROFIT

CASH FLOWS

2019

467

1290

2018

794

1177

2017

758

1249

2016

698

1008

2015

618

750

Table 4: Net profit and Cash flow for the last 5 years

(Source: created by author)

Chart

Figure 2: Trend analysis for last 5 years’ net profit and cash flow

(Source: created by author)

Analysis:

From the above chart, we can conclude that the profit and cash flow has been increasing from 2015 to 2018 but there has been a substantial decrease in the profit in 2019. But surprisingly the cash flow was higher than in 2018. Therefore the company was not able efficiently thus incurring very low margins.

Profitability Analysis

 

2019

2018

Profit Margin

(EBIT/Sales Revenue) x 100 = x%

5%

7%

Return on capital employed

(EBIT/Capital employed)*100=x%

7%

11%

Return on Assets (ROA)

(EBIT/Average total assets) x 100 = x%

4%

6%

Return on Equity

(Profit available to owners)/Average equity x 100 = x%

7%

13%

Asset Analysis

 

 

 

Asset Turnover

Sales revenue/Average total assets = x times

0.97

0.88

Capital Structure

 

 

 

Debt ratio

Total Liabilities / Total assets x 100 = x%

63%

62%

Market Performance

 

 

 

Earnings per share

(Profit available to ordinary shareholders)/(Weighted average number of shares) = x cents per share

80 cents

136 cents

Working capital

 

 

 

Debtors Days

(Average Receivables/Sales revenue) x 365 days

52

60

Liquidity

Current assets/Current liabilities

0.92

0.96

Table 5: Ratio analysis of 2018-19

(Source: created by author)

For analyzing the company's financials we have taken past 2 years of data (data of 2018 and 2019) and found out some important yet very simple ratios.

Profitability ratios: profit margin is the ratio of EBIT and sales. Thus if we conclude from the above table the profit has decreased which is not a good sign for the company as well as for the investors. ROCE (return on capital employed) is one of the most important metrics for any business. ROCE gives a measure of how efficiently a business is using the funds available. It measures how much is earned per $1 invested (Osemene, Gbadeyan & Oyelakun, 2016). Therefore from the above calculation, we can conclude that the company has not been able to use their funds efficiently and thus the ROCE has decreased by 4% to 7%. Return on assets is how much a company generates for its assets and how efficiently it is using its assets. Here also there has been a reduction of 2%. Return on equity measures how much profit a company generates for its ordinary shareholders with the money they have invested in the company.  This has also decreased from 13% to 7%.

Asset efficiency: Asset turnover measures how much revenue the company is able to generate with its existing assets. Surprisingly in this metric, the company has performed well.

Capital structure: It defines what should be the capital structure of a company to maximize its return. Therefore the debt-equity ratio tells us the % of liabilities against total assets .this has almost been same.

Market performance:  This is also known as the investor’s ratio. EPS is the basic measure of a company’s performance from an ordinary shareholders point of view. It is the amount of profit incents attributed to each ordinary share. This has also decreased and has been detrimental to the investor’s point of view as well.

Liquidity: this shows the ability of the company to repay its short term liabilities against the total assets. This has almost been same but still, there has been a slight reduction in the value.

Due to an unprecedented situation of COVID 19, there has a complete construction halts, labour crunch and severe working capital is under pressure. The inventory turnover ratio of construction companies are generally high and thus there will be a huge risk of inventory write off. As there will unemployment across the globe the demand of residential house is going to slow down as people would avoid making unnecessary expenditure of owning and maintaining a house. Due to complete lockdown in many countries where we operate like in America, China, Europe there has been a disruption of many business and companies will be facing huge losses. This will led them to minimize the infrastructure expenditure and thus directly affecting lend Lease Corporation.

The retirement village project will also have to be delayed as there will be less demand as people will avoid spending and save and keep cash in their hand to avoid any unprecedented situation. With major economies of the world declaring fiscal packages or implementing helicopter money got to have to cut down expenses by reducing expenditure in the infrastructure sector.

Conclusion

From the above analysis, we can conclude that it’s better to stay away from investing in Lend Lease Corporation as the current market price is $11 compared to $20 (a year ago). Considering the macro environment it’s better to avoid the infrastructure sector overall. But from the above analysis, we can also conclude that the company has not been performing well as its profitability decreased sharply from 2018 to 2019.

 

 

References

lendlease.com, (2020) LENDLEASE Retrieved from https://www.lendlease.com/-/media/llcom/investor-relations/asx-announcements/2019/lendlease-group-2019-annual-report.pdf Retrieved on 9th may 2020

lendlease.com, (2020) LENDLEASE Retrieved from https://www.lendlease.com/au/ Retrieved on 8th May 2020

lendlease.com, (2020) LENDLEASE Retrieved from https://www.lendlease.com/au/company/about-us/ Retrieved on 7th May 2020

Osemene, O. F., Gbadeyan, R. A., & Oyelakun, O. (2016). Effects of environmental accounting on the performance of quoted manufacturing companies in Nigeria.

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