Accounting for Next Generation Leaders

SAMPLE ASSIGNMENT

ELECTRONIC ASSIGNMENT COVERSHEET

Course/Unit Information

Course Extended Diploma in International Business and Strategy

Unit No. 4009

Unit Name Accounting for Next Generations Leaders

Unit code SQA/4009

Schedule Code

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Name

Assignment Information

Full/ Part Assignment Full Assignment

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STUDENT DECLARATION

I hereby confirm that this assignment is my own work and not copied or plagiarized. It has not

previously been submitted as part of any assessment for this qualification. All the sources, from

which information has been obtained for this assignment, have been referenced as per Harvard

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LEARNING OUTCOMES AND ASSESSMENT FEEDBACK

Name of the Assessor

Module Code & Title SQA/4009 Accounting for Next Generation Leaders

Module Learning Outcomes

LO1 Critically analyze Financial Accounting Principles to measure Bottom Line impact

and develop competitive strategies.

LO2 Critique the relevance and significance of Budgeting Process, Techniques and

Methods in driving Organisational Performance.

LO3 Evaluate Financial Statements and business performance using Ratio Analysis.

LO4 Evaluate investment appraisal techniques to support decision-making..

Assessment Types Marks Marks Achieved

Organisational Study (Project Format)

Introduction – Profiles of Organisations selected 10

Application of Financial & Management Accounting

Principles and Core Finance Strategies to measure

Bottom Line Impact and Decision Making

25

Relevance of Budgets in driving Organisational

Performance 25

Ratio Analysis & Performance Review 25

Investment Appraisal Techniques 15

Overall Score 100

Overall Grade Click or tap to enter a date.

Summative Feedback:

Overall Feedback on

current work with

emphasis on how the

student can further

improve in future.

Internal Verification Report

Internal Verification Done By Date

Assignment Brief Assessors Decision

The following grading criteria will be applicable for the course, Executive Diploma in

International Business and Strategy:

GENERAL GUIDELINES (Please read the instructions carefully)

1. Complete the title page with all necessary student details and ensure that the student

declaration is ticked.

2. All assignments must be submitted as an electronic document in MS Word to the LMS

(Use 12 Times New Roman script).

3. All assignments must be submitted with an accompanying Turnitin report.

4. Assignment that is not submitted to the LMS by the prescribed deadline will be accepted

ONLY under the REDO and RESIT submission policy of Westford.

5. The results are declared only if the student has met the mandatory attendance requirement

of 75% and/or a minimum of 50% under extenuating circumstances approved and ratified

by the Academic Director. The student has to repeat the module (with additional fees

applicable) if the attendance is below 50%.

6. The assignment should not contain any contents including references cited from

websites like www.ukessays.com, www.studymode.com, www.slideshare.net ,

www.scribd.com.

7. Students can refer Wikipedia as a source of information, but the references cited in

Wikipedia must be mentioned.

8. Submit the assignment in a MS Word document with the file name being:

First Name Last Name_ abbreviation of the subject.

Marks Grade

70 to 100 A - Distinction

60 to 69 B - Merit

50 to 59 Pass

40 to 49 Fail with

Resubmit

0 to 39 Fail with Retake

Example: John Smith_ANGL.

Quick reference Checklist for the Faculty/Instructor to accept/reject the assignment

before evaluation:

 Adherence to the deadline of submission date.

 Original cover sheet and format retained.

 Student information and signature intact.

 Font style and size used as instructed.

 Harvard Referencing Style is strictly followed.

Assignment Accounting for Next Generation Leaders

Learning Outcome 1: Critically analyze Financial Accounting Principles to measure Bottom Line

impact and develop competitive strategies.

▪ PC 1.1: Evaluate the financial and operational performance of an organization

▪ PC 1.2: Critically review the influence of Accounting Standards and Accounting Policies in a

financial and (macro) economic environment.

▪ PC 1.3: Critically discuss financial accounting and management accounting practices that

highlight the use/ misuse of financial data.

▪ PC 1.4: Discuss how a plan and execution strategy can ensure competitive financial

management.

Learning Outcome 2: Critique the relevance and significance of Budgeting Process, Techniques

and Methods in driving Organizational Performance.

▪ PC 2.1: Critically analyze the relevance of Traditional Budgets versus “new age” Alternative

Budgeting Types and Techniques.

▪ PC 2.2: Conceptualize the budgeting approaches required to link performance management to

improved operational planning and management strategies.

▪ PC 2.3: Apply Smart Technologies in Budgeting, Forecasting and Management Control Processes

to investigate performance management issues.

Learning Outcome 3: Evaluate Financial Statements and business performance using Ratio

Analysis.

▪ PC 3.1: Apply Ratio Analysis to interpret the historic business performance of your chosen

organization.

▪ PC 3.2: Critically discuss how forefront developments or disruptions in the external operating

environment have impacted the financial performance of your chosen organization.

▪ PC 3.3: Evaluate future strategies for financial changes that will improve organizational

sustainability.

Learning Outcome 4: Evaluate investment appraisal techniques to support decision-making.

▪ PC 4.1: Critically discuss the importance of investment appraisal techniques when approving

capital expenditure investment proposals.

▪ PC 4.2: Conduct discounted and non – discounted flow analysis.

▪ PC 4.3: Evaluate at least two investment appraisal techniques and apply them to your chosen

organization.

Assignment Task Report [100 Marks] [6000 Words (+/-10%)

Read the following Scenario and prepare a Formal Business & Financial Review Document with

the guidelines provided.

Scenario:

The assignment below will help you to review and critically analyze financial and management accounting

principles, relevant accounting standards/ policies applicable, and apply the relevant knowledge to evaluate

the overall business and management performance based on the current complex, volatile, competitive and

uncertain economic/business environment by reviewing their impact on businesses.

You are required to present a Formal Business Report, that would contain a neatly designed Table of

Contents to capture the main and sub-topics in an orderly fashion which should adhere to meeting the

assessment standards and grading criterion:

Required: Choose a public listed corporation related to your current work domain or preferred area of

industry. Questions below would require candidates to research relevant financial and operational

performance of the organization by reviewing and understanding the 2018 & 2019 Annual Reports on the

chosen public listed company. The facts and figures will help the candidate to answer below questions, and

validate with relevant statistics for analysis or examples (wherever applicable).

1. Introduction: Introduce the organization in the context of prevailing macro-economic and business

conditions by discussing the vision, mission and planning strategies of the company. For the chosen

organizations, evaluate the financial and operational performance of the organizations by reviewing

the company’s annual performance (use financial data/annual report of the company for the year

2018 and 2019 for specific information) [10 marks]

2. Financial Principles and Bottom Line impact [600 to 1200 words]: Demonstrate meaningful

understanding of accounting policies and accounting standards by critically reviewing academic

and non-academic literature pertaining to its implications on the financial and macro-environment.

Critically debate the use/ misuse of financial data in the practice of management accounting and

financial accounting.

Discuss as how a plan and execution can lead to effective financial management in the chosen

company. Students can use financial and strategic information of the chosen company to validate

their explanations. [25 marks]

3. Ratio Analysis & Financial Interpretations [2000 words]: For the question below, in addition to

the chosen organization above, also select a competitor organization for the chosen company.

Financial data for FY 2018 and 2019 for both the organizations will be used here.

Calculate two ratios for liquidity, profitability, activity, capital structure and growth which should

be critically interpreted and evaluated by comparing each ratio between the chosen and the

competitor organization. Interpretation should follow with final comments on their business

performance which should be supported with the critical analysis of the macro developments with

impact of external operating environment on the performance of the organizations.

