ACCT11081 INTRODUCTORY FINANCIAL ACCOUNTING

ASSIGNMENT STAGE 1Danielle Bradley

CQUniversityPersonal Moodle Profile: Danielle BradleyPersonal Blog Link: Be Audit You Can Be

STEP 3: MY FIRM – BREEDON GROUP PLC

I present to you the dynamo of the UK construction industry, the LARGEST independent construction materials provider:

BREEDON GROUP PLChttps://www.breedongroup.com/

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INITIAL IMPRESSIONS

As illustrated on my blog post: Breedon Group…Breedon Who???“With fingers crossed and an internal chant of ‘please be Australian, please be Australian’ I took the plunge and opened the ‘Find your company’ link on Moodle. Once my eyes roamed over my name and that of my assigned firm I was disenchanted by the fact I had not only received a firm in a foreign industry, but alas the country was foreign also. While many may find my reaction unnecessary for it is just an assignment, I was eager to create a connection with my allocated firm through an understanding of where they are based. And if I’m truly being honest I felt as though an Australian firm would be less difficult to navigate and understand. Nonetheless, after a moment I felt myself being transported back to ACCT11059 and reminiscing over my feelings regarding the firm I was allocated in said unit. I recall the disheartening emotion I felt for receiving a NZ firm in an industry I had no prior experience with but throughout the course of the unit my thoughts shifted dramatically and I greatly enjoyed the task. I enjoyed making new discoveries and opening my eyes to a whole new world. It wasn’t so much that I found myself delighted in what they did or learning more about their locale, what I loved was uncovering the secrets of how outside influences could cause such a large impact on a firm, I loved determining the constraints they faced and what mechanisms they were putting in place to overcome such constraints. But most of all I LOVED physically witnessing the firm’s financial statements reflect the relationship between the firm and the outside world. Thus I realised that it doesn’t truly matter where my firm is located or what they do, the excitement I seek is from gaining an understanding of the interconnected relationship between the financial accounts of a firm and their business realities. As I pushed the unwelcome emotions aside, I became excited by all the possibilities this new firm may provide.”

MY FIRM

Breedon Group PLC, previously Breedon Aggregates, is a United Kingdom based firm engaged in the business of quarrying of aggregates and the production of value added products. Breedon itself is a relatively young firm which only dates back to 2010, whereby Breedon took ownership of an existing aggregate and quarrying organisation by the name of Ennstone. Moreover, Breedon is a public listed company on the Alternative Investment

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Market (AIM) of the London Stock Exchange with an end of financial year date of December 31.

Breedon Group PLC Overview

Breedon operate in the construction industry as the UK’s largest independent supplier of construction materials which include, but not limited to, cement, asphalt, ready-mixed concrete & mortar and concrete blocks. For more information on the construction sector in the UK and Breedon’s role within the industry view my blog post: Construction WHAT???. Breedon itself is comprised of three autonomous divisions: Breedon Southern, Breedon Northern & Hope Cement, with Hope Cement being a new addition as of August 2016. Breedon Southern and Breedon Northern both operate as fully-integrated aggregates businesses which comprise of an extensive network of quarries, ready mixed concrete and asphalt plants, as well as surfacing and contracting operations. Essentially these two divisions mine aggregates, which is a type of course material used in construction (think gravel, crushed stone, sand, etc), create concrete and asphalt, deliver the materials, and also provide surfacing and contracting operations which include minor road resurfacing and major infrastructure contracts. On the other hand, much like the name suggests, Hope Cement is a producer and importer of cement and cementitious products (such as glue that holds concrete together and other products derived from cement) with vast rail network and depots.

