Introduction to the Assignment.
Following report conducted a detailed analysis on financial reporting of Lotus Hydro Power PLC, which is a listed entity in the main board of Colombo Stock Exchange. In this assignment, we would looked at the background of the Company and its Group Structure, Key areas of Annual report mainly Directors report, Auditors Report, Risk Report, Main accounting standards adopted in preparation of Financial Reporting and conclude the assignment with proposing improvements to the reporting.
2.0 Company Profile
2.1 Background of the Company
'''Lotus Hydro Power PLC was formed in year 2000 (Cse.lk, 2017) as a sister company of Free Lanka Group. Company was initially formed to develop Hydro capacities within the group plantation Companies of Pussellawa Plantations Limited and Maturata Plantations Limited. Company has listed in the CSE Main Board on 26th October 2010 where they have current installed capacity of 4.9 Mw which is generated from 4 plants namely, Sanquhar (1.6 Mw) , Delta (1.6 Mw), Stellenberg (0.9 Mw) and Thebuwana (0.8 Mw.) . Apart from Power generation Sanquhar and Delta MHP are registered with United Nations Scheme for issuing Certified Emission Reductions (CER's). (Change, 2017) Company was formed under Free lanka group in year 2003 where change of ownership occurred on 2015 March which was subsequently sold to Lotus Renewable Energy Group in August 2016 who add these hydro plants to their renewable Energy solution portfolios" (Lotusreenergy.com, 2017).
2.2 Organisational Structure
LHPP – Owns and Operate Two Mini Hydro Plants namely Sanquhar and Delta having installed Capacity of 1.6 Mw each in Gampola.
SHPL – 100% owned Subsidiary of LHPP which operates Stellenberg MHP with Installed capacity of 0.9 Mw at Pussellawa Town.
THPL – 100% owned Subsidiary of LHPP which operates Thebuwana MHP with installed capacity of 0.8 Mw at Kuruwita Town.
HOPL – 100% owned Subsidiary of HOPL which posses Energy Permit to develop 0.65 Mw in Ragalla Town.
3.0 Analyzing Key areas of Annual Report
All the listed entities of Sri Lanka governed by the Colombo Stock Exchange. As per the section 8, Clause 8.6 and 8.7 of listing rules (Cse.lk, 2017) every registered entity must circulate Annual Report to exchange and all other stakeholders within 6 months from the close of financial year. There are mandatory published requirements (Casrilanka.com, 2017) as per the Chartered institute of Sri Lanka (Refer Addendum 1) as well voluntary disclosures by the Company.
3.1 Director's Report
Directors Report is a mandatory requirement to be published in Annual report as indicated in listing Rules. This reports indicates the director'''s responsibility on complying with Accounting standards in preparation of financial statements as per the Companies Act No.07 of 2007. Generally, in a Director's Report following information needs to be included.
''' Report Should have the Directors who has served during the Period.
'''Lotus Hydro Power PLC Ownership was changed in the month of August 2016. But at the time of Annual Report Publication Previous Director board was resigned and new board has been appointed. Considering these changes Directors Report carries both the old as well as new director details by satisfying the disclosure requirement'''.
''' Summary of Firm trading activities and future prospects
Company has taken very restricted stand on reveling company activities where they have mentioned only the Principle activities which is mentioned in the financial statements. They have not made any disclosure on future plans even after there is ownership change.
''' Recommended Dividends
This is a key information which is most sort out by shareholders. Since company has not declared final dividend they have not disclose this.
''' Summary of Firm Trading Activities.
'''Remuneration and related Party transaction, Stated Capital, Reserves, Share Holding Information and Director's Interest. As per mandatory requirement all performance indicators showed with correspondence figure on previous period.'''
3.2 Auditors Report
In most of the cases firm financial performance would be prepared by internally they have been influenced by the policies and decisions of the Directors and Senior Management. However, managers of a firm should always safeguard the interest of shareholders and they are performing a custodian job. In order to review their performance and validate their decision making with compliance to national and international standard opinion of Independent firm is required and which is given in Auditors Report. They could give 4 types of Auditing opinion on Financial statements namely, (Smallbusiness.chron.com, 2017)
''' Unqualified Opinion – This a clean opinion giving financial statements free of misstatements.