Finally, evaluate and recommend future strategies which will improve organizational sustainability.

[25 marks]

4. Literature Review on Budgeting Practices [1700 words]: Carry out a critical analysis which

exhibits a suitable understanding of current issues/concepts that are relevant for investigating

existing practices of ‘Traditional Budgets’ versus ‘Modern Age’ types of alternative budgeting and

techniques in large corporations.

Contextualize these budgeting approaches which can lead to enhancing operational performance

by linking them to the overall operational strategies & decision-making of the companies.

Present critical debate to review the impact of ‘smarter’ technologies in the overall budgeting

processes when examining forecasting and management control processes. (Students may use

examples from chosen organization). [25 marks]

5. Investment Appraisal Techniques [700 words]: If you were a Director of a public listed

company and had to present a significantly high value capital expenditure proposal to the CEO,

how would you critically evaluate investment appraisal techniques that remain important when

seeking an approval from the CEO.

Any capital expenditure involves protecting shareholder interests & maintaining a careful balance

between risk and rewards, using the concept of ‘time value of money’, to study the impact of

choices between discounted cash flows and non-discounted cash flow methods. Therefore,

conduct a discounted and non-discounted cash flow analysis.

You are required to apply necessary knowledge and understanding to evaluate at least two popular

investment appraisal techniques that can be used & considered by managers/decision-makers in the

light of dynamic business & economic conditions. (Examples/data from the chosen organization

can be used to support the explanations). [15 marks]

6. Presentation & References: You should present the whole document in methodical manner and

should remain aligned to appropriately demonstrate correct application of the Harvard Referencing

System (HRS).

Performance Descriptors

Performance descriptors indicate how marks will be arrived at against each of the above criteria. The

descriptors indicate the likely characteristics of work that is marked within the percentage bands

indicated.

Assessment

Criteria

(70-100%)

Work of an

outstanding,

excellent & v.

good

standard (*)

(60-69%)

Work of a

good standard.

(50-59%)

Work of a

pass standard.

D (40-49%)

Fail

E (0-39%)

Fail

Introduction

& Financial

Accounting

Principles and

alignment of

strategies to

measure

Bottom Line

impact.

(35%)

Assignment

produces an excellent factual

analysis of

companies

operational and

financial

performance by

reviewing the

relevant Annual

Reports which

presents

necessary

accounting and management

decisions in a

well explained

manner to

present its

significance, by

draw

comparisons

across peer group

companies within

the segment. Additionally,

domain specific

industry reports

are reviewed to

narrate current

macro-economic

events which

provide and

propose reasons

for changes with

comparisons by

stating means of improvement

futuristic goals.

Excellent

understanding

Assignment

produces accurate

& relevant

information to

evidence and

support factual

analysis of

companies

operational and

financial

performance by

reviewing the

relevant Annual

Reports which produced accurate

accounting and

management

decisions, that

have been

reasonably

explained as to

their share its

significance, draw

comparisons

within the segment.

Additionally,

domain specific

industry reports

have been

reviewed to

capture the current

macro-economic

events in a

satisfying manner

to provide and

propose reasons for changes with

comparisons by

stating means of

improvement

futuristic goals.

Assignment

produces a fairly

good narrative to

support factual

analysis of

companies

operational and

financial

performance by

reviewing the

relevant company

‘websites’ &

Wikipedia sources

in a limited manner to produce

necessary details

of accounting and

management

decisions, which

have reasonably

explained as to

demonstrate its

significance, but a

bit inconsistent,

when drawing comparisons

within the

segment. Some

errors spotted in

grammar and

syntax

Fairly reasonable

understanding

demonstrated

when commenting

on judgements and estimates used to

review the

preparation of

Financial

Statements, along

Assignment

produces a poor

review in support

of factual data

analysis with

respect to

company’s

operational and

financial

performance.

Evidence

presented is of

limited manner in

not reviewing necessary Annual

Reports to produce

required details of

accounting and

management

decisions.

Explanations are

in a language that

is not fluent to

contain inaccurate

grammar Some errors &

inconsistencies

sighted in

information

produced.

Presentation is

poor in structure

relevant concepts

when reviewing

the judgements

and estimates and includes errors in

grammar and

syntax. Not very

coherent as

Assignment fails

to provide any

significant review

to support factual

data analysis with

respect to

company’s

operational and

financial

performance.

Structure,

language grammar

and presentation

of information is not of an

acceptable

standard including

faulty syntax.

Purpose of the

analysis to present

necessary views

and opinions on

judgements and

estimated presented in poor

and disorderly

manner. Language

is unclear and

incorrect usage of

grammar and

syntax.

demonstrated to

critically examining

judgements and

estimates used

for arriving at

preparation of

Financial

Statements, along

with review of

key financial

metrics on the

strength of financial notes,

accounting

standards to

assess the impact

and review

appropriate

financial

strategies

Good understanding

demonstrated to

critically

examining

judgements and

estimates used for

arriving at

preparation of

Financial

Statements, along

with review of key financial metrics

on the strength of

financial notes,

accounting

standards to assess

the impact and

review appropriate

financial

strategies.

Grammar &

spelling accurate

and fluent. Thoughts and

views clearly

expressed.

Presentation is

orderly and of

good standards,

minor syntax

errors sighted.

with examining

key financial metrics on the

strength of

financial notes,

accounting

standards to assess

the impact and

review appropriate

financial

strategies. Some

inconsistencies in

grammar & syntax observed.

language is

inconsistent.

Ratio Analysis

& Financial

Interpretations

(25%)

Assignment

produces an

excellent analysis

of the company’s performance

which includes

relevant ratios,

which have been

explained as to

their role,

comparisons

provided and

proposed reasons

for changes,

differences with

comparisons and means of

improvement

Assignment

produces a very

good analysis of

the company’s performance

which includes

most of the

relevant ratios,

explanations of

their roles,

comparisons,

proposed reasons

for change,

differences with

comparisons and

means of improvement

Assignment

produces an

analysis of the

company’s performance

which is based on

a sufficient

number of the

relevant ratios ,

explanations of

their roles,

comparisons and

proposed reasons

for change,

differences with

comparisons and means of

improvement

Assignment

produces a limited

analysis of the

company’s performance

which misses

some of the key

elements and

supporting detail.

Assignment

produces a limited

analysis of the

company’s performance

which misses most

of the key

elements and

supporting detail.

Relevance of

Budgeting in

driving

Organisational

Performance

(25%)

Assignment

produces a clear

and concise

critical analysis

of the strengths

and weaknesses

Assignment

produces a clear

and concise

analysis of the

strengths and

weaknesses of the

Assignment

produces an

analysis of some

the strengths and

weaknesses of the

current budgetary

Assignment

produces an

analysis of a few

the strengths and

weaknesses of the

current budgetary

Assignment fails

to produce an

analysis of the

strengths and

weaknesses of the

current budgetary

of the current

budgetary process. This

analysis

recognises

changing

economic

environments,

weakness with

traditional

budgeting

processes and

proposals for changes.

Excellent clarity

of expression.

Consistent/

accurate use of

grammar and

spelling using an

academic writing

style.

Presentation

standard of the

assignment is excellent;

consistent with

academic

protocol.

Referencing

clear, relevant

and consistently

accurate using

the Harvard

system

current budgetary

process. This analysis

recognises some of

the issues around

the changing

economic

environments,

weakness with

traditional

budgeting

processes

Thoughts and ideas clearly

expressed.

