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The purpose of the given paper is to discuss some concerns that arise after reviewing the income statement of the Arabian Gulf’s biggest dairy company Almarai. In 2018, the organization earned 2,007,222,000 SAR of profit, compared to 2,159,963,000 SAR earned in the previous year (Almarai Company, 2018, p. 114).
This 8% decrease in profit can be viewed as a reason for concern. The shareholders may wonder about the negative dynamics of the company’s development and doubt the efficiency with which the organization generates profit from its daily operations. A decrease in profit can be attributable to a decrease in revenue from dairy and juice and bakery segments, which were most sensitive to the changes in the market dynamics. The top line of the dairy and juice segment was adversely impacted by a decrease in the number of shops, the introduction of value-added tax, as well as the introduction of the expatriate levy by the government. At the same time, the revenue from the poultry segment increased.
While general and administration expenses decreased, other expenses increased from 211,071,000 to 301,299,000 SAR. Such an alarming increase is equal to 43%, and its size may be questioned by shareholders who are suspicious of creative accounting and fraud practices. Using the information from the company’s annual report, an increase in other expenses can be explained by a loss on disposal of biological assets due to the deterioration of market conditions in the secondary dairy herd market and the impairment of assets (Almarai Company, 2018, p. 163).
The impairment of assets was associated with the cessation of production of alfalfa and green forage and the change in some business operations, which led to an asset impairment charge (Almarai Company, 2018, p. 163). Other factors that contributed to an increase in other expenses are the loss on disposal of an investment, which occurred after the reclassification of foreign operations, and the loss on disposal of property, plant, and equipment (Almarai Company, 2018, p. 149). However, it is worth mentioning that the dividend on equity investment was lower in 2018 than in 2017, yet the difference was insignificant.
A major increase in the actuarial loss on end of service benefits can be a cause for concern since, in the previous year, there was the actuarial gain on end of service benefits. The company, however, does not give explicit clarification regarding this issue. It should be further investigated why Almarai Company paid a higher amount than expected. There was a significant increase in settlement of cash flow hedges transferred to inventory/PPE, from -13,728,000 SAR in 2017 to -20,529,000 SAR in 2018. This 33% increase in settlement of cash flow hedges transferred to inventory may indicate that the company was not successful in managing the risk of changes in cash flows.
Furthermore, the company did not provide any notes regarding a decrease in movement in fair value on cash flow hedges. However, the movement in fair value on cash flow hedges decreased three times from 2017 (from 128,475,000 SAR to 39,652,000 SAR) (Almarai Company, 2018, p. 114). This concern is important as the organization lost a significant portion of its total comprehensive income for the year. The question that logically arises is why the business entity did not mitigate the risk of changes in the net value of its assets as efficiently as it did in 2017.
Reference
Almarai Company. (2018). Resilience through quality: Annual report 2018. Web.
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