Accounting in Organization
RollsRoyce holdings is the world’s second biggest maker of aircraftengines. The company also has key businesses in energy and the marinepropulsion sectors. In 2012, Rolls-Royce was named as the world`s16thbiggest defence contractor in terms of the revenue. The companyprepares financial statements every year in accordance to the IFRSsrequirements. The company’s financial year ends on the 31stDecember of each year both individually and as a member of a groupcompany for its subsidiaries. This paper focuses on both the groupand the company’s financial statements for the year ended 31stDecember 2013.
Q1)The name of the Company and its registered office.
Rolls-Royce plcis a manufacturing and distributing incorporated public companyfounded on March 1906 (Rolls-Royce.com). It is a BMW AG subsidiarycompany registered under the UK Companies Act 1985. Its registrationnumber is 4706930. RollsRoyce headquarters are inBuckingham Gate, London, England, Post code SW1E 6AT. It is amultinational company with customers in more than 150 differentcountries and it has its presence in over 50 countries. (Annualreport, pg144).
Q2)The names and qualifications of the directors.
RollsRoyce Plc has 15 directors: (Annual report, Pg 36 andBussinessweek.com)
The chairperson, Ian Davis. Age 62
Hehas been a managing partner, a chairperson and worldwide managingdirector for over 5 years. In addition, he is a nonexecutive directorand a senior advisor in several major companies.
The Chief Executive, John Rishton. Age 55.
Hebeganhis career back in1979 at Ford Motor Company. In1994, John joinedBritish Airways Plc as a Chief Financial Officer before he became aCFO at Royal Ahold in 2006 where he became a CEO a year later. He hasalso worked as a member of Rolls Royce audit committee and a memberof the company’s ethics and nomination. He also has experience as anon-executive director.
Senior Independent Director, Iain Conn. Age 50.
Iainhas held a number of executive positions in the past. He is also aChief Executive of BP p.l.c. and a member of both The ImperialCollege Council and Energy and Climate Change Board. In addition, heis an advisor for a number of development and reform projects.
Non-executive director, Dame Helen Alexander. Age 56.
Hellenhasbeen a ChiefExecutive,a President and a non-executive
directorof several well known companies. She is also a DBE award holder.
DameHelen is also a Chancellor at the University of Southampton.
Non-executive director, Lewis Booth CBE. Age 64.
Lewisis the former Executive Vice President and Chief Financial
Officerof a Motor Company. He is also a CBE holder for his exceptionalcontribution to UK automotive manufacturing industry.
Non-executive director, Sir Frank Chapman. Age 60.
SirFrank has over 38 years experience in the oil and gas industry.
SirFrank is a member of the Royal Academy of Engineering, the EnergyInstitute and the Institution of Mechanical Engineers.
Non-executive director, Warren East CBE. Age 51.
Warrenis a member of the Institute of Engineering and Technology, the RoyalAcademy of Engineering and of the BCS. He CBE award holder. He hasbeen a Chief Executive and managed to see the company become theworld’s leading semiconductor IP licensing Company under hisleadership.
Non-executive director, Lee Hsien Yang. Age 55.
Yangis an MSC and BA holder. He was Chief Executive of aTelecommunications company. He has served as Chairman, anon-executive director, an advisor and he is a Chairman of a CivilAviation Authority.
Non-executive director, John McAdam. Age 65.
Johnis a B.Sc and a PhD holder. He was the Chief Executive and a formernon-executive director. He is also a Chairman and the SeniorIndependent Director of several well-established companies.
Non-executive director, John Neill. Age 65.
Johnis a CBE holder and member of the Council and Board of Business inthe Community and holds various positions in automotive manufacturingcompanies. He also has extensive experience in as a director.
Non-executive director, Jasmin Staiblin. Age 43.
Jasminhas had a successful career as a CEO and is a Federal Institute ofTechnology board member.
The President and the Chief Executive Officer of Rolls-Royce North America Inc. James Guyette. Age 68.
Jamesis a B.Sc holder and a formerExecutiveVice President of United Airlines. He is also the Chairman ofPrivateBancorp Inc and the lead independent director of priceline.comInc. He is also the Chairman of Emeritus of the Smithsonian NationalAir & Space Museum in Washington DC.
Chief Financial Officer, Mark Morris. Age 49.