Grammar and

spelling accurate

and fluent.

Presentation

overall of good

standard with few

errors in grammar

and syntax.

Referencing

relevant and mostly accurate

using the Harvard

system.

process. This

analysis recognises some of

the issues around

the changing

economic

environments,

weakness with

traditional

budgeting

processes.

Presentation has

limitations including some

errors in grammar

and syntax Minor

inconsistencies

and inaccuracies in

referencing using

the Harvard

system

process. This

analysis fails to recognise the main

issues around the

changing

economic

environments,

weakness with

traditional

budgeting

processes.

Meaning apparent

but language not always fluent,

grammar and

spelling is often

inaccurate.

Presentation is

poor in structure

and includes errors

in grammar and

syntax.

Referencing

present

having many inconsistencies

and inaccuracies

process. This

analysis fails to recognise the main

issues around the

changing

economic

environments,

weakness with

traditional

budgeting

processes. Purpose

and

meaning of assignment

unclear.

Language,

grammar

and spelling poor.

Structure and

presentation is not

of an acceptable

standard including

faulty grammar

and syntax.

Referencing mainly inaccurate

or absent

Investment

Appraisal

Technique

(15%)

Excellent Academic

Debates are

presented when

reviewing

necessary

challenges and

inherent

difficulties in

decision-making

process whilst

approving

Capital Expenditure

Proposals.

Harvard

Referencing

System followed

in a systematic

and accurate

manner

Sound Academic Debates are

presented when

reviewing

necessary

challenges and

inherent

difficulties in

decision-making

process whilst

approving Capital

Expenditure

Proposals. Errors in Harvard

Referencing, along

with minor flaws

grammar and

syntax observed.

Suitable

recommendations

post reviewing

each investment

Reasonably Good Academic Debates

are presented

when reviewing

necessary

challenging and

inherent

difficulties in

decision-making

of Capital

Expenditure

Proposals.

Limited Harvard Referencing &

recommendations

are placed post

reviewing each

investment

appraisal methods

to support long

term decision-

making.

The purpose of this task does not

meet acceptable

standards. Lack of

Academic debates

sighted. Limited

understanding

exhibited with

poor language

carrying confused

meaning and no

structure or pattern

followed when discussing the

relevant

investment

appraisal

techniques. Poor

Grammar and

syntax errors

observed

The information placed fails to

meet desired

expected standard.

Language,

structure and

presentation of

thoughts are not

fluent and is

unclear. Poor use

of grammar and

syntax

Suitable

recommendations on ideal

investment

appraisal

techniques, post

reviewing each

technique

considers merits

c ‘time value of

money concept’,

cash flows to

distinctly clarify positions on risks

versus rewards,

rate of return, to

be well supported

with empirical

evidence when

contemplating on

long term

decision-making.

appraisal methods

considering ‘time value of money

concept’ clarifies

positions on risks

versus rewards,

rate of return, is

well supported

with empirical

evidence to

support long term

decision-making.

Errors in Grammar

and syntax

Recommendations

are not in line with the academic

thinking to support

investment

appraisal

techniques for

supporting long

term decision-

making.

Introduction

Aldar Properties PJSC based in Abu Dhabi is one of the largest developers in the Middle East

and North Africa region, with over US$ 12 billion worth of assets. The Key objective in

establishing Al Dar company from its beginnings in 2005 through to today, is to enhance the

shape and real estate industry in Abu Dhabi by serving high quality and professionally

managed properties. Through strong partnership with Abu Dhabi Government who is a major

shareholder in Al Dar.

Aldar is a listed company and its shares are traded on the Abu Dhabi Securities Exchange.

Aldar Properties has a diversified and balanced property portfolio, diversified between

residential property, retail, commercial and hospitality.

Aldar is playing a leading role in the development and provision of world class retail - Yas

Mall, iconic entertainment venues such as the Yas Marina Circuit, and community amenities

across its entire portfolio.

The business is aligned with the Emirate’s “Vision 2030” strategy of economic

diversification and social infrastructure development. (Al Dar Property, 2019)

In 2013 Al Dar and Sorouh merged to form one of the biggest real estate development entity

in the UAE and middle east with total assets exceeding AED 41 billion. All Al Dar projects

and developments are mainly in Abu Dhabi. Currently Al Dar does not have a competitor in

Abu Dhabi.

Strategy Vision and Mission

Aldar's strategy has three principal pillars:

To maximise value of its recurring revenue assets through value accredited growth and

optimisation of the asset management portfolio.

Monetise the land bank through launching new developments and enhancing its existing three

destinations, Yas Island, Al Raha Beach and Shams Abu Dhabi.

Optimising its capital structure through a clear financial policy.

The focus of Aldar's development strategy will centre around its key locations such as Yas

Island and Saadiyat Island, which benefit from well-developed infrastructure already in place.

Al Dar Vision: Aldar is driven by a vision to be the most trusted and recognized real estate

lifestyle developer in Abu Dhabi and beyond.

Al Dar Mission: To maximise its stakeholder value by passionately creating and managing

quality living spaces. (Al Dar Property , 2018)

▪ PC 1.1: Evaluate the financial and operational performance of an organization

Economical Highlights for the year 2019

- Economic growth in the Gulf Cooperation Council (GCC) states significantly

weakened in 2019; overall real GDP growth is estimated to drop to 0.8% in 2019 from

2% in 2018 before gradually recovering in 2020-21. (The world Bank, 2019)

- As per Abu Dhabi Vision 2030, the government of Abu Dhabi is supporting the

investment and business growth in Abu Dhabi, by contributing to enhance business

environment through further legislative reform and by ensuring that all economic

policy is formulated with reference to rigorous data sources and statistical

information. Enhancing the economy and business climate will also help to integrate

Abu Dhabi further into the global economy by attracting foreign as well as local

investment, and by facilitating export of capital through targeted investments with

international partners. (Abu Dhabi Government, Nov 2008)

Economical Highlights for the year 2019 related to real estate business

- The UAE Economy grew 2.9% in 2019.

- Abu Dhabi property prices fell by 11 percent in 2019 as compared to 2018 while

rental rates dropped by 9.3 percent. (Arabian Business Magazine, 2020)

- Residential sales prices in Abu Dhabi fell on average by 7.5% in 2019. (Frank, 2020)

Al Dar Properties recognize revenues from the following the below major sources:

• Sale of properties

• Service charges from the tenants

• Hospitality and leisure

• Others (cooling, school fees “Aldar academies”) and management fees

Financial statements highlight

FY 2019

AED M (Al

Dar Property,

2019)

FY 2018

AED M (Al

Dar Property,

2019)

change

AED M

% change (vs.

FY 2018)

Revenue 7,148 6,286 +862 +14%

Gross profit 2,770 2,632 +138 +5%

Gross profit % 38.7% 41.9%

Net profit 1,925 1,854 +71 +4%

Total assets 41,266 38,543 +2,723 +7%

Total liabilities 16,315 14,308 +2,007 +14%

Equity 24,951 24,235 +716 +3%

Cash and cash

equivalent

5,686 5,014 +672 +13%

Overall analysis:

Even though Abu Dhabi property prices and rental prices fell during 2019, Aldar Properties,

reported 4% increase in 2019 net profit to AED 1.925 billion, driven by growth across both

its development and asset management businesses.

Below is a detailed analysis of Al Dar financial statements:

- Aldar revenues has increased by AED 862 million 14% as compared to prior year,

increase is related to the AED 284 increase in property management and AED 372 in

sales of property. (no significant increase in leasing and leisure, as compared to prior

year AED 59m).