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Based on the above information, it is evident that Breedon is a powerhouse in the construction industry with an immense range of products and services, with their most CRUCIAL area of business being the production and supply of high quality construction materials. Their reach is also widespread with the three division head offices located throughout the UK from Dundee, Scotland (Breedon Northern) right though to Breedon on the hill, England (Breedon Southern). For those that are illiterate regarding geography, much like myself, that’s a span of approximately 600 kilometres and crosses right down the middle of the UK, thus allowing Breedon to maximise their total service area. On top of this large area of service, Breedon additionally have the extensive rail networks that acquiring Hope Cement has provided.

Breedon Group PLC Scope of Reach

BREEDON IN THE MEDIA

Before immersing myself in the annual reports of a firm I first like to conduct some background research, gain a stronger understanding of what the media and broader community express regarding the firm. This I feel is imperative 4 | P a g e

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to obtaining a more accurate representation of a firm considering annual reports are quite often a marketing tool, and like any promotional material they are full of propaganda to draw in current and prospective investors, customers and the wider community. Based on my preliminary research I was surprised to find only articles relating to Breedon’s acquisition of other firms operating in the construction materials industry and further information relating to their continual growth. That isn’t to say however that Breedon doesn’t have a relatively strong social media presence, as they are active on numerous social media platforms which they utilise to highlight their involvement with the community.According to the various media outlets and articles, it appears that in Breedon’s short lifespan their organisation has grown immensely through its strategy of procuring smaller operations within the same industry in a bid to reduce competition, expand their geographic footprint, and maintain the largest market share for construction materials (Breedon Acquisition Media Article). Although not the most recent, the most noteworthy acquisition to date is that of Hope Construction Materials in August 2016. This moved Breedon from being the ‘leading supplier’ of construction materials to the ‘LARGEST supplier’ in the UK. Consequently Breedon’s operation expanded from only dealing with aggregates to include cement and cementitious products. Much of this publicised information highlights the value Hope will bring to Breedon but what I found not so widely published was the inquest into the acquisition from the Competition and Markets Authority (CMA) (Inquest into Breedon Media Article). The CMA is a non-ministerial government department that is designed to ensure the well-being of markets for businesses, consumers and the economy. Breedon purchasing Hope Construction Materials signified possible competition issues within the building industry and consequently Breedon decided to divest 14 of their ready-mixed concrete sites in order to subdue the competition issues. My peer Billy Van Moolenbroek also raised an important issue in relation to this: “You mentioned Breedon is trying to monopolise the market by reducing competition, when reading this I thought they would take advantage and raise their prices due to them being the main player on the field. Reading on, I see the issue was rectified by the CMA.” Although the CMA did intervene in this instance, I’m left pondering how much further Breedon is able to grow and whether the current economic conditions can facilitate such growth and maintain their large operation. Subsequently, I decided to investigate the economic climate of the construction industry and it became apparent that within the last few years there has been continual growth both in private and commercial construction, even when considering the significant event of BREXIT. (Construction Industry Media Article). As such I am excited to see

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what Breedon’s annual reports and financial statements disclose, the impact from their numerous acquisitions and whether they themselves identify any challenges in the future markets.