Markhas been an employee of Rolls-Royce since 1986 where he has held anumber of senior positions all over the Company.
Director, Colin Smith. Age 57.
Colinis a CBE, B.Sc hons, FRAes, FREng and FIMechE holder. He is incharge of Engineering and Technology. He joined Rolls-Royce in 1974and has held a variety of leadership positions within the Company. Heis a member of the Royal Academy of Engineering, the RoyalAeronautical Society and the Institution of Mechanical Engineers. Heis also a part of the Council for Science and Technology.
Company Secretary & Head of Legal Nigel T Goldsworthy.
Nigelis a solicitor who has held a number of senior legal and companysecretary roles within Rolls Royce in the past. He was Deputy GeneralCounsel before his appointment.
Q3)The name of theAuditor. Give both the partner’s name and the name of the firm.
Externalauditors from KPMG Audit Plc (KPMG) conducted the audit. The SeniorStatutory Auditor Jimmy Daboo signed the report on behalf of KPMGAudit Plc. (Annual report, Pg 137). There are five auditors mentionedon the report. The audit committee chairman, Lewis Booth CBE, auditcommittee members Iain Conn and John Neill, and a retired committeemember Ian Strachan, who was present at the beginning of the auditedfinancial year. Warren East CBE is a new member of the auditcommittee but he did not contribute in the audit of the financialstatements for the year ended December 2013. (Annual report, pg 46)
Q4)The type of business undertaken by the company. Include informationabout the location(s), markets, key customers, products, competitorsetc.
Rolls-RoyceHoldings is one of the world`s leading aircraft enginemanufactures and they manufacture cars as well. Rolls-Royce has aCivil and Defence Aerospace production where it manufacturesindustrial and military engines for airlines, helicopter operators,and armed forces worldwide.  Its Energy segment alsosupplies gas turbine power invention to the oil andgas industry while its Marine unit design propulsionsystems that are used to power 70 fleets worldwide.(rolls-royce.com)Rolls-Royce hascompanies in North America, Europe, Asia and up-and-coming presencein the Middle East. That company’s topthree competitors areGE Aviation, SAFRAN and Pratt & Whitney Engine Services, Inc.(rolls-royce.com).
RollsRoyce has customers worldwide but its major customers include:(Annual report, pg94)
Civil Aerospace. Rolls-Royce engines power 600 airlines around the world including 3,800 aircrafts for US and Canadian leading airlines as well as corporate operators. It also powers 3,800 North America’s civil turbine helicopters.
Defence Aerospace. Rolls-Royce engines and their technology serve the US armed forces on land, in the air and at sea.
Marine. Rolls-Royce provides environmentally friendly marine solutions to over 2,000 commercial customers and over 50 navy troops around the world.
Energy. Rolls-Royce supplies turbine driven, oil pumping, gas compression and power generation packages worldwide. It has supplied over 4,000 gas turbines to consumers in over 80 countries worldwide. (roll-roys.com)
Q5)For both the company and the group, give the profit or loss after taxfor the year. How does this compare with the previous year?
Theprofit for the group 1,379 million in 2013 and 2,335 million in 2012(Annual report, pg 138 and pg 92) but the company made a loss of $ 1million, (Annual report, pg 128). The group made almost one thousandmillion more profit in 2012.
Q6)For both the company and the group, give the income tax expense.
Thegroup tax for the year is 297 million but the charge on the incomestatement for the year ended 31stDec 2013 is $ 380 million(Annualreport, pg 96).Thecompany made a loss so there is no tax charge.
Q7.For both the company and the group, the basis of valuation (e.g.historical cost, net market value etc) and amounts of ClosingInventories (Material, W.I.P. and F.G.).
Bothinventories and work in progress are valued at the lower valuebetween the net realisable value and cost on FIFO basis (first-in,first-out) basis. Cost of inventory includes the price of directmaterials, costs of direct labour if any and overheads that have beenincurred in the process of getting the stock to its present positionand state. The net realisable value is estimated by deducting thecost of sales including the cost of inventory and that of marketingand distribution from the selling price (Annual report, pg 89).
Q8)For both the company and the group, the nature, basis of valuation,amount and depreciation of Property, Plant and Equipment.