- The decrease in real estate prices in 2019 as compared to 2018, has resulted in decrease

in the gross profit margin from 41.9% in 2018 to 38.7%.

- The increase in revenues countered with the decrease in margin have resulted in

increase in gross profit AED 138 million.

- Aldar reported AED 71 million 4% year on year increase in 2019 net profit to AED

1.925 billion as compared to AED 1.854 billion in 2018, driven by growth across both

its development and asset management businesses.

- The increase in total assets is mainly due to the increase in current assets, which was

noticed through the increase in:

1- Trade receivables by AED 1.2 billion, due to the increase in sales.

2- Land held for sale by AED 0.9 billion due to additional assets bough during the year.

3- Cash by AED 0.6 billion (see below explanation under cash)

- The increase in total liabilities is mainly due to increase in non-current liabilities due to

the increase in Non-convertible Sukuk by AED 1.8 billion to finance the operations of

the company and increase in trade and other payables by AED 0.6 billion due to the

increase in the cost of sales.

- The increase in equity reflects the net movement between the net profits and dividends

paid of AED 1.1 billion.

- The increase in cash was due to

1- Increase in cash from operating activities by AED 1.3 billion coming from adjusted

profit and net movement from working capital which indicate that the core business

of the company is generating cash along with efficiency of the company in dealing

with its working capital.

2- Increase in cash from investing activities by AED 0.5 billion. Cash flow from

investing activities reflect the movement of long-term assets, investments,

equipment, and finance income received. The net movement reflects the net effect

of the acquisition of assets (fixed assets and investment properties) and proceed

from sale of assets (fixed assets and investment properties). While the negative cash

out flow from investing activities might indicates that a company is investing in

assets to generate future revenues, and the positive cash inflow might indicate that

a company is selling part of its fixed assets and investment property, however in Al

Dar, the company positive cash positing in investing activities was mainly due to

finance income received which means that the company is financing its customers

and have along with that interest income from bank deposits.

3- Decrease in cash flow in financing by AED 0.9 billion. Cash flow from financing

activities shows the net results of bank borrowing, settlement of borrowings and

dividends paid to shareholders. The positive cash inflow from financing might

indicate that a company is borrowing to finance its operations while the negative

outflow might indicate that a company is settling its own debts. In case of Al Dar

the cash outflow was mainly coming from dividend paid to shareholders.

▪ PC 1.2: Critically review the influence of Accounting Standards and Accounting

Policies in a financial and (macro) economic environment.

Accounting Standards Definition: Accounting standard means a rule or guideline set up by

governing bodies, like FASB and IASB, for how financial activities are recorded and reported

to third parties. to keep accounting practices consistent and understandable across all

companies and industries. (Investopedia, 2020)

Accounting Policies Definition: are the internal policies set by the entity to process,

measure, recognize, record, and disclose a specific item or transaction in the financial

statements. These policies may be different from company to company, but all accounting

policies are required to conform to generally accepted accounting principles (GAAP) and/or

international financial reporting standards (IFRS). (WIKI accounting, 2019)

The flexibility in accounting policies gives the company’s management team several options

to choose specific accounting policies that are advantageous to the financial reporting of the

company as long as the company is transparent in regards to the accounting policies used

which should be clearly mentioned in the notes to the financial statements. Based on the

selected accounting policies, the user of the financial statements might notice whether the

management is aggressive in recognized and reporting profits or conservative to assess the

quality of earnings. Also, external auditors who are hired to review a company's financial

statements should review the company's policies to ensure they conform to a specific

standard such as IFRS, GAAP, or as regulated. (Investopedia, 2019)

These Accounting Standards and Policies have an impact both on a national economy and on

the economic and fiscal policy. With the implementation of accounting guidelines on a national

scale, countries are able to implement a common terminology in the economic world and

perform a precise, uniform, objective and correct calculation of data on the financial position

and results of business units.

The standardization of the accounting procedures helps businesses to record and monitor their

business activity and achieve comparability of accounting information between companies that

operate in the same industry. By applying the same accounting principles and methods,

businesses ensure homogeneous, reliable and accurate data and information about their assets,

liabilities, financial position, and overall activity. (Accounting Dictionay, 2020)

Accordingly, several countries are working together to come with one global accounting

standard by mainly combining the US GAAP with IFRS. Resulting in high quality,

comparability financial results and information. Many finance people believe that this is a

vital for growing global economy and make provide easy and direct data to make economic

decisions

Further, the change and combining the accounting standards will potentially affect

management, employee and executive compensation, investor relations and legal issues.

As per the article in Journal Accounting Research dated 28 March 2008, in regards to the

effect of applying IAS, it was noted that “The application of IAS reflects combined effects of

features of the financial reporting system, including standards, their interpretation,

enforcement, and litigation. Firms applying IAS generally evidence an improvement in

accounting quality between the pre‐ and postadoption periods. (LANG, 2008)

However, the author cannot be sure whether their findings are attributable to the change in

the financial reporting system rather than to changes in firms' incentives and the economic

environment. (LANG, 2008)

As an example of the significance of different accounting policies used in Al Dar to its

financial results, the Company’s investment property portfolio amounted AED 16.7 billion

(2018: AED 16.4 billion) is evaluated at fair value and that resulted in recording a net fair

value loss of AED 375 million (2018: AED 671 million) in the income statement and

decrease in total assets by the same value. While if the company decided to record those

investment at cost which is also acceptable accounting principle, those losses would not have

been directly recorded in the income statement at this point of time, but they will be recorded

upon the sale of those assets. When the company has its assets recorded at fair value, it would

give the reader of the financial statement a better view in regard to the accuracy of the

company position and limit the ability to manipulate the financial position. However

sometimes it is not easy to get the related data to support the valuation and in cases of un-

stabilized market, the result of the valuation would vary significantly and creating large

swings year to year.

▪ PC 1.3: Critically discuss financial accounting and management accounting

practices that highlight the use/ misuse of financial data.

Financial accounting is the collection of financial data to create the company’s current position

(balance sheet, income statement, equity and cash flow) prepared in accordance to specific

accounting principle (GAAP, IFRS or other) and as per a set of disclosed accounting policies to

show the company’s assets, liabilities, equity, profit, and cash position. The users for the

financial accounting are company’s shareholders, investors, bankers, customers, suppliers

etc.…

To provide an assurance on the financials, those financials are audited by independent auditor

who provide his opinion in regards to the financial statements being free of material

misstatement that might have an impact on the user of the financial statements either quarterly

or at year end (depending on the regulations and management requirements).

Managerial accounting goal is to provide useful operating information to managers. Managerial

reporting might be prepared on monthly basis and depends on management requirement the

management report is more of operational report for a purpose to think of ways to generate

more profits, and there is no standard covering the issuance of reports, accordingly, the report

will cover more detailed such as profit by project, or by key customers, ratio analysis, budget

and forecast vs actual.

Key difference Financial accounting Management accounting

Users Internal and external Internal

Business Looks at entire business Detailed and could covers

profit by project/customer

Reporting/timing Quarterly/yearly audited by

external independent auditor

Based on management

requirement and no third-

party review required

Standards Most follow a specific

accounting standard

No requirement to follow

standards

Time period Past Current and future

Financial statements might be manipulated to impact the decision of the users through one or

more tactics such as recording premature revenues, recording revenues that does not exist,

unrecording liabilities and expense, overstatement of assets or vice versa by reducing the

revenues, assets or increasing cost and liabilities.