BREEDON’S ANNUAL REPORT

https://www.breedongroup.com/investors/annual-interim-reports/archiveThe first noteworthy point regarding Breedon’s 2016 Annual Report is that it is very much fashioned as a marketing instrument in order to draw in investors, consumers, and the like. And I must admit, I myself was enraptured by the design, content and graphics displayed. There was a significant contrast between Breedon’s Annual Report and that of Lyttelton Port of Christchurch (LPC), which I reviewed last term in ACCT11059. LPC’s Annual Report was much more concise with a focus on conveying the financial information required of them as set out by the NZ Generally Accepted Accounting Principles and the NZ International Financial Reporting Standards (http://www.lpc.co.nz/about-us/publications/). I presume this difference can be attributed to LPC being a privately-owned firm and thus they did not need to promote themselves to current or potential future investors, whereas Breedon is a public firm, listed on their regions stock exchange and consequently utilises their annual report as an advertising aid. As such, I was not all that surprised to find the first page, even prior to the report’s table of contents, outline Breedon’s financial and operational highlights for the year. The operational highlights delineated the recent acquisitions from 2016, the decrease in work related injuries and their positive forecast for 2017. However it was the financial highlights that stole the show. Breedon are performing exceptionally well in 2016 with an increase of 42.8% in Revenue, an increase of 49.5% in Profit Before Taxation and an increase of 57.8% in Underlying EBIT. Now I recall EBIT to be Earnings Before Interest & Tax, but I was confused as to what the term ‘Underlying’ meant. After some detective work I comprehended that ’Underlying’ is a term used when measuring the normal accounting cycle of a firm whilst excluding one off or unusual events, thus meaning that random occurrences that the firm would not usually engage in, such as acquiring a large asset, would not be displayed when the term ‘Underlying’ is applied. As such this is seen as a more accurate representation of the profit of a firm. Underlying is contrasted to statutory or non-underlying profit which needs to encompass all the financial activities to abide by the rules and regulations of financial reporting. I’m left questioning whether displaying profit in such a way is a

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method of manipulating the data? Because Breedon are performing so well, and flaunting it, I feel I need to be more critical when reviewing their report. Am I being paranoid, or are Breedon hiding something??? Nonetheless, I am curious to view what the financial statements reveal regarding their standard EBIT. As I began my decent into the body of the text supplied, I found myself overwhelmed by all the information that was displayed. However it became increasingly obvious that such a document was focused at shareholders and future investors with the report also including a large section dedicated to: ”Benefiting our Shareholders”. Due to my previous firm, LPC, being privately owned I was curious to determine whether this is a common occurrence in publicly listed organisations. As such I decided to view the annual reports of some of my peers. As to be expected, many of my peer’s annual reports are quite illustrative and contain various forms of propaganda, nonetheless from the one’s I viewed thus far, they don’t outline their benefits or reasons why to invest in them as bluntly as Breedon does. This comparison is evident when comparing with Billy Van Moolenbroek’s firm AVJennings, which also operates in a facet of the construction industry, although Australian in origin as compared to Breedon in the UK. (AVJennings Annual Report). Thus are Breedon focusing their sights on obtaining additional funds from financial investors as a mechanism to reduce their liabilities from their various aquistions, or to increase their ability to procure more businesses within the construction materials industry? After quickly skimming through to Breedon’s 2015/2016 Statement of Changes in Equity, my hypothesis was somewhat confirmed with Breedon’s Shares Issued rising from approximately 41,000 in 2015 to nearly 200,000 in 2016. I’m interested to understand why Breedon are releasing further shares and how exactly a firm determines how many shares it has available to offer? I must admit, the information I’m uncovering has left me quite captivated!Moving forward, as made evident from the news articles previously listed, Breedon’s current strategy is one of continual growth through acquisitions of other firms operating within the same industry. What the annual report did indicate however is that this is not their sole strategy. Breedon also have a focus on efficiency, more earning-enhancing tactics and further organic growth. I was left to consider what exactly organic growth is and how does these strategies intertwine with what I currently understand of the firm? After consulting trusty google, it turns out that ‘organic growth’ is the process of expanding via increasing output and sales. This is contrasted to inorganic growth which relates to increasing profit through mergers and acquisitions, and according to www.investopedia.com organic growth is a

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more stable method and signifies less risk to potential investors. This I found very fascinating considering Breedon have continually looked to procure other firms within the industry in a bid to grow their organisation and monopolise the industry. So it would seem that Breedon are now attempting to balance their inorganic growth with a larger focus on increasing their sales and output by utilising their assets and resources more efficiently moving forward. Obviously the goal for many firms is to ensure they are using their resources effectively and are able to generate increasing income from their products/services but I do wonder whether Breedon are highlighting their intent for organic growth in order to ensure shareholders and potential investors that they are a reduced risk firm to invest in?Overall while the information and illustrations within Breedon’s annual reports were informative, at times I felt overwhelmed by how much was included. Reflecting on my firm from last term, LPC, I recall feeling resentful of my peers that had annual reports filled with fancy tables and well worded documents showcasing their firm’s direction, risks and strategies, as I was left to make assumptions based mainly on LPC’s financial statements. But now I appreciate how difficult it actually is to wade through such a vast document and try to comprehend all the information displayed. So as I trudged through the seemingly endless pages and propaganda I was more than elated to see Breedon’s financial statements. For financial statements can’t lie, or can they???

