TERM PAPER

INTERNAL ASSESSMENT
PROGRAMME: MBA
SEMESTER: 3

Course: COST AND MANAGEMENT ACCOUNTING

Dubai Refreshments (P.J.S.C.)
PepsiCo

Submitted by:-
Rachit Raj Gupta

Tanu Verma

Suroor Syed

Johanna Lobo
Dubai Refreshments (P.J.S.C.)
Q 2 List out the Company’s accounting policies and applicable IFRS

The Financial Statements of Dubai Refreshments (P.J.S.C) have been prepared in accordance with the
International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB) and applicable requirements of UAE Federal Law No (2) 0f 2015, and the Articles of
Association of the Company.

The financial statements have been presented in U.A.E Dirhams which is the functional and reporting
currency of the company, rounded to the nearest thousand except when otherwise indicated.

The Company’s financial statements have been prepared under the historical cost basis except for the
following.

 Derivative financial instruments are measured at fair value

 Available-for-sale financial assets are measured at fair value (before 1 January 2018)
 Financial assets at fair value through other comprehensive income (applicable from 1 January 2018)
The Company applied IFRS 15 and IFRS 9 for the first time. The nature and effect of the changes as a
result of adoption of these new accounting standards are as follows.

The company has not early adopted any standards, interpretations or amendments that have been issued
but are not yet effective.

IFRS 15 – the new standard establishes a five-step model to account for revenue arising from contracts
with customers. Revenue is recognized at an amount that reflects the consideration to which an entity
expects to be entitled in exchange for transferring goods or services to a customer. The company adopted
IFRS 15 using the modified retrospective method of adoption, with effect of initially applying this
standard recognized at the date of initial application. Accordingly, the in information presented for 2017
has not been restated and has been presented as previously reported under accounting policies disclosed in
annual financial statements of the company as per IAS 18 and related interpretations. The company is
primarily in the business of selling Pepsi Cola International Products and has adopted the following
accounting policies with respect to revenue recognition under IFRS 15.

Sale of goods: the company has concluded that the revenue from the sale of goods should be recognized
at a point in time when control of the asset is transferred to the customer, generally on delivery of the
goods.

IFRS 9:

This replaces IAS 39 Financial Instruments. Recognition and Measurement for annual periods beginning
on or after 1st January 2018, bringing together all three aspects of the accounting for financial
instruments, classification and measurement, Impairment and hedge accounting. The company has opted
exemption not to restate comparative information with respect to reclassification and measurement
requirements.
A financial asset is classified and measured under IFRS 9 as

 Amortized costs
 FVOCI, debt instruments
 FVOCI, equity instruments
 FVTPL

Impairment: ECL are based on the difference between contractual cash flows due in accordance with the
contract and all the cash flows that the company expect to receive. The shortfall is then discounted at an
approximation to the asset’s original effective interest rate. For Contract assets and trade and other
receivables the company has applied the standard simplified approach and has calculated the ECLs based
on lifetime expected credit losses.

Hedge Accounting: Under IAS, all gains and losses arising from the company’s cash flow hedging
relationships were eligible to be subsequently reclassified to profit and loss. Under IFRS 9 gains and
losses arising on cash flow hedges of forecast purchase on non-financial assets need to be incorporated
into the initial carrying amounts on the non-financial assets.

IFRS 16 Leases:

IFRS 16 was issued in January 2016 and it replaces IAS 17. It introduces a single on-balance sheet lease
accounting model for leases. Leases shall measure the lease liability and adjust the right of use asset on
occurrence of certain events such as change in the lease term, future lease payments resulting from a
change in an index or rate used to determine those payments.

The standard is effective for annual periods beginning on or after 1 January 2019 and requires making
extensive disclosures than under IAS 17. The company plans to apply IFRS 16 initially on 1st January
2019. the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening
balance of retained earnings at 1 January 2019.