As an example of the financial manipulation is the financial crisis in 2008, which was due to

financial manipulation and had an impact on the global economy and resulted in world-wide

crisis.

Audited financial statement does not necessary identify or detect fraud, as auditors perform

their audit based on evidence gathered, identifying and detecting fraud is the management

responsibility. Examples of the other financial manipulation are Enron, Worldcom, Tyco

International, Adelphia, Cendant, Freddie Mac, and AIG should remind investors of the

potential landmines that they may encounter. The known prevalence and magnitude of the

material issues associated with the compilation of corporate financial statements should

remind investors to use extreme caution in their use and interpretation. Audited financial

statements does not necessary identify or detect. (Investopedia, 2020)

▪ PC 1.4: Discuss how a plan and execution strategy can ensure competitive financial

management.

A key successful real estate strategy to get a competitive edge in the market: lowest costs,

knowledge of client and market, and differentiation.

For the largest extent of the firms in the real estate industry, human resources can become a

key determinant of competitive advantage, but only by complementing a more conventional

approach. Consequently, in order to develop and maintain on the long run a human resource

based competitive advantage the firms should make a shift in their strategic thinking, by

emphasizing on education and training of their employees. (Dobre, 2011)

The globalization of tourism has created a significant number of opportunities for real estate

developers.

Al Dar was able to achieve lowest cost strategy and increase margin through merging with

Sorouh Real Estate. Prior to 2013, Abu Dhabi had two large real estate development companies

in the market “Al Dar PSJC and Sorouh PSJC” both of them significantly owned by the

government of Abu Dhabi and were competing with each other. The merger has resulted in

significantly reducing the cost and eliminating the competition resulted in higher margins.

Al Dar knowledge of client and market and differentiation was translated through benefiting

from the government vision of transforming Abu Dhabi to global cultural, business and trade

hub and Al Dar was and still able to transform this vision to additional profits to its shareholder

as an example of such projects is Yas island including Yas Circuits, Ferarri world, and many

other projects. This partnership with Abu Dhabi Government gives Al Dar an edge at all the

real estate developers in Abu Dhabi.

Al Dar mainly operates and focus its business in Abu Dhabi and that also reflected in its

strategy, vision and mission as it clearly mention its focus in Abu Dhabi and currently it is a

very successful model as Abu Dhabi real estate is

In case the company decided to develop other areas such as in the Middle East, North Africa

Far East and/or east Europe, Through looking at Al Dar financial statement, the company has

sufficient equity and strong financial position, however the company needs to ensure proper

understanding of the related area lows and regulation and political environment to ensure

successful planning and execution

▪ PC 2.1: Critically analyze the relevance of Traditional Budgets versus “new age”

Alternative Budgeting Types and Techniques.

Budgeting definition: A budget is an estimation of revenues and expenses over a specified

future period of time and is usually compiled and re-evaluated on a periodic basis.

The purposes of budgeting and budget objective are for resource allocation, planning,

coordination, control and motivation. It is also an important tool for decision making,

monitoring business performance and forecasting income and expenditure. With proper

budgeting, limited resources are managed efficiently. (Investopedia, 2020)

Budget Types: There are several budget types and techniques, such as:

- Traditional Budget

- Activity Based Budget

- Value proposition budgeting

- Zero Based Budget

- Others (Imposed Budget, negotiated Budget and Participative Budget)

Traditional budgeting is a method of preparation of the budget in which last year’s budget is

taken as the base. Current year’s budget is prepared by making changes to previous year’s

budget by adjusting the numbers based on insight from management and might consider the

change in the inflation rate, consumer demand, market situation, etc. Past year’s revenues and

costs form an integral part of current year’s budget. Only those items in traditional budgets

need to be justified which are over and above the last year’s budget.

ADVANTAGES OF TRADITIONAL BUDGETING

Traditional budgeting method has various advantages as well as disadvantages.

ADVANTAGES

- The traditional budget is can be easily prepared and implemented, as minor changes

required as compared to prior year budget It is easy to prepare and implement. Thus,

saves manpower, time and efforts of managers.

- The employees are aware of the budget details; hence it is a carried forward.

Accordingly, everyone knows what needs to be done.

- Decentralization: Traditional budgeting helps in promoting decentralization in the

organization like in the case of banks.

- It supports the underperforming projects/cost center by consolidating them in one

budget with overperforming projects.

DISTADVANTAGES OF TRADTIONAL BUDGETING

- Fixed and rigid: it does not consider the new factors which might have an impact on

the budget, thus it is fixed and inflexible.

- Employees are not involved or participating much in the preparation of the budget as

it is mainly a carried forward budget with minor changes, accordingly, the employees

do get motivated and further they don’t feel that they own their budget, accordingly

they will also feel less motivated to achieve it.

- Unidentified errors and inflations: this budget are a carried forward from prior year/s

accordingly any unidentified error or inaccuracy will be also carried forward put

excessive reliance on past year budgets. This would lead to the preparation of

incorrect budgets of the organization, which can harm the growth of the company in

the long run. Further, Managers may deliberately increase their budgeting cost

without justifying such expense.

Because of such disadvantages, and the continuous developments in industries and

technology, most of the big companies moved towards alternative budget methods, different

approaches and different styles in preparing the budgets to improve efficiency, increase

profitability and controls such as:

Activity-based budgeting

Activity-based budgeting is a top-down budgeting approach that determines the amount of

inputs required to support the targets or outputs set by the company. Based on that the

company sets the targeted revenues/profit and then decided the sales/profit from each of its

current activity to reach to the proposed target.

Value proposition budgeting

In value proposition budgeting, the management would raise the questions of why do we

have budgeted for this amount and what is the value coming out of it along with a proper

justification for using such amount. The purpose in using such budget is to avoid unnecessary

expenditures and the amount included in the budget would add value to the company

Zero-based budgeting

As one of the most commonly used budgeting methods, zero-based budgeting starts with the

assumption that all department budgets are zero and must be rebuilt from scratch. Managers

must be able to justify every single expense. No expenditures are automatically “okayed”.

Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not

considered absolutely essential to the company’s successful (profitable) operation.

The zero-based approach is good to use when there is an urgent need for cost containment,

for example, in a situation where a company is going through a financial restructuring or a

major economic or market downturn that requires it to reduce the budget dramatically.

Imposed budgeting

Imposed budgeting is a top-down process where executives adhere to a goal that they set for

the company. Managers follow the goals and impose budget targets for activities and costs.

Negotiated budgeting

Negotiated budgeting is a combination of both top-down and bottom-up budgeting

methods. Executives may outline some of the targets they would like to hit, but at the same

time, there is shared responsibility for budget preparation between managers and employees.

Participative budgeting

Participative budgeting is a roll-up approach where employees work from the bottom up to

recommend targets to the executives. The executives may provide some input, but they more

or less take the recommendations as given by department managers and other employees

(within reason, of course).

(Types of Budgets, 2020)

▪ PC 2.2: Conceptualize the budgeting approaches required to link performance

management to improved operational planning and management strategies.

The budget is supposed to be the tool by which an organization transforms its strategy into

action. According to data cited by Kaplan and Norton, 60 percent of organisations do not link

strategy to their budgets. For budgeting to become the relevant process this gap needs to be

fixed.

For an entity to achieve its strategic objectives, a proper link should be there between its

objectives, strategy, resources and capabilities.

