ACC510 Financial Statements

Introduction

Dominos Pizza Enterprise Ltd. operates in Australia as a franchisee of Domino’ s Pizza Enterprise Ltd., USA. (Dominos Pizza Enterprises Limited, Australia, 2017) The financial Statement of the preceding year was obtained from the Annual Report of 2017, which is easily accessible from the website. In addition, the website also publishes presentations of some concise financial figures on the website. This report further analyses the financial data obtained from these sources, in order to understand the financial performance of the Company. The objective of this report is to critique the quality of financial data available for the Company in public domain, especially regarding the provisions and contingencies in its financial disclosures (in this case, annual report).

Source of Data

The Dominos Corporate website publishes a consolidated Annual Report for several countries. It is difficult to locate these reports on the website as compared to the data published by other multinational Companies such as Microsoft Inc, Apple Inc.. and Volkswagen.

The data published for Australia for this source is contained in the consolidated Annual Report of  Dominos Pizza Enterprise Ltd. in various geographical regions. The Annual Report provided on the website is a half yearly annual report which provides consolidated financial statements for all the various subdivisions of the Parent Company of Dominos Pizza Enterprises Private Ltd. (Dominos Pizza Enterprises Limited, 2018) Financial information for Australia is recorded under the ANZ (Australia and New Zealand Division). Moreover, the accounting period that the report is based on does not coincide with the Australian financial year or accounting year which ends on 30^th June, every year. Hence, the financial statements were perused using the audited Annual Report provided by the firm to the Australian Securities Exchange. (Dominos Pizza Enterprises Limited, Australia, 2017) It is expected that the data used from this report (contains data only for Australian operations) is of high quality since it has been audited and provided by the firm in line with legal provisions. However, the consolidated report of the parent Company has been used for reference in some cases, to get a better understanding.

Provisions and Contingencies

Provisions to accounting are recognized when the firm has an obligation in the present that was accrued in the past. . There is a probability that the firm would be required to settle the present obligation at the reporting date. Hence, an estimate must be made to understand the dollar value of that obligation. It is important to understand that the amount is an estimate and there is just a probability that a settlement will happen. (Dominos Pizza Enterprises Limited, Australia, 2017)

The amount that is used as an estimate is calculate using various financial methods and must take into account all the risks and uncertainties surrounding the obligation. The present value of the cash flows is used where the provision is made using the cash flows for the settlement expected.

If the provision is being made  for a settlement that is expected to increase the amount of cash receivable, then it is assigned as an asset. Similarly, if it is to be expected as a payable, it is accounted for as a liability.

Some of the provisions made in the financial statements for the firm are:

Onerous contracts:  Onerous contracts are contracts whose economic benefits were over estimated and as a result, the firm may have to fulfil the aggregate cost. Such contracts drag down profitability and are usually, accounted for under liabilities.  Dominos Pizza has made provisions for onerous contracts in the current statements for the value of the present obligations that might arise as a result of onerous contracts.

Make Good Obligations: Make Good Obligations are obligations that  the firm may accrue in the process of dismantling, removing or restoring items on any plant, property or equipment. Reliable estimates must be made to account for the  present obligations . In making these estimates, Dominos Pizza uses the historical data. Make good obligations , generally, become present obligations when there are store closures or when the Company vacates the premises as tenants.

Contingent liabilities and Contingent Assets Acquired in a Business Combination

These are liabilities that a business acquires when it enters into business with another firm. These business combinations may include joint ventures, acquisitions etc. Similarly, assets are assets that were accrued during the given period. These are , generally , measured at “’fair value’ at the date of the formation of the business combination and are re-measured at higher than the original value. Provisions have been made in the statement for the same. (IFRS Foundation, 2018)

Make Good Obligations led to the accrual of liabilities, according to the annual report. However, these were not included as contingencies since these were incurred at actual. However, these are being depicted here, in order to demonstrate that these liabilities are big enough to be included and hence, provisions must be included for the same.

Table 1 Make Good Liabilities (incurred as expense, not as provisions)

Additionally, liabilities for the contingencies regarding guarantees for franchise loans and leases paid by the firm have been mentioned. It is important to include provisions for these liabilities since Dominos Enterprise has a legal obligation to pay them, in case of failure of payment by franchisees. However, these expenses can be recovered from franchisees. Hence, there is also, a case for non inclusion of these provision of these liabilities. (ACT Government, 2011)

Table 2 Contingent liabilities

There are some contingent liabilities that were acquired by the Company but have not been made provisions for. These liabilities are accrued for the consolidates entity of Dominos Enterprises Ltd. and relate to a lawsuit in France against the firm’s subsidiary. However, no economic loss is expected owing to this. Hence, no provisions for the same are made either. (Dominos Pizza Enterprises Limited, Australia, 2017)

