Accounting Business Reporting for Decision Making

502 Accounting: Business Reporting for Decision Making

assets when it is foreseeable that a product will generate future economic benefits. In 2014, research and

development (R&D) costs expensed were €4.6 billion which was a decrease of 4.7 per cent compared to

those in 2013. BMW Group undertakes this process to help deliver the best product possible and keep up

to date with innovative technologies. This strategy obviously involves risks as there is no guarantee that

saleable and successful products will be developed. BMW cannot be certain about the market’s desira-

bility for any new products.

Investments normally span long periods of time and require cash outlays initially, with cash inflows

being received over a long future period. Consider, for example, airlines such as the Qantas Group or

Virgin Australia and the large sums of cash outlaid on new aircraft. Airlines require a number of different

types of aircraft (e.g. Airbus A380, Boeing 747 and Bombardier Q400) and they make a choice whether

to buy or lease the aircraft. New aircraft require millions of dollars to be spent upfront or as progress

payments before delivery. Returns come in from the sale of flights to passengers or freight income over

several years. In 2015, the Qantas  Group invested $10.1 billion in capital expenditure on new aircraft

and building works for its passengers and also its air cargo operations. In 2014, the investment was

$8.6 billion. The Group has certain rights within its aircraft purchase contracts which can reduce or defer

the above capital expenditure.

What happens if, part-way through the development of a project, the investors find circumstances

have changed and they really would prefer not to be involved? Such unexpected changes might involve

major changes in consumer or political values, changes in legislation governing an industry, substantial

increases in the infrastructure development costs, or perhaps major reductions in the supply of raw mat-

erials. Normally, if projects are suspended before coming to fruition, investors stand to lose most, if not

all, of their invested funds. This risk should impose great pressure on analysts and investors when they

are investigating the worth of potential investment projects. There are many examples available of these

types of losses. For example, making movies is a very expensive business, with a single high-budget film

costing $100–200 million, or more. Any expenditure incurred on a film project before the full financing

is arranged will be lost if filming does not proceed. These preliminary expenses are ‘sunk costs’, which

should not be considered in any future consideration of the same or a related project.

Many investment decisions are made before all the relevant expenditure can be properly costed

because the cost information is just not available. This was the case, for example, with the development

of the Docklands movie studios in Melbourne. The aim of the studios was for 26 feature films to be

produced there each year, and Victoria’s premier at the time was quoted as saying that the studios would

turn over $100 million each year. At the time of the development of the studios, the costs associated with

developing the movies were not known and also the future revenues to be earned were also uncertain.

The reality check ‘The rocky road of Docklands Studios’ reports on its chequered history and its future

prospects.

REALITY CHECK

The rocky road of Docklands Studios

The Docklands film studios in the heart of Melbourne have certainly travelled a rocky road. The studios

have been in existence for over 10 years and during that time they have had two name changes, strug-

gled to win business and faced a government buyback.

The studios do have ongoing revenue-earning activities including hosting programs such as The

Footy Show and Millionaire Hot Seat. Network Seven also uses a studio for its local drama Winners &

Losers. Additionally, some smaller Australian films and some large-scale international movies such as

I Frankenstein, Killer Elite and Ghost Rider have been made at Docklands over the years. However, the

original estimate of generating $100 million a year in revenue has never been achieved and was always

going to be a difficult task considering the entire film and television production in Victoria in 2011–12

was worth only $209 million. The high Australian dollar in recent years has also been a disincentive for

overseas business.