FINANCIAL STATEMENTS

The first financial statement to be displayed was Breedon’s Consolidated Income Statement. I was pleased to recognise the income statement as illustrating Breedon’s financial performance for the period, however, while it looked similar to other consolidated income statements I have viewed there were also a few differences. Firstly, the term ‘Underlying’ was back and incorporated into the Consolidated Income Statement. From my newfound understanding, Breedon was illustrating the revenue and expenses of the firm from their normal activities without the impact of extenuating circumstances such as acquisition related expenses, redundancy costs associated with re-organisation and so forth. They also had a column for ‘non-underlying’ which included the revenue/expenses associated with the extenuating circumstances previously listed. What I found interesting from going back to review earlier Annual Reports from Breedon is that they always include both ‘underlying’ and ‘non-underlying’ columns due to the aforementioned transactions. So wouldn’t that mean that such revenue

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and/or expenses are a common occurrence for the firm and technically Breedon do not need to distinguish between the two? Or is there something I am not quite grasping here? After lengthy discussions with a few of my peers, there was no discernible consensus on whether Breedon should incorporate both underlying and non-underlying revenue/expenses. Some viewed the inclusion of both as a good mechanism to highlight the various costs of acquisitions and reorganisation over the years, whereas others agreed with my train of thought that due to acquisitions being a ‘normal’ occurrence for Breedon that it may not be as necessary. Either way it has definitely been a learning curve and an item I haven’t yet discovered in the annual reports of my peers. The second item of difference for Breedon’s Consolidated Income Statement is that it lacks the ‘Other Comprehensive Income’ (OCI) portion. This item I remembered due to the process of restating LPC’s financial statements last term as I had an issue where tax was excluded for OCI in the Income Statement but included in OCI in their Equity Statement. Nonetheless, I was curious to discern why Breedon did not have an OCI which generally includes items such as changes in Cash Flow Hedges. I decided to take a peek at the Notes to Financial Statements but stopped on the following page where OCI essentially had its own report, Consolidated Statement of Comprehensive Income. Hence I’m left to question why Breedon would separate the two reports? I’m sure there is a logical explanation but in my novice opinion I feel this is just creating further work for the sake of it. After Conversing with a fellow peer, Kelly Tranberg, I discovered that other UK based firms also incorporate a ‘Consolidated Statement of Comprehensive income’ which specifies their OCI (Kelly’s firm: TheAA). I wonder if this is a standard practice in the UK or do many firms from various global locations also set out their statements as such?Nonetheless, both of the abovementioned reports indicate Breedon is in-fact performing exceptionally well, and their flamboyant display at the commencement of the 2016 Annual Report is confirmed with a significant increase in profit between 2015 – 2016, albeit by a smaller number (47% compared to the illustrated 49.5%) when taking into consideration non-underlying revenue/expenses. Continuing on, the next financial statement was the Consolidated Statement of Financial Position, the Balance Sheet. This is by far my favourite of the financial reports. I’m not entirely sure why but I believe it may be due to the simplified layout and how the fundamental accounting equation is so easily displayed (assets = liabilities + equity). Breedon’s Consolidated Statement of Financial Performance was straight forward and I enjoyed its design which

