Goodwill is the value of the commercial advantages that an entity enjoys because its prior existence. It reflects such things as the entity’s particular expertise and trade reputation.
In the case of some entities, particularly ones in the service or knowledge sectors, it may represent the major trading ‘asset’ of the enterprise. However, it is not separable/ saleable from the enterprise, is very difficult to place a value on, and is not normally valued in corporate financial statements. (Glynn, Perrin ; Murphy, 1998, p 452) According to the Accounting policies of Fountain Set, goodwill represents the excess or shortfall of the purchase consideration over the fair value ascribed to the organization’s share of the separable net assets of subsidiaries or jointly controlled entities at the date of acquisition. Goodwill is written off or credited directly to reserves, in the year of acquisition.Capitalization policy Fountain Set identified Investment properties, Property, plant & equipment and Interests in jointly controlled entities. Investment properties valuation All investment properties (completed properties are held for investment potential) of Fountain Set are held under medium-term leases for rental income under operating leases.
At the end of each financial year, Fountain Set will revalue its Investment properties on an open market value basis by a firm of independent property valuers.Any surplus or deficit arising on the valuation of investment properties is credited or charged to the investment property revaluation reserve. If the reserve balance is insufficient to cover a deficit, excess deficit is charged to the income statement. If a revaluation surplus arises for a deficit previously been charged, the surplus should credit to the income statement. On the disposal of an investment property, revaluation reserve balance of this investment property should transfer to income statement. No depreciation for the investment properties, which the lease term is more than 20 years.Property, plant and equipment Other than the property, plant and equipment, which are construction in progress, they should be stated at cost or valuation less provision for impairment loss, if any, and depreciation and amortization. Operational expenditure of the assets is normally charged to the income statement in the period it is incurred.
However, if the expenditure has resulted in an increase in the future economic benefits, this expenditure is capitalized as an additional cost of the assets. The difference between the sales proceeds of the asset and the carrying amount of the asset should be recognized in the income statement.Certain leasehold land and buildings were previously revalued on 30 September 1995. However, the accounting policy of Fountain Set has been changed and no further revaluation of land and building is carried out.
No amortization is provided in freehold land. However, leasehold land, building and equipment are amortized/ depreciated on a straight-line method. Depreciation methods Fountain Set adapted the straight-line method, at the following rates per annum; 10-20% for furniture, fixtures and equipment; 10%-20% for plant and machinery and 20%-25% for motor vehicles.Inventories According to the accounting policy of Fountain Set, inventories are included Raw materials, Work in progress and Finished goods. Inventories are stated at the lower cost (purchasing cost plus any inventory delivery cost) and net realizable (estimated selling price less the estimated cost of completion and selling cost). This cost is calculated using the first-in, first-out method.
Sales turnover Fountain Set identified sales turnover as the net amounts received and receivable for goods sold and services rendered by the organization to outside customers during the year.Revenue Recognition Refer to Fountain Set accounting policies, Sales of goods are recognized when goods are delivered and title has been passed. Service income is recognized when services are provided. Interest income is accrued on a time basis, by reference to the principal outstanding and at the interest rates applicable.
Trade and other receivable In the annual report, it did not state clearly about the credit policy of Fountain Set. It has only mentioned that the organization allows an average credit period of 75 days to its trade customers. Also, it did not state how do the organization judge on whether debts will be collectable. The level of provision for doubtful debts and its judgment are so not stated in the annual report.Ratio Analysis After considering what kind of principal areas of judgment contained in the Annual Report, we will try to use the ratio analysis for measuring and commenting upon the profitability, asset utilization, liquidity and debt utilization of Fountain Set (Holdings) Limited. The essence of ratio analysis techniques is the linking of significant items of accounting data to compute a ratio and then comparing this ratio with a yardstick.
These techniques can be regarded as providing performance indicators, which summarize in quantitative terms the performance of the organization and its management in certain key areas. (Glynn, Perrin & Murphy, 1998, p 148-149) These techniques include, Profitability ratios, Profit ratios, Solvency and liquidity ratios, Financing ratios and Investment performance ratios. The following table is the summary of the above ratios and the ratios analysis will be followed by this summary table.