Jack Weich (New York: Harper Business, 2005) suggests that budgeting can be a productive

if organisations concentrate on two questions: “How can we beat last year’s performance?”

and “What is our competition doing, and how can we beat them?” (Yvanovich, 2017)

The answers to these key questions typically appear in a strategic or operational plan, against

which budgets can be set and monitored for effectiveness.

Performance management is all about managing the activities that generate results. Those

activities should directly support the organisation’s strategic objectives.

Therefore, a good plan acts as a road map, showing the organisation how it should move from

its current level of performance to the desired level of performance, based on the perceived

economic environment.

There is evidence to support the contention that organisations that focus on performance

management outperform those who don’t. In a survey of 437 publicly traded organisations,

those that had structured performance management systems (205) produced better results

than those who didn’t. Moreover, despite constrained budgetary environments, the CPM

software market still recorded a 16.4% growth increase in 2011. (Yvanovich, 2017)

Based on the current micro and macro-economic situation of having the Corona virus impacting

negatively on most of the industries including the real estate business, companies need to

manage their expenses in order to survive the current situation. Accordingly, in Al Dar Property

which is profit oriented company and relies on the sale of its unit whereby the cycle in real

estate industry takes almost three years in order to build and sell, accordingly, in prior years Al

Dar might have used the Activity Based Budget to put target at each cash generating unit (Real

estate, maintenance, Education) to ensure reaching to the maximum and best revenues result.

Currently, and depending on its future strategic objectives, Al Dar might to use for 2020

budgets and moving forward for the next three years the Value Proposition Budget as it would

assist in monitoring and minimizing its expenses and costs, proper cash management and

ensure the continuation of its operations for future developments.

▪ PC 2.3: Apply Smart Technologies in Budgeting, Forecasting and Management

Control Processes to investigate performance management issues.

Traditional budgeting and forecasting tools, such as spreadsheets, are still used by many

organizations. This leaves these businesses struggling to overcome outdated systems,

complex algorithms and productivity issues.

Availability of timely data is very essential for decision making, which would give the

decision maker a fast reaction for challenges and opportunities and that could be the

difference between a very successful company and bankrupt company. Accordingly, many

businesses have noticed the importance of technology and investing to adopting to the

changes. Technology has brought ways to apply superior strategic approaches to budgeting,

forecasting and the performance of the management on monthly basis. In general, at most of

the companies the compliance with the budget is one of the most followed KPI’s to ensure

management performance.

In 2014 Deloitte performed a survey in regards to performance management, the results

highlighted that many organisations still struggle to drive real value from their performance

management processes. Processes are unclear, lack ownership and more often they entirely

miss the point.

Addressing process and technology issues along with proper culture change will certainly

deliver incremental improvements in efficiency and effectiveness. (Deloitte, 2014)

Some of the advantages of adopting technology in budgeting and planning to improve and

monitor performance:

▪ Increased Accuracy and Productivity

Relying on data that is wrong costs businesses millions each year in poor decision making.

▪ Better Budgets and Forecasts

Having an outdated budget (and budgeting system) is a massive problem for the overall

financial health of a business.

Good financial forecasts can help organization project production and staffing, reduce

spending and plan for the future. They can also identify potential needs down the road and

help guide organizational strategy.

▪ More Collaboration

All the information can be easily accessed. This helps to broaden the number of key

stakeholders involved in the budgeting and forecasting process.

▪ Knowing Actuals and Cash Flow

Real-time cash flow is a vital piece of information to plan for short term and long-term

liquidity to meet the obligation as they fall due.

The reason for adopting technology is strengthening the ability of the organisation to plan and

execute, to anticipate and respond and to maximise value for the organisation.

As a conclusion: Appling Smart Technologies in Budgeting, Forecasting and Management

Control Processes is essential to evaluate management performance.

The smart technology will provide the tools for management to monitor and control budget and

expense which would reflect positively in the company and management performance. It would

provide a very clear understanding of the organization’s overall health is incredibly important

for strategic decision making. Taking control of budget is so crucial, and with a smart budget

approach, it’s easier now than ever before. As such any investment in technology programme

needs to be taken seriously. Management and leadership needs to develop a clear understanding

of the true extent to which performance is impacted by existing issues with the PBF process

and the potential improvements that investment in technology can drive as part of a broader

programme of change.

▪ PC 3.1: Apply Ratio Analysis to interpret the historic business performance of

your chosen organization

▪ PC 3.2: Critically discuss how forefront developments or disruptions in the

external operating environment have impacted the financial performance of your

chosen organization.

▪ PC 3.3: Evaluate future strategies for financial changes that will improve

organizational sustainability

For the purpose of the above question, we have decided to compare Al Dar to Emmar. Emmar

is considered the biggest real estate company in Dubai and also in the middle east. Below is

the summary of both companies’ financial results used for ratio calculation.

Al Dar (Al Dar Property, 2019)

Emmar (Emmar consolidated

FS 2019, 2020)

AED M AED M AED M AED M

2019 2018 2019 2018

Current Assets

20,294

16,833

37,229

37,299

Account receivables 6,211 5,070 25,924 21,439

Non-current assets 20,972 21,710 79,641 74,120

Total assets

41,266

38,543

116,870

111,419

Current liability

7,410

6,740

27,225

30,405

account payables 6,125 5,489 16,919 16,096

Non-current liability

8,905

7,568

26,196

24,225

Long term debts 8,035 6,675 23,101 20,909

Total liability

16,315

14,308

53,421

54,630

Capital 7,862 7,862 7,160 7,160

Others 17,089 16,373 56,289 49,629

Equity

24,951

24,235

63,449

56,789

Total liability and equity

41,266

38,543

116,870

111,419

Revenues

7,147

6,286

24,585

25,694

Cost of sales

(4,378)

(3,655)

(13,023)

(12,811)

GP

2,769

2,631

11,562

12,883

Others (844) (777) (3,353) (3,831)

Interest charges 349 309 1,162 1,057

Net profit

1,925

1,854

8,209

9,052

Liquidity Ratios

Liquidity ratio focuses on a company’s current assets and liabilities to assess if it can pay the

short-term debts. The three common liquidity ratios used are current ratio, quick ratio, and

net-working capital.

Al Dar Emmar Real Estate:

Average

Industry

Ratios* (Real

Estate:

average

industry

financial

ratios, 2020) AED M AED M AED M AED M

2019 2018 2019 2018 2019

Liquidity ratio

Current ratio

2.74

2.50

1.37

1.23 1.18

Quick ratio

1.61

1.50

0.98

0.98 0.92

Net working capital

12,884

10,093

10,004

6,894 Not available

*average real estate industry ratio for the listed companies in the US for the year 2019

Current ratio, quick ratio and net-working capital:

- Current ratio is the result of dividing current assets over current liabilities. And it

shows the ability of the company to pay its current liability “liability that are due

within a year” while quick ratio it is current assets minus inventory “most liquid

assets” divided by current liability and it measures that a company has instant liquid

assets to cover its current liabilities. In general, 1 is considered a very healthy quick

ratio.

- Net working capital: it is the difference between the company current assets and

current liabilities, and it measures liquidity, efficiency and short-term health.

Negative working capital and less than one current ratio might give an indication that the

company might not be growing or able to meet its current liability and, in some cases, going

bankrupt.

Evaluation and Interpretation of the ratio

In the case above Al Dar and Emmar Properties are showing improvement in the current ratio

as compared to prior year, moreover both companies show current ratio greater than 1 and

quick ratio of almost one in Emmar and exceeding 1.5 in Al Dar which indicate that both

companies are in good financial health and it is less likely, that they would fall into financial

difficulties within the next financial period.