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displayed Net Assets = Equity (Net Assets obviously being Assets – Liabilities). This was less complicated than LPC’s balance sheet whereby I had to manually calculate Liabilities + Equity. Overall this financial statement once again highlighted Breedon’s great financial standing as at 31 December due to the value of the new acquisitions from the financial period, especially that of Hope Cement. For instance, Breedon’s Net Assets has increased by £234.302 million from 2015 to 2016. That is a massive 100% increase. On the contrary however, Breedon’s non-current liabilities have increased exponentially (up approximately£150 million). And as we know, having assets such as building, plant and equipment does not always equate to success as CASH is IMPERATIVE. Hence, it is all well and good to have a huge asset backing but if something unforeseeable was to occur, Breedon would need to ensure they had enough of the asset cash to pay their enormous financial obligations. As expected, due to Breedon’s large acquisition total from 2016, their available cash and cash equivalents has significantly diminished. So I was intrigued to see exactly what changes had occurred when viewing their Consolidated Statement of Cash Flows.Breedon’s Consolidated Statement of Cash Flows was again easy to follow and while I did not have previous experience with this statement as it was not required to be restated for ACCT11059, I enjoyed how they had separated their operating activities from that of their financial activities. Breedon additionally had a separate section relating to investment activities which I found interesting considering last term we only focused on the operating and financial activities of a firm. As such I went back to consult LPC’s 2016 Annual Report and was surprised to see the three types of activities separately listed. On the whole, Breedon did see an increase in cash generated from operating activities of approximately £20million from 2015 to 2016. I was pleased to see this as it is indicative of Breedon performing well without the huge impact of its increase in assets, therefore highlighting that their operating activities are relatively profitable. I believe this also emphasises the trust Breedon have gained from their interactions with the wider community considering even with recent economic events such as BREXIT, Breedon have continued to grow. What wasn’t as pleasing was their overall cash available once the expenses from operating, financing and investing were removed. Nevertheless, even though their cash and cash equivalents has reduced significantly, there still seems to be a substantial amount currently available (£4.628m).The final statement to review was the Consolidated Statement of Changes in Equity. While Breedon’s statement was fashioned similar to ones I have seen, I personally find the layout of the Changes in Equity Statements more

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complicated to read. However, after having a more in-depth understanding of said statement this term I enjoyed being able to physically view the Equity Statement combining both the Balance Sheet and the Income Statement, whereby the Equity from the Balance Sheet ending 2015 + Profit from the Income Statement – Drawings = Equity from the 2016 Balance Sheet. Having the ability to put into practice concepts learnt within the course is a great way to gain a truer appreciation of the information. Breedon’s Equity Statement did not provide any revelations in relation to its inclusions or the fact that Equity has greatly increased based on the information supplied throughout the Annual Report. The only item I found of great interest was the number of shares issued which I stated previously.

CHALLENGES & OPPORTUNITIES

After significant review of Breedon and their current Annual Report, I believe the firm face two critical challenges moving forward. The first and foremost being whether Breedon will continue to have sufficient financial resources to meet their obligations. As highlighted previously, Breedon’s cash and cash equivalents has significantly reduced in 2016 as a consequence of their more recent acquisitions. To add to this, their non-current liability of interest bearing loans has increased by a staggering £150 million. Thus it is imperative for Breedon to overcome this financial deficit by ensuring it has the means to continue to make repayments.The second critical challenge Breedon face is that of the market conditions. Breedon themselves are at mercy of government regulations and economic fluctuations that can arise within the construction industry, which can consequently trigger a significant impact on their cash flow and ability to cover their financial obligations. Market conditions also relate to the issue I identified on my blog post regarding the construction industry in general. On the post, Construction WHAT???, I discovered that a key problem the industry face is that of sustainability within the market: “The challenge here is for firms within the construction industry to source an increasing number of materials in a more environmentally friendly manner, but also construct more efficient and resilient structures…To contribute to this, the government is not permitting further mines or quarrying locations to be available in the foreseeable future”. Such sustainability issues impact market conditions and therefore transfer to the firms operating within them. So how exactly can Breedon overcome these challenges and what opportunities lay ahead? The answer is Organic Growth. Organic Growth,

