Accounting Analysis and Evaluation

By: Tapan, Sathia, Lu Chen, Gerard, Jue Wang

Agenda
1 2 3 4 5 6 7 8 About Brambles Ltd. Key Accounting Policies and Standards Management Flexibility & Accounting Policies Accounting Policy & Management Incentive Quality of Disclosure Potential Questionable Numbers & Distortions Press releases and Conclusion Questions

About Brambles

CHEP & IFCO are worlds leading provider of pallet, RPCs and container pooling solutions. RECALL provides information management solutions to businesses. It employs more than 17,000 people in 54 countries and had sales revenue of US$4.7 billion as of financial year ended 30 June 2011. Brambles headquarter is based in Australia.

Brambles Strategy & Products

Diversification
Innovation Geographical Expansion

Brambles Core Growth Strategy

Key Performance Indicators & Competitors

Key Performance Indicators (FY 2011)

Market Cap Sales Revenue Operating Expense Total Assets Total Debt

Brambles (BXB)
10.915B 4.74B 3.98B 7.40B 2.93B

Mineral Downer Resources EDI (DOW) (MIN)

1.523B 6.96B 6.70B 3.89B 732.79M 2.176B 675.66M 454.30M 1.26B 102.04M

NRW Holdings (NWH)

1.046B 745.34M 686.60M 545.01M 123.57M

Transfield Services (TSE)

1.192B 2.82B 2.73B 2.17B 515.73M

Debt to Asset
Net Profit Margin

23.75% 8.05%

18.74% 2.35%

10.02% 20.07%

22.67% 5.53%

23.31% 2.17%

Key Accounting Policies

Key Accounting Policies
Revenue Recognition

Summary and Analysis

Sales Revenue account for 97% of the total income reported. The point at which revenue is recognised and the timing of revenue recognition will be critical to increase or decrease in revenue for a particular reporting period.

Property Plant & Equipment

PP&E accounted for 55% of total assets. Significant amount of estimation assumption and judgement involved in recognising & measuring assets. Goodwill forms 22% of the total assets and is recognised on acquisition of subsidiary or joint venture. Recoverable amount of goodwill is determined based on value in use calculation undertaken at the CGU level and calculated using discounted cash flow method covering 10 year period with appropriate terminal value at the end of that period.

Goodwill

Borrowings

Borrowings represented 59% of the total liabilities in 2011. The borrowings are combinations of committed facilities and loan notes with varying terms secured from banks and capital markets in multi-currency global banking facilities. Recognition and measurement of Borrowings and related costs will have a significant impact on the net asset position and their key key financial ratios to meet their covenants.

Applicable Accounting standards are in report with detailed explanations on their selection

Management Flexibility & Accounting Policies

Accounting Policy& Management Incentive

Strategies employed by management in respect of key accounting policies are geared towards supporting the success of their long term strategy of growth through expansion and managing funding Key Accounting Policy
Presentation Currency

Summary & Analysis

Financial statements of individual entities are presented in their respective functional currency. Presentation Currency for the consolidated and parent entities statements is USD.

Management of Borrowings

Geared towards reducing risk profile and maintaining key financial ratios Targets a net Debt to EBITDA ratio of 1.75 times Strong financial position and reduction in risk profile are significant to the funding of the managements growth strategy

Financial Risk Management

Capital Management Risk - Strategy employed by the management in relation to management of its capital structure is geared towards maintaining its credit rating.

Interest Rate Risk - Policy is designed to reduce volatility in funding costs

Foreign Exchange Risk - Policy is designed to counter the volatility of the exchange rate within and across the various market it operates in

Accounting Strategy & Management Incentive

Incentive KPI & Performance Conditions Measure
Focuses on efficient use of capital within Brambles measures strong focus on the generation of cash for the Group

Short Term Incentive (STI)- BVA (Brambles Value Add) cash award
Cash Flow (from Operations)

PAT (Profit After Tax) - for the CEO & Focuses on efficient use of capital within Brambles CFO Non-financial KPIs include personal strategic objectives in areas such as safety, business growth, customer satisfaction and retention, and people and talent management.

Long Term Incentive (LTI)

TSR (Total Share holder Return) relative Half of the LTI is measured by TSR which is the to S&P/ASX100 indexed over three return the company has provided for its share years performance period. holders, reflecting share price movement and reinvestment of dividend over a period. Vesting only occurs three years from the date of the award. Other half of the LTI is measured against the achievement of profitable growth objectives. This is designed to incentivize both long term growth and BVA. In the event of termination or resignation unvested awards are forfeited.