Value-added Tax (VAT): Expenses and assets are recognized net of the amount of VAT except

 When the VAT incurred on a purchase of assets or services is not recoverable from the taxation
authority in which case the VAT is recognized as part of the cost of acquisition of the asset or as part
of the expense item, as applicable
 When receivables and payables, amounts are stated with the amount of VAT included.
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in
value, they are depreciated on a straight-line basis over the assets estimated useful life.

Land and capital work in progress are not depreciated.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of an asset that
necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as
part of the cost of the asset.
During the year ended 31 December 2018, the Company has not capitalized any borrowing costs (2017:
NIL).

Inventories

Inventories are stated at the lower cost and net realizable value. Costs are those incurred in bringing each
product to its present location and condition.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. Following initial
recognition, intangible assets with finite lives are amortized over the useful economic life and assessed for
impairment whenever there is an indication that the intangible asset may be impaired.

Impairment of non-financial assets

At each reporting date the Company reviews the carrying amounts of its assets to assess whether there is
an indication that those assets may be impaired. If any such indication exists, the Company makes an
estimate of the asset’s recoverable amount.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount
of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in the
income statement.

Accounts receivable

Accounts receivable as stated at original invoice amount less a provision for any uncollectible amounts.
An estimate for doubtful debt is made when collection of the full amount is no longer probable. Bad debts
are written off when there is no possibility of recovery.

Cash and cash equivalents

For the purpose of the statement of cash flows, cash and cash equivalents comprise cash on hand, bank
balances and short-term deposits with an original maturity of three months or less.

Financial assets

Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair
value through other comprehensive income (OCI), and fair value through profit or loss.

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash
flow characteristics and the company’s business model for managing them. with the exception of trade
receivables that do not contain a significant financing component or for which the company has applied
the practical expedient, the company initially measures a financial asset at its fair value and, in the case a
financial asset is not at fair value through profit or loss, transaction costs.

Financial assets at amortized cost

This category is the most relevant to the company. The company measures financial assets at amortized
cost if both of the following conditions are met:

 The financial asset is held within a business model with the objective to hold financial assets in order
to collect contractual cash flows; and
 The contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method
and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is
derecognized modified or impaired.

Financial assets designated at fair value through OCI (equity instruments)

Upon initial recognition, the company can elect to classify irrevocably its equity investments as equity
instruments designed at fair value through OCI when they meet the definition of equity under IAS 32
Financial instruments:

Presentation and are not held for trading.

Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognized as
other income in the statement of profit or loss when the right of payment has been established, except
when the company benefits from such proceeds as a recovery of part of the cost of the financial asset.

Impairment of financial assets

The company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held
at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows
due in accordance with the contract and all the cash flows that the company expects to receive, discounted
at an approximation of the original effective interest rate.

ECLs is a recognized in two stages. For credit exposures for which there has not been a significant
increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default
events that are possible within the next 12-months ( a 12-month ECL). For those credit exposures for
which there has been a significant increase in credit risk since initial recognition, a loss allowance is
required for credit losses expected over the remaining life of the exposure, irrespective of the timing of
the default (a lifetime ECL).

For trade receivables and contract assets, the company applies a simplified approach in calculating ECLs.
Therefore, the company does not track changes in credit risk, but instead recognizes a loss allowance
based on lifetime ECLs at each reporting date.
The company considers a financial asset in default when contractual payments are 90 days past due.
However, in certain cases, the Group may also consider a financial asset to be in default when internal or
external information indicates that the Company is unlikely to receive the outstanding contractual
amounts in full before taking into account any credit enhancements held by the company. A financial
asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Accounts payable and accruable

Liabilities are recognized for amounts to be paid in the future for goods or services received, whether
billed by the supplier or not.

Derecognition of financial liabilities

A financial liability is de-recognized when the obligation under the liability is discharged or cancelled or
expires.

Provisions

Provisions are recognized when the company has an obligation (legal or constructive) arising from a past
event, and the costs to settle the obligation are both probable