Leased Items: Current and Non- current Assets or Liabilities

Current and Non Current assets are classified based on whether they have been accrued in the current period or non-current assets. (Ittelson, 2009) For example, good will is a non current asset. It is measured as “the sum o consideration transferred”.  (Dominos Pizza Enterprises Limited, Australia, 2017)

The Leased items mentioned as leased assets in the report and could classified as non –current assets. Leased assets include leased store spaces, eased equipment and leased motor vehicles. The leased items are considered as assets, in accordance with General accounting principles. The lease payments are accounted for as liabilities only when the economic benefit has been consumed within the year. (Dominos Pizza Enterprises Limited, Australia, 2017)

Lease Payments, in the report, have be estimated on a straight lined basis over the term of the lease agreement and have been introduced as present liability for each year to the tune of the lease payments within the year. If the economic benefits of the rented property is greater than the liability accrued from the lease payment, then it is accounted for as reduction in rentals. This may be the case when some kind of incentives have been received for the lease. An example of a incentive for lease is tax benefits. (Dominos Pizza Enterprises Limited, Australia, 2017)

Table 3 Lease Payments under different Lease Agreements

Additionally, lease incentive liabilities have been accounted for in the statement along with the interest to be paid towards borrowing to fulfill lease liabilities. In the givem year, there were no liabilities incurred due to interest payments over lease arrangements.. However, there was a deduction of 121000 Dollars towards fulfillment of incentives to lease liabilities.

Reclassification of a Lease Payment

Currently, Dominos Pizza does not have the right to purchase the leased assets once the period of leased assets has expired. However, hypothetically, if the firm were to allowed to purchase the leased asset (such as real estate) owing to a change in policy, then the leased asset would be classified as an immovable asset and payments would be made towards amortization instead of lease.

Non Current Lease Payments

Non Current Lease Payments are payments that have arisen due to a contract made in the past. In generally, fair value of lease payments is judged using the current prevalent market value with provisions of an increase every year. In general, inflation is not accounted for. The underlying assumption here, is that the market value or the lease value of the property will increase every year. However, this assumption may not be true in every case. Alternative methods of valuation of lease agreement could be to recalculate the base rate every year based on the current market value. Additionally, lease payments could also, make adjustments for inflation in the contract. Similarly, leased properties require plenty of upkeep and maintenance and generally, these costs increase as the age of the property increases. Hence, the age of property must be accounted for while making the contract for lease payments.

Conclusion

Financial statement for the Australian Operations of Dominos Pizza Enterprises Limited are not easily accessible and do not contain all the data presented well. This can lead to confusion regarding the financial performance of the firm.

Quantitative indicators:

There are several important quantitative indicators that should have been presented such as an an understanding of the currency exchange and arbitrage risks, change in arbitrage and more.

Qualitative Reporting:

In order to understand the quality of reporting, the financial statements were compared to those of two other Companies, Microsoft Inc, and BMW AG. For example, there is more information presented in terms of the percentage change achieved in the annual reports of these firms.(See Figure 1).  Quarterly Financial Statements for Domino’s Pizza are not available.

Figure 1 Glimpse of the Statement of BMW AG

Source: (BMW Group, 2018)

Overall, the qualitative presentation of Domino’s Pizza is not very investor friendly and helpful in making decisions.

References

ACT Government. (2011, April 06). Accounting forProvision for Make Good Clauses within a Lease Agreement. Retrieved from ACT Government: https://apps.treasury.act.gov.au/__data/assets/pdf_file/0015/604311/Accounting-for-Provision-for-Make-Good-Clauses-within-a-Lease-Agreement.pdf

BMW Group. (2018). ANNUAL REPORT 2017. Retrieved from BMW Group: https://www.bmwgroup.com/content/dam/bmw-group-websites/bmwgroup_com/ir/downloads/en/2018/Gesch%C3%A4ftsbericht/BMW-GB17_en_Finanzbericht_ONLINE.pdf

Dominos Pizza Enterprises Limited. (2018, Februrary). Investors. Retrieved from Domino's: https://www.dominos.com.au/inside-dominos/corporate/investors/reports-presentations

Dominos Pizza Enterprises Limited, Australia. (2017, September 29). Annual Financial Report for the fianncial Year End 02 July 2017. Retrieved from Australian Securities Exchange i: https://www.asx.com.au/asxpdf/20170929/pdf/43msc08vrrp76l.pdf

IFRS Foundation. (2018, February 1). International Financial Reporting Standard 3: Business Combinations. Retrieved from International Financial Reporting Standard: http://www.frascanada.ca/international-financial-reporting-standards/resources/unaccompanied-ifrss/item45582.pdf

Ittelson, T. R. (2009). Financial Statements: A Step-by-step Guide to Understanding and Creating Financial Statements. USA: Career Press.

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