By comparing both companies “Emmar and Al Dar” to the industry, Emmar is in line with

industry average for both current and quick ratio while, Al Dar current ratio is almost double

Emmar Properties’ and the average industry

The above is reflected in the net working capital for Al Dar which amounted AED 12.8

billion as compared to AED 10 billion in Emmar Properties which indicate that Al Dar has a

very strong financial position not only to pay its current short term debt as they fall due but

also to finance future needs.

Future Strategic Recommendation

It is recommended that Al Dar could utilize part of its working capital to finance its future

growth and investment which would result in lower financing costs and gave it better

compatibility position against its competitors in the market with a better margins and

profitability.

Profitability Ratios

These ratios analyze how the company uses its assets and how effectively it generates the

profit from the assets and equities. This also then gives the analyst information on the

effectiveness of the use of the company’s operations.

Al Dar Emmar Real Estate:

Average

Industry

Ratios (Real

Estate:

average

industry

financial

ratios, 2020) AED M AED M AED M AED M

2019 2018 2019 2018 2019

Profit ratio

GP Ratio 39% 42% 47% 50% 52%

Net profit ratio 27% 29% 33% 35% 18%

G&A and other

expenses to revenues 12% 13% 14% 15% 34%

Return on equity 8% 8% 13% 6% 2%

Gross profit ratio analysis: Gross profit ratio equal Gross profit/net sales *100 and it shows

the amount of profit gained before operating and other expenses.

Evaluation and Interpretation of the ratio

The decrease year to year in both companies GP margin might be related to the drop in both

property prices and rental prices as mentioned in question 1, also it might be due to the

increase in available units, however both companies’ margins seem stable and considered

high which indicate a strong management and also it reflects the strong financial position for

both companies. But both of them are still below the average industry ratio. Moreover, Al

Dar margin is lower than Emmar,

Future Strategic Recommendation

- Both companies need to work better to enhance the cost management.

- Looking at the industry ratios It is recommended for both companies to improve the

control over their operating costs to enhance their gross margin. Based on

understanding the industry, the key costs are mainly contractors cost, accordingly,

better controls on quotations, proposals and drafting scope of work along with strong

negotiations techniques with the contractors would save significant amount of money.

Net profit ratio: it equals net profit / net sales*100

The net profit margin is intended to be a measure of the overall success of a business. A high

net profit margin indicates that a business is pricing its products correctly and is exercising

good cost control

Evaluation and Interpretation of the ratio

Real Estate Businesses

Businesses related to real estate have good profit margins. Lessors of real estate earn a

margin of 17.4%. These include rentals for apartments, houses, self-storage facilities and

mini-warehouses. Real estate agents and brokers also do very well, with profit margins

averaging 14.8 percent (Woodruff, 2019)

As shown above, both companies are significantly performing higher than the industry

average, while Emmar is still doing better as compared to Al Dar, this is mainly due to the

difference coming from GP margin, as Al Dar is doing better in controlling its admin cost.

looking at the real estate average in the US which has significantly higher G&A expenses

resulting in lower net margin it might be due to using different accounting standards which

might have in impact on revenue recognitions and/or recording expenditures.

Future Strategic Recommendation

In order to increase profitability, both companies need to enhance their controls on their

expenses and reduce the administrative and other expenses As per Mckinsey study the best

practice range of the G&A expenses is between 8%-10%. (Mckinsey, 2016)

Return on equity: it equals net profit after interest and taxes/equity and it shows the benefit

gained from an investment and the efficiency of the company using its capital to generate

profit to compensate the shareholders of their investment.

Evaluation and Interpretation of the ratio

According to S&P 500 index, the average return on investment in the US real estate market is

8.6%. It differs based on property investment strategies. Residential real estate has an average

ROI of 10.6%, commercial real estate has an average of 9.5%.

Future Strategic Recommendation

As mentioned above to enhance the ROE, Al Dar needs to further control both its cost and

G&A ratios

Working capital “Activity” ratio

Activity ratios measures the efficiency of a company using its resources through trend

analysis. It would also compare the efficiency of different entities by comparing them to each

other.

Al Dar Emmar Real Estate:

Average

Industry

Ratios (Real

Estate:

average

industry

financial

ratios, 2020) AED M AED M AED M AED M

2019 2018 2019 2018 2019

Working capital ratio

debt turnover ratio 111% 115% 95% 120% 55%

debt days 329 318 385 305 664

credit turnover ratio 71% 67% 77% 80% Not available

Creditors days 511 548 474 459 Not available

Accounts Receivable Turnover: it is calculated by dividing revenues over trade receivables

and it determines the entity's ability to collect money from its customers. High ratio shows

how quickly the credit sales are converted into the cash while a low ratio suggests a

deficiency in the collection process.

Accounts Payable Turnover: it is calculated by dividing cost over accounts payable and it

determines the entity’s ability to pay its creditors. High ratio shows how quickly the company

is paying while low ratio might suggest delays in payment process.

Evaluation and Interpretation of the ratio

As compared to Emmar properties, Al Dar has slightly higher ratio and lower debts days

which indicate that it is more efficient in collecting its receivables, while as compared to

industry, Al Dar and Emmar are collecting their receivables faster than the industry.

On comparing Al Dar year on year, the number of debt days is consistent with a slight

increase which might be linked to higher competition in the market and the slight drop in

economy which might result in flexibility to the credit terms given to customers.

On the other hand, Al Dar shows more creditors days and both companies show more creditor

days than debtors days which means that they are keeping the cash in their hands for the

longest period possible this also is reflected in the liquidity and current ratios analysis.

Future Strategic Recommendation

In order to determine the efficiency in collecting receivables and paying payables both

companies needs to compare the debt days to their credit terms and credit days to the

agreement with the suppliers as delays in paying to suppliers might impact reputation and/or

delays in delivery.

Capital Structure Ratios

A company’s capital structure points out how its assets are financed. The company’s assets

could be either financed via debts or equity depending on the company’s strategy.

The purpose of capital structure is to provide an overview of the level of the company’s risk.

Al Dar Emmar Real Estate:

Average

Industry

Ratios (Real

Estate:

average

industry

financial

ratios, 2020) AED M AED M AED M AED M

2019 2018 2019 2018 2019

Capital structure

ratio

Debt to equity 65% 59% 84% 96% 69%

Interest coverage ratio 6.5 7.0 8.1 9.6 1.2

Debt to equity ratio: it equal total debts / total equity and it actually measures the relationship

between the external (debts/equity/outsiders fund) and Internal (equities/shareholders fund).

Assets are acquired by the utilization of both outsiders’ fund and shareholders’ fund.

Accordingly, the ratio would tell the reader how the assets/projects were financed.

- The shareholders desire to utilize more funds taken from the investors so that they

will share lesser risk and at the same time to increase the rate of dividend after paying

a smaller fixed rate of interest to outsiders. Similarly, outsiders desire that

shareholders should take the greater risk.

In short, the higher the ratio, the greater will be the risk to the creditors, and this indicates too

much dependence on long-term debts. On the contrary, a lower ratio reveals a high margin of

safety to the creditors.

Various all-Indian Financial Institutions suggested that the normal Debt-Equity ratio is 2: 1

Evaluation and Interpretation of the ratio

The debt to equity ratio is lower than two in both companies which indicate that both

companies relies on financing themselves through the shareholders contribution rather than

from outside debtors and that indicate a lower risk to the debtors.

