The Financial Statements of Worleyparsons Limited Report

Introduction

Preparation of financial statements in a company is a very crucial exercise in that it enables the managers as well as other internal and external stakeholders to make important decisions based on their roles in the company. To understand the company’s performance, a mere preparation of the financial statements is not enough.

An analysis of the financial statement items is required in order show comparative performance taking into accout the previous years. Horizontal analysis, vertical analysis as well as ratio analysis are important procedures carried out in order to determine whether the changes in the financial statements’ variables are favourable or adverse for purposes of decision-making.

This report includes both the horizontal and the vertical analyses as well as profit ratio analysis of the financial statements of WorleyParsons Limited; an international provider of professional services to the energy and other complex process industries. The company is headquartered in Australia. The government, as a user of the financial statements of the company, is also discussed in terms of the decisions it makes from the financial statements as well as the information from the financial statements that is useful to the government.

Items on the income statement with a significant impact on the profits

The profits of a service business are usually affected by two main elements: the revenues generated and the costs incurred during operations. WorleyParsons Limited has a portfolio of operations which generate revenues classified under five headings, namely, professional services revenue, procurement revenue, construction and fabrication revenue, interest income and other incomes. The combined revenue for the financial year 2012/2013 was an increase by 19.2% due to performance from the previous year.

Only interest income in all the revenue items decreased from the previous year’s amounts. An increase in revenues positively affects the profits from operations.

The increase in revenues in WorleyParsons can be attributed to several important events that took place during the trading year ended in June 30, 2013. That is the acquisition of two companies, South African TWP Holdings Proprietary Ltd and Norwegian Bergen Group Rosenberg AG. Other factors are the favourable trading conditions in several areas of operation, especially the increase in customers’ capital expenditure in hydrocarbons during the year.

The other items in the income statement of WorleyParsons Limited that had a significant impact on the profits of the company are expenses from operations. The expenses of the company are further broken down into staff costs, procurement costs, contract-related reimbursable costs, office and administration costs, depreciation, amortization, borrowing costs and other costs. The increase in revenue generated from operations was followed by a more than proportionate increase in the operating expenses that led to an ultimate decrease in profit before income taxes from the previous year’s trading profits.

Of all the categories of costs and expenses incurred by the company, it is only amortisation and costs categorised as ‘other costs’ which decreased during the trading year. The income tax expense during the year also increased from the previous year’s figures; further reducing the amount of profits attributable to the shareholders of the company and the non-controlling interests.

Horizontal analysis of significant items that impact on profits

A horizontal analysis of financial statement items involves the analysis of the trend portrayed by the income statement items or the items in the statement of financial position from one year to another (Sinha 2009). The horizontal analysis of WorleyParsons’ income statements for the financial years ended 30^th June, 2013 and 2012 is as shown in appendix 1.

There is a trend towards decreasing profitability despite the increase in sales. According to Herald Sun newspaper in an article dated 21^st November 2013, WorleyParsons Limited continued to suffer financially after the share price of the company plunged by 25.9, following the announcement that its profits were tumbling as investment in mineral activities fell (Whalley 2013). That is an indication that the trend towards a continuous decline in earnings per share shall continue in the company.

Vertical analysis of significant items that impact on profits

A vertical analysis of the income statement is necessary in order to understand and determine the proportion of sales that were used to meet the various expenditures (Sinha 2009). It is also useful, especially in this case, to determine the proportion of each revenue in the total revenues generated. The vertical analysis of WorleyParsons Limited’s income statement is as shown in appendix 2.

It can be seen from the vertical analysis that one of the income statement items that had a visible impact on the revenues of the company as well as the costs was procurement. Procurement revenues increased by $1026 million, which is a 112.4% increase. Similarly, procurement costs increased more than proportionately by $1036.4, which is a 115.9% increase.

Profitability ratio analysis

Profitability ratios are used to measure the efficiency with which an organisation uses available funds in order to generate profits. They also measure an organisation’s ability to control expenses. The profitability ratio analysis of WorleyParsons Limited is as shown in appendix 3.

Accounting Communication

Financial statements are prepared for different stakeholders of a company in order for them to make decisions based on the roles they play in the company. There are various stakeholders, external and internal, who have an interest in the performance of the company. The internal stakeholders include the employees, managers and shareholders. The external stakeholders include the government, lenders, customers, communities and suppliers. The external stakeholder to be discussed in this report is the government.

The government as a business stakeholder

The government is one of the most influential stakeholders in any business. Some scholars rank the government as the second most important external stakeholder. It is the government that gives the business the mandate to operate by giving licenses to the business. In return, the government expects returns in the form of taxes as well as assistance in carrying out certain social activities. In particular, the government gets some interest in the financial statements because they have to make the following decisions:

Determining the amount of corporation tax payable

The government agencies involved in collecting revenue need the financial statements in order to re-compute the tax payable so as to determine whether the taxes declared by the company are in tandem with the amounts they should actually pay based on the prevailing corporate rates. The government will then be interested with the revenues earned by the company as well as the expenses indicated as allowable for tax purposes so as to ensure conformance with the tax law. The profit before tax is also a very important figure for the government as this is the figure used to compute the tax payable.

Preparation of national statistics

The government needs the information about the performance of the various companies in different industries in order to prepare important statistical data that is then turned into information to help plan its development activities as well as the preparation of the national budget. Such figures include the amount of import or exports of goods and services by the company that is then used to compute the balance of payments of the country.

Reference List

Sinha, G, 2009. Financial statement analysis. New Delhi: PHI Learning Pvt Ltd.

Whalley, J, 2013. WorleyParsons suffers biggest market rout since 2002 float with $1.4b stripped from value. Herald Sun.