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which has a focus on increasing output and sales in contrast to acquisitions and mergers, is something I listed previously whereby I assumed Breedon was applying such terms in their Annual Report to make their organisation look more appealing to potential investors. But could there be more here than meets the eye? Breedon essentially monopolise the materials sector of the construction industry in the UK as they are the largest independent supplier with a far reaching geographic footprint. While procuring other firms operating in the same sector has been a focus throughout Breedon’s history, I believe it is now crucial for their organisation to amplify their methods to a more efficient, effective and sustainable level of making and processing their products for sale. Many of Breedon’s products, such as the various aggregates, may not face the issue of scarcity YET, but they are not an unlimited resource. Therefore, Breedon must ensure they do not waste or engage in unsustainable practices as this would have a huge impact on their ability to obtain revenue in the years to come. To conclude, the opportunity for organic growth will enable Breedon to maintain their position as the dominant supplier while ensuring various market pressures, sustainability and the issue of scarcity doesn’t thwart their ability to meet their financial obligations.

FINAL THOUGHTS

I came in to reviewing Breedon’s Annual Report with an enthusiasm stemmed from my enjoyment of completing a similar task last term. Having the basic background knowledge acquired from the magnitude of information obtained from ACCT11059 enabled me to recognise and interpret much of the information, financial statements and their inclusions. Still I was intrigued to find certain aspects of Breedon’s Annual Report that I hadn’t previously encountered, such as ‘underlying’, and am aware that I am only at the beginning of the process to obtain complete understanding. Nonetheless, I did prefer the layout of LPC’s Annual Report as I had a strong sense of Breedon overtly trying to sell themselves to me which, just like pushy salesmen, is something I am not a fan of. I am unsure whether my feelings are typical as I still feel strangely protective of my previous firm and am obviously having difficulties and letting go. In saying that, I was relieved to receive a firm that didn’t have the difficulties which impacted LPC which in turn made LPC’s financial statements more difficult to review and restate. Nonetheless, this is just the beginning of my journey into the construction industry in which Breedon operate and I am sure there is plenty more for me to discover.

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PEER DISCUSSIONS

Once again, I greatly enjoyed having the ability to converse with my peers and found it fascinating to compare the financial standing of firms from a vast array of industries over the world. As found throughout the body of my text, I was able to communicate with my peers on a range of topics, however I did notice there was a dramatic shift in the comparing of firms as compared to ACCT11059. In the previous course I found much of the communication centered around trying to distinguish and comprehend certain aspects of a firm’s financial statements, whereas this time, while still having the discussion on certain concepts, we moved beyond that to discuss the interesting factors surround our firms and their relationship with outside influences affecting them. This to me is evidence of our continual growth in the sphere of accounting and I’m looking forward to seeing what we all uncover next. I also found having in depth discussions provided me with greater insight into my own firm by many of the questions my peers posed. One instance is through my interaction with fellow Peer Sharon Field:Sharon: “A company who is responsible for the major infrastructure of a country must have engaged in some trust building exercises. It will be interesting how these relationships are reflected in the financial reports.”

My Reply: “It’s funny you should mention trust as Martin highlights what an importance concept trust is within business. So I would agree that you are correct. Breedon have obviously taken steps to ensure they have the trust of both the employees within their firm, such as ensuring a high level of safety standards, as well as the broader community. This is evident through their interactions with the community and putting into effect mechanisms to ensure their business does not have a significant negative impact on the wider social, environmental and economic well-being of the areas in which they operate. Moreover, due to Breedon displaying a continual growth in their revenue from their daily operations, as evident in their financial reports, I believe this is highly indicative of the trust they have built both internally and externally.”

Hence, I can confidently state that the discussions I engaged in were a great aid in this step of the assignment and provided me with further insight into my own firm. I am a strong advocate in communication and interaction being a large component of our learning process and I believe this is evident in the work I produce.

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