Interest coverage ratio: it equal EBIT/interest expense. The interest coverage ratio measures

how many times a company can cover its current interest payment with its available earnings

it measures the margin of safety a company has for paying interest on its debt during a given

period. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet

interest expenses may be questionable.

Evaluation and Interpretation of the ratio

Both companies have a very high interest coverage ratio which is a reflection of the low debt

to equity ratio.

stability in interest coverage ratios is one of the most important things to look for when

analyzing the interest coverage ratio in this way. A declining interest coverage ratio is often

something for investors to be wary of.

Future Strategic Recommendation (for both ratios above)

Since the rate of return is higher than the rate of interest that would result in lower dividends

for the investors, but it is less risky for both the shareholders and debtors. Both companies

might need to consider to either drop their capital and utilize the debts more or invest more in

international markets.

Learning Outcome 4: Evaluate investment appraisal techniques to support decision-

making.

▪ PC 4.1: Critically discuss the importance of investment appraisal techniques when

approving capital expenditure investment proposals.

▪ PC 4.2: Conduct discounted and non – discounted flow analysis.

▪ PC 4.3: Evaluate at least two investment appraisal techniques and apply them to

your chosen organization.

Investment appraisal techniques are primarily meant to appraise the performance of a new

project. The first question that comes to the mind of the decision maker before beginning or

approving to invest any new project is “Whether it is viable or profitable. Proper evaluation

of a capital expenditure is essential for taking a decision, using a specific technique might

result in different result in using other technique. Accordingly, a decision maker should be

aware of the types of techniques and the advantages and disadvantages of each type. Each

technique evaluates the project from a different angle and provides a different insight. There

are two types of criteria in evaluating the techniques which are non-discounted cash flow

criteria and discounted cash flow

Investment appraisal techniques can be divided into two catogeries

- Traditional (non discounting) such as payback period and accounting rate of return

- Non tradional (discounting) such as Net present value, Internal rate of return,

discounted payback period and profitability index method.

Below is the details for each method and its impact on the decision maker:

Following are the techniques used for traditional non-discounted cash flow criteria in

evaluation a project:

1- Payback period: One of the simplest investment appraisal techniques is the payback

period. It would tell the investor how long it would take to get his capital investment

back. The advantage of payback, it is very easy to calculate and understand. But the

disadvantage is that it ignores the time value of money and anything that happens after a

payback point. (efinance, 2019)

It is recommended to use the payback period for projects with expected low risks and

also in case of small and short-term investments which require a little input.

For Example, “this example is applicable to all stages of the question” and it shows

different results/decision made based on the investment appraisal technique used.

Al Dar is planning to invest AED 100,000. It has two options, projects A and project B.

Project A will generate revenue/cash of AED 60,000, AED 40,000 & AED 10,000 in year 1,

year 2 & year 3 respectively. Project B will generate revenue/cash of AED 30,000, AED

40,000 & AED 60,000 in year 1, year 2 & year 3 respectively.

Payback period for project A and Project B is 2 years & 2.5 years respectively. Based on this

result and the payback period method, Project A will be given preference. However, while

looking at the future the curve for project B revenues is increasing while the curve for project

A is dropping down, but this fact is ignored while using the payback period technique.

2- Accounting rate of return: it measures profit expected from an investment as a

percentage by dividing the average net profit over the investment/capital. Same as the

payback period, the advantage of the ARR is it is easily calculated and understood, but

the disadvantage it ignores the time value of money. (efinance, 2019)

It is recommended to use the rate of return on a simple projects and/or small investments, as

compared to the payback period method, it has the advantage of accounting for the future

profits

As per the above example the ARR for project A and Project B is 3.67% and 4.3%

respectively. Accordingly, project B will be a better investment based on ARR.

Accordingly, in order to evaluate the above two techniques and as a recommendation for

decision maker,

- in case the decision maker is looking for short term and to get back his

capital/investment at the earliest possible, Investment A will be a better option.

- while in case the decision maker is looking for long term and to generate better and

more revenues, Investment B will be a better option.

The techniques using the non-traditional / discounted cash flow criteria in evaluation a

project:

1- Net Present Values: It is the most common method of investment appraisal. Net present

value is calculated by discounting the free cash flow related to the project using the rate

of the weighted average of cost of capital “WACC”.

The project is considered profitable if the results were positive and loss making if the

results were negative. The advantage of NPV method that it takes into account the future

value of money “i.e. one Dh today equal less next year” and it takes into consideration the

cost of capital “WACC” however the key disadvantages of NPV that there are assumption

built in calculating the cost of capital accordingly, if the cost of capital was not calculated

accurately, it might result in approving a loss making investment or rejecting a profit

making investment. (efinance, 2019)

It is considered the best procedures when looking at long term investment, it helps in

analyzing the cost and benefits of long-term plan. The rationale behind the NPV method is

its focus on the maximization of wealth for business owners or shareholders. It gives a

straightforward criterion for the decision maker. Also, it would show the cash in and out

during a period which would also help in preparing the budget. Currently it is one of the

most used techniques for long term investments

As per the above example and considering the WACC is 10% for the company, project A will

generate cash-flow of AED 60,000, AED 40,000 & AED 10,000 in year 1, year 2 & year 3

respectively. The NPV = [AED 60,000/(1+0.1)1] + [ AED 40,000 / (1+0.1)2 ] +[ AED

10,000/ (1+0.1)3 ] – 100,000

Net present value = AED 95,116 – AED 100,000. The net present value of the project is

AED (4,884) loss.

For Project A the result of the NPV is negative accordingly, it would be recommended to

reject the project.

Looking at the same for project B, project B will generate cash-flow of AED 30,000, AED

40,000 & AED 60,000 in year 1, year 2 & year 3 respectively. The NPV = [AED

30,000/(1+0.1)1] + [ AED 40,000 / (1+0.1)2 ] +[ AED 60,000/ (1+0.1)3 ] – 100,000

Net present value = AED 105,410 – AED 100,000. The net present value of the project is

AED 5,410 gain.

For Project B the result of the NPV is positive accordingly, it would be recommended to

proceed with the project.

2- Internal Rate of Return: is a discounted cash flow technique which gives a rate of return

earned by project. In other words, it is the discounting rate at which the company will

neither make loss nor make a profit. (efinance, 2019)

3- Profitability index: It defines how much you will earn per dollar of investment.

Proceeding with the project would be recommended If the Profitability index greater

than 1 and in case the result was less than 1 it would be recommended to reject the

project. (efinance, 2019)

4- Discounted payback period: From its name, it is the discounting the payback period by

discounting the future cash flow.

While looking at Al Dar properties financial statements, Al Dar has a strong current position,

high liquidity and high liquid current assets as compared to current liabilities (as discussed

and shown in the ratio analysis) accordingly based on the above

Using the non-discounted two techniques it would be better for Al Dar to look for long term

investment and go with option B.

while in using the discounted techniques the results for project B shows AED 5.4k gain

approx. 1.7% per year which would be considered a low return considering other options

such as bank deposit and the other risks associated with any investment such as market

stability, geopolitical factors, accuracy of the assumptions used and other qualitative factors

such as if the project might drive culture change which the company might face resistance

from the employees and it might impact employees morale and productivity in regards to this

project and other existing projects.

Summary: management strategy is a key factor in evaluating an investment, the decision

maker needs to understand the different types of techniques and their advantages and

disadvantages before taking a decision. The amount of profit is not always driving the

decision. It is recommended for decision maker to always look at other quantitative matters

and risk associated. Management might also accept a loss-making project that is benefiting

the society as part of marketing strategy and pay back to the community.

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