Analysis of the financials of My Essential Care Limited
Essential Care Limited
You are a senior auditor with Mason and Associates Pty Ltd. Your audit partner, Amanda, has approached you to undertake an independent review of the preliminary risk assessment for one of the company’s clients, My Essential Care Limited.
My Essential Care Limited Group, which includes four entities, has been operating for ten years. The group produces organic personal care products, including a skincare range and personal grooming products for both men and women, using primarily an Australian sourced essential oils. However, they also import oils from several overseas sources. The group has also expanded through the acquisition of several smaller manufacturers over the past five years, and now supply over 1,000 health food stores and hairdressing salons through-out Australia and New Zealand. The group also sells their products to major department stores, as well as maintaining an online presence.
In 2010 the group entered into five-year contracts with major department stores in Australia, the US and Europe. These stores include David Jones and Myer in Australia, Bloomingdale’s and Saks in the US, and Selfridges and Fortnum & Mason in the UK. After successful in-store and online sales in the US and Europe, the group began a strategic expansion program, via a new subsidiary My Essential Care International, and established high-end boutique retail stores in New York, London, Paris, Milan and Moscow. Initially, these ventures were highly successful. However, over the last couple of years results from some of these stores have been disappointing.
In 2016 following the non-renewal of some department store contracts and disappointing sales in the boutique stores, My Essential Care Limited, diversified into animal care products and acquired a 100% control of MyPet Limited. In 2017, on the back of rising demand for healthy alternatives, they acquired a company that produces vitamin supplements and essential oils. These products are sold online and stocked in the retail stores. This year, they also decided to sell a subsidiary that was involved in the transport industry, retaining a 49% stake in the company.
Below are the financial figures, excluding cash flow statements and changes in equity statements, for the last three years.
|My Essential Care Limited|
|For the year ended 30 June|
|Revenue from continuing operations||722,040||779,230||743,764|
|Cost of goods sold||(382,657)||(364,149)||(337,767)|
|Selling, general and administrative expenses||(322,498)||(282,331)||(234,894)|
|Share of net profit after-tax of associate accounted for using the equity method||147|
|(Loss)/profit before income tax||(261,333)||44,342||101,516|
|Income tax benefit||19,991||1,925||(28,933)|
|(Loss)/profit from continuing operations||(241,342)||46,267||72,583|
|Profit from discontinued operation after income tax||103,002||12,756|
|(Loss)/profit for the year||(138,341)||59,023||72,583|
|Loss attributable to non-controlling interests||516||547||411|
|(Loss)/profit for the year attributable to the members of My Essential Care Limited||(137,825)||59,570||72,994|
|My Essential Care Limited|
|Consolidated balance sheet|
|As at 30 June|
|Cash and cash equivalents||158,632||72,429||104,371|
|Trade and other receivables||122,518||187,188||199,189|
|Current tax receivables||9,311||7,929||1,792|
|Total current assets||449,461||454,427||439,343|
|Investment accounted for using the equity method||67,290|
|Property, plant and equipment||80,077||92,426||85,239|
|Deferred tax assets||35,549||17,982||11,328|
|Total non-current assets||590,474||755,556||665,817|
|Trade and other payables||160,113||172,017||157,773|
|Current tax liabilities||1,477||920||4,410|
|Total current liabilities||305,722||194,604||177,390|
|Provisions and other payables||22,091||46,909||11,136|
|Deferred tax liabilities||40,173||25,003||27,408|
|Total non-current liabilities||220,581||833,918||318,981|
|Capital and reserves attributable to members of My Essential Care Limited||514,286||596,732||608,380|
At this stage, the following additional information has been provided by My Essential Care.
Revenue consists of seventy percent credit sales, twenty percent online “cash” sales and ten percent in-store sales.
|Provision for impairment of receivables||(19,776)||(9,927)||(10,761)|
In 2018, $51,350,000 trade receivables were outstanding more than 3 months ($44,266,000 in 2017 and $54,449,000 in 2016). Impairment for receivables was $16,105,000 in 2018 ($2,792,000 in 2017).
Include monies owed under a debt factoring arrangement
|Raw materials and stores – at cost||1,921||2,970||2,451|
|Work in progress – at cost||3,867||5,688||4,485|
|– at cost||127,911||156,298||97,146|
|– at net realisable value||12,902||9,413||16,118|
During 2018 goodwill was impaired by $144,340,000 and finite intangibles were impaired by $184,714,000.
For the 2018 financial year, the company paid a dividend $20,547,000. The dividend paid in 2017 was $41,699,000.
Current liabilities (non-borrowing)
The current liabilities include income tax payable of $1,476,500 and provisions of $29,588,500 (this includes an onerous lease/contract provision of $17,794,000).
Total unsecured borrowings include a revolving multi-currency facility of $108,279,000 (to be repaid from a rights issue in 2018-2019), lease liabilities of $719,000,000. Secured borrowings include bank loans of $3,894,000 and a bank overdraft of $800,000.
The unsecured non-current liabilities include the remaining balance of the multi-currency facility $108,310,000 and lease liabilities of $3,285,000. Secured non-current liabilities include a draw-down facility of $12,940,000.
The Group’s lenders require the group to maintain a positive tangible ratio, and a quick ratio of 1:1. They are also expecting to see an improved profit/reduced loss in the 2018-2019 financial year.
Prepare a report for the audit partner that includes:
- Analysis of the financials of My Essential Care Limited that covers: a simple comparison of the movement in the accounts between 2017 and 2018, a trend analysis, and the profitability, liquidity, solvency and efficiency ratios for the last three years (2018, 2017 and 2016). This analysis is to be attached as an appendix to your report. (11 marks)
- A commentary on any perceived going concern issues for My Essential Care Limited, with reference to each of the ratio areas, the other analysis, and the background information provided in the question. (5 marks)
- The identification, and justification, of four key account areas or balances that could potentially be materially misstated and would require additional audit resources. (12 marks)
- The identification and justification of two primary assertions for each of the accounts/areas in (c). (12 marks)