''' Qualified Opinion – When company accounts has not kept according to the standards and it is full of misstatements Auditors would give qualified opinion.
''' Adverse Opinion – This is the worst opinion that can be given by the Auditors. when accounts kept not considering the Accounting standards this opinion is given. This would give strong indication for fraud.
''' Disclaimer Opinion – When Auditor cannot conduct proper Investigation they would issue a Disclaimer Opinion.
Lotus Hydro Power PLC (Formerly known as Browns Hydro Power PLC) external audit was carried out by KPMG Chartered Accountants. Conducting the audit they have considered the Internal Control practiced by the company. Lotus Hydro has set up a Audit Committee who give their opinions to the board of Directors on matters concerning to governance. Since only source of Income comes from Ceylon Electricity Board audit practices applied considering this as Small entity. But being a listed company more emphasis given on managing the risks and comprehensive audit was carried out. They have considered Directors responsibility on preparation of Financial statements and made their Opinion on Page 41 of Annual Report. They have divided their opinion in to 2 categories where one opinion on preparation of Financial statements and Cash flows and other one on Legal and other regularity opinion. On both the occasion they have forwarded unqualified clean opinion stating company has complied with the Companies Act.
3.3 Audit and Remuneration Committee Report
As per the listing rules all Companies need to follow the Corporate Governance Rules which enforced by the Colombo Stock Exchange. Corporate governance is a set of rules and policies adopted by an Organisation (BusinessDictionary.com, 2017) which would increase accountability of the Company towards its Shareholders, employees as well as to general public.
Source – Author, (BusinessDictionary.com, 2017
It is mandatory to form Remuneration and Audit committees in a Listed entity. Composition of these committees mentioned in the Listing Rules where as minimum of 2 independent non executive directors must be included in the committee and one of them should head the Committee. Audit committee provides oversight to the financial reporting, internal controls and compliance with laws. Committee is to review results of External as well Internal Auditors. Having Independent Directors would direct companies Internal Control and financial Management. Even with Ownership changing hands Independent Directors retained their position and continued their best practices. Audit Committee report was published in the Annual Report and they have met 3 times during the financial year. It is mandatory for the company that all periodical financial report should obtain the approval of Audit Committee prior to releasing to the public.
Remuneration committee is the steering body that formulates strategies and remuneration packages when recruiting Senior Executives. This would clear senior management on deciding salaries and salary related policies. Committee members would have direct access to board members where they would determine the Senior members of the organization which needed to set remuneration packages. Independent directors who were members of the Audit committee also the members of the committee where they understand the company financial which helped them to set more realistic packages and future directions. As per the listing rules Company annual report given details of the composition and given clear assurance on the independence of the external Auditors.
4.0 Standards adopted in the Annual Report
As we mentioned earlier Financial reporting of a Listed Company should follow the Sri Lankan Accounting standards when preparation of Annual financial Statements.
4.1 IAS 16 – Property, Plant & Equipment
This standard applies to all the property, plant and equipment which has a value. As per this standard Property initially should be measured on cost and subsequently it could be using either Cost or revaluation method (Iasplus.com, 2017). Adaptation of this standards is use to recognition of asset, Carrying amount, impairment and depreciation the assets.
Annual Report reflected the Company accounts as well as its Subsidiary accounts which is mentioned earlier. During the financial year Thebuwana MHP plants begin its operation hence their construction value has recognized in PPE as per the IAS 16. This recognition was based on providing future benefits for the company as well as it could be measured reliably. This has reflected where Work in Progress value of Rs.292 Million in year 2014/15 come down to 15 Million while Group PPE has increased to 860 Million from 612 Million.(Refer page 45 of Annual Report). Details were published in note 3.2 which discuss about the asset Costs, valuation, subsequent cost as well as estimated life time based on class of assets (Refer page 45 of Annual Report). Company accounts revealed that there were revaluation carried out on assets previously and adjustment of revaluation assets shown separately (Refer page 66 of Annual Report) as per the requirement of IAS 16. However proper usage of IAS 16 need to put correct carrying values with adjustment carried out with impairment where there is no impairment shown where there were assets which is used in more than 10 years at Sanquhar and Delta MHP.