Accordingto page 89 of the report, “Property, plant and equipment assets arestated at cost less accumulated depreciation and any provision forimpairment in value. Depreciation is provided on a straight-linebasis to write off the cost, less the estimated residual value, ofproperty, plant and equipment over their estimated useful lives. Nodepreciation is provided on assets in the course of construction.”The assets’ estimated useful lives of land and buildings are set asrecommended by the professional advisers and the land is notdepreciated, (Annual report, pg 89). The group’s property, plantand equipment are valued at $ 320 million and the depreciation chargefor the year is $79million (Annual report, pg 102).
Q9)The amount and nature of any long-term liabilities of the company.
Thecompany’s long- term liability for the year ended December 2013 is$10,989 million and it is in the form of owner’s equity, (Annualreport pg 126).
Q10)The amount and nature of any other liabilities of the company
Thecompany has contingent liabilities of £1 billion, (Annual report, Pg128).
Q11)The company’s value of issued capital.
RollsRoyce Plc has 1,880,301,654 issued ordinary shares (Annual report, pg142). The shares have a face value of 20p each (Annual report, pg78). The value of the issued when rounded off figure to the nearestmillion is $376 million, (Annual report, pg 78).
Q12.Ratio analysis: Using the consolidated figures for your company andusing ratio analysis, including but not limited to the quick ratioand the current ratio, comment on the liquidity of the company. Doesthis analysis support or contradict the information in the corporategovernance statements? Why?
Current ratio= Current assets / current liabilities
Currentratio shows the company`s capability to pay back its short-termliabilities using its current assets. It gives an idea of the numberof times the short-term liabilities can be covered by the currentassets, if the value is above 1.00, it shows the current liabilitiescan be fully covered therefore there is a very low likelihood thatthe company will struggle to service its short-term liabilities.
Acid test ratio = Current assets- Inventory/ current liabilities
Quickratio also known as Acid Test ratio, just like current ratio, showsthe company`s capability to pay back its short-term creditors usingits most liquid assets. Inventory is considered to be less liquid asit requires time and the business is limited on the ways it canmanipulate the period of time it takes to convert inventory to liquidcash. For this reason, it is deducted from the current assets for amore efficient estimation of a company’s liquidity. If the value isabove 1.0, it indicates that the company is unlikely to experiencecash flow challenges when service its short-term liabilities. Anyfigure above 0.5 may also considered healthy.
Net Working Capital to Total Assets = current assets/ total assets
Networking capital helps determine whether the company has a healthycurrent to fixed assets ratio. It shows when the company is over orunder investing to ensure that the company is liquid enough to meetits day-to-day expenses but at the same time making the most out ofthe available resources. Roll Royce has enough money to finance itsoperations but since its net working capital is over 50%, themanagement should consider reducing the current assets value andinvest more for higher returns.
Liquidity ratio= cash and its equivalents/ current liabilities
Liquidityratio shows a company`s ability to pay off its short-term creditorswith its total cash. It helps determine the short-term liabilitiescovered by cash. The company has a
0.4figure which is slightly below the ideal 0.5 figure. This shows thatthe company is sound enough to meet its short term liabilities.However, the management should keep a close eye on the short termfinancial instruments to ensure that they do not exceed what thecompany can comfortably meet and also to ensure that the creditorsare well spread to avoid pile up as this may cause liquid issues forthe entity.
Cash and its equivalents/ current assets = 3,990/12,818 X100
Cash& Equivalents to current assets percentage shows the percentageof the current assets that is liquid cash. This helps determine thecompany’s ability to finance its day-to-day activities as well asits short-term liabilities. Rolls Royce has relatively healthy Cash &Equivalents to current assets percentage.
Thefigures reflected by the ratios agree with what the company’sgovernance reported on of the annual report. The report indicatesthat the company has recently disposed assets which has boosted thecompany’s liquidity. These disposals have also resulted to asurplus in the liquid assets and the directors agree that there is aneed for the excess cash to be reinvested to secure the future of thecompany as well as generate more income for the shareholders (Annualreport, pg 33).
TheRolls Royce annual report is an ideal example of a financialreporting in accordance to IFRS and the company’s act. The companyhas all the statements prepared within the required standards, theaccounting standards explained and the financial statements checkedby an external independent auditor. The report shows that the companyis well managed and run. The company has a tradition of withholdingethics, hard work and innovation, it is no wonder the companycontinues to be among the leading manufacturers in its industry.
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