Accounting Business Reporting for Decision Making

CHAPTER 8 Analysis and interpretation of financial statements 377

Required

Locate the most recent annual reports of Collection House and Credit Corp Group, and other

resources available, to answer the following:

a. The debt collection industry has two main business models: debt collection with and without

recourse. Explain the difference in the business models.

b. Assume that you are an analyst. Calculate the necessary ratios for the past two years to be able

to write a report on the financial performance and position of the two companies.

c. Read the management commentary and discussion in the annual reports of the companies and

identify the financial information that is referred to in the management commentary.

d. Explain why it is important to read the Accounting Policy Notes of Collection House and Credit

Corp Group to contextualise ratio analysis.

8.50 S&P, one of the leading credit rating organisations and publisher of financial information and

research services, identifies its debt rating process as follows:

Meeting

with issuer

management

Surveillance of

rated issuers

and issues

Initial evaluation

Standard & Poor’s analyst driven rating process

Ratings request

from issuer

Analysis

Rating committee

review and vote

Notication

to issuer

Publication and

dissemination of

public rating opinions

Source: Standard & Poor’s, ‘Guide to credit rating essentials’, Standard & Poor’s Financial Services LLC,
http://www.understandingratings.com.

Standard & Poor’s undertakes quantitative and qualitative analysis in the rating assignment process,

and comments that it must be remembered that a rating is, in the end, an opinion and ‘the rating experi-

ence is as much an art as it is a science’. As part of the process, entities are required to provide Standard

& Poor’s with five years of audited financial statements and the last several interim statements. The

analytical process involves consideration of an entity’s business risk and financial risk. In assessing

the business risk, Standard & Poor’s is interested in an entity’s industry characteristics and competitive

position. The assessment of financial risk involves consideration of financial characteristics, financial

policy, profitability, capital structure, cash flow protection and financial flexibility.

Required

a. Explain what credit ratings are and the ratings that can be assigned to an entity.

b. Prepare a checklist, under each of the financial risk categories, of the items or ratios that you

believe Standard & Poor’s would investigate or calculate when assessing financial risk.

8.51 Maintaining premium wine prices and reacting to trends similar to the latest ‘handbag’ are some

of the ways the wine industry can recover from struggling production profitability, according to

some New South Wales wine makers.