4.2 IAS 38 – Intangible Assets
When non physical assets provided future economic benefits which they are called as Intangible Assets. This could be recognized only when their cost an benefits recognized separately and they could be transferred. Patented technology, trademark and Computer software's are some of the examples for Intangible assets. When Intangible Asset value cannot be recognized separately it should be treated as expenses and these costs cannot be reinstated in future. As per financial position statement Group companies do not have any Intangible assets where previous year identified intangible assets of Computer Software is already depreciated. However there were internally developed Computer software's to run the Control panels of Thebuwana Hydro Power plant but with difficulty in separately identifying the cost these were treated as expenses.
4.3 IAS 28 – Investments in Associates and Joint Ventures
This standards looks at how to identify the Associates and Joint ventures and how to apply equity method for investment in associates and Joint ventures. This standard applies not only when investing in an entity as well as when it is have significant influence over an investee.
In Lotus Hydro Power PLC they have invested on 3 subsidiaries namely Stellenberg Hydro Power (Pvt.) Limited, Thebuwana Hydro Power (Pvt.) Limited and Halgran Oya Power (Pvt.) Limited. These entities are 100% owned subsidiaries of the company. Therefore they have the Power over the entities, exposure, right and involvement right on the company and have the ability to use their power over the company. As a result of these mother company is able to use the equity method to record the financials and could apply relevant accounting standards on consolidated recording of the accounts. Further to this Annual Report contain the disclosures on the ownership and the share percentage and include details of Goodwill as well as non control share percentage along with minority share holdings of the subsidiaries.
4.4 IAS 26 – Accounting and Reporting by Retirement Benefit Plans
This standard measures and disclose all the reports on retirement benefit plans and should include how it would affect the net assets of the company. These changes should be measured periodically and disclose on the annual report. It further emphasis the disclosure requirement if it uses the actuarial valuation where report date and most recent valuation bases should be considered. There are main disclosure requirement and following would look at whether company annual report has met this requirements.
''' Assets at the end of the period – Note 20 on Financial Position in Annual Report
''' Basis of Valuation – As per Note 3.5.2 company has used actuarial valuation
''' Details of the investment of the employer – Note 20 on Financial Position
''' Details on measurement calculations – In note 3.5.2 assumptions made on calculations mentioned. i.e Rate of Discount, Rate of Salary and wage increase, Retirement Age, Staff Turnover.
''' Auditor confirmation on company comply with going concern requirement.
5.0 Recommendation for Improvement
When published annual report compared with its previous publishes we could clearly see that company has submitted only minimum disclosure requirement which is mandatory by law. By large company looking at the current business practice but do not give any details on their future plans. For example they have formed a company called Halgran Oya Power (Pvt.) Limited where they have Energy permit for the development of a Mini Hydro Plant but company is silent and does not provide enough information to company stakeholders. Looking at this and comparing with other annual reports in same industry we could put forward following recommendations.
''' Improvement of Company Risk Report where they just mentioned only about the Risks which applied in general industries. They have not considered the Industry specific risks such as Risk on tariff reduction after completion of Standard Power Purchase Agreement.
''' There should be further information provided on Corporate Social Responsibility and company contribution on reducing the carbon Emission on the environment.
''' They should expand the corporate governance just not limiting to mandatory requirement where more details on accounting policy changes and new adaptation could be introduced.
''' Further to this financial reporting could also improve where company could include comparisons with other competitors so that stakeholders could have real picture on company performance.
''' Majority of Annual Report is consist of Financial reports where it is rarely disclose information apart form which is mandatory. More encouragement should be to set standards on providing information as much as possible to stakeholders.
''' Make it more user friendly – Annual Report could include more graphs, colours and pictures it could be more readable. Further to this company could use modern technology to uploading report online while could insert more hyperlinks to the report so users get more details and information's.