Equity Awards

Quality of Disclosure
The company has a principle of 'making timely and balanced disclosure', and it means that Brambles exercises continuous disclosure policy. Pitfalls in Disclosure Statement
Key Accounting Element Lack of Disclosure
Valuation methods ?
Discount Rates ?

Goodwill
Intangible Assets Remuneration Policy

List of intangible assets ? Valuation methods ? Justify remuneration packages for top management ? Lack of information on allocations share options ?

Questionable accounting numbers

On analysing Brambles financial statement, we have not found any compelling questionable accounting numbers which stood out as discrepancy.

However we have identified couple of accounting items which requires further questioning and analysis as the annual report fails to provide sufficient information on how and on what basis the items were estimated and calculated.
Valuations of Goodwill & Intangible Assets Valuations of Provisions

Correcting Distortions
Discount Rates
Brambles have used the pre-tax weighted average cost of capital (WACC) & include a premium for market risks appropriate to each country in which the CGU operates. WACC ranged between 10.1% to 25.0% (Page 93)

Goodwill (asset)

Discount Rate - Goodwill in millions

AR 2011 10.10% 25% Difference (Column 2- Difference 3) (Column 2-4)

Goodwill acquired through takeover of CHEP Goodwill acquired through takeover of IFCO Goodwill acquired through takeover of Recall Total goodwill for Brambles

159.7

143.57

119.78

16.13

39.92

985.2

885.69

738.9

99.51

246.3

549.4

493.91

412.05

55.49

137.35

1694.3 1523.17 1270.73

171.13

423.57

Press Releases
No 1 2 3 4 5 6 Business Strategy Strategy Brambles small-target to life US Sales Strategy Brambles talks up US Acquisition Brambles buys Swiss based airline container Unitpool Acquisition Brambles to buy IFCO for $1.28 bn Acquisition Brambles continues growth strategy, acquires CAPS Australian Financial Review Asiapulse News News Article Headline Brambles to diversify in US Source Australian Financial Review Bloomberg

Australian Financial Review Asiapulse News Sydney Morning Herald

7 8
9

Performance
Brambles keen to spread wings

Performance
Brambles reports 1st half profits of $219.6 Million Performance First half profits rises by 6 on China, India sales

Bloomberg
Bloomberg

Conclusion
By and large Brambles strictly adheres to accounting standards in valuations, estimation and reporting of key items on it financial statements. This is further endorsed by independent auditor every year to ensure company complies with relevant laws, regulations and standards. However parts of the reports lack in-depth detail to explain some of business valuations and performance. Furthermore we would advise future and current investors to pay attention to valuations of goodwill, intangible assets and PPE (property, plant and equipment) as there significant portion of the companys balance sheet. Overall Brambles has done very well in 2011 by focusing on three key areas of delivering on its near-term objectives, making ongoing investments and implementing long-term growth strategy.

References
Brambles Limited, Annual Report 2011, 2010, viewed multiple times,
http://www.brambles.com/BXB/content/investors_welcome.html Brambles Limited, Investor Presentation 2011, viewed multiple times, http://www.bramblesreview.com/2011/ Deegan, C, 2011. Australian Financial Accounting. 5th ed. Australia: McGraw Hill. Evans, R, 2011. Brambles reports first half profit of $219.6 million. Bloomberg, 14 February 2011. pp 33. Gale, C, 2010. Aust pallet supplier acquires US based container firm. AsiaPulse News, 08 February 2011. pp 3. Gale, C, 2010. Australia's Brambles buys Swiss airline container provider. AsiaPulse News, 24 September 2010. pp 14. Lee, T, 2010. Brambles small-target strategy to lift US sales. The Australian, 20 August 2010. pp 23. Wen, P, 2010. Brambles keen to spread wings. The Sydney Morning Herald, 19 November 2010. pp 4. Wiggins, J, 2010. Brambles talks up US. Australian Financial Review, 15 September 2010. pp 49. Wiggins, J, 2010. Brambles to buy IFCO for $1.28bn. Australian Financial Review, 16 November 2010. pp 18. Wiggins, J, 2010. Brambles to diversify in US. Australian Financial Review, 20 August 2010. pp 41. Wilson, I , 2011. Brambles first half profits rises 6% on China, Inida. Bloomberg, 15 February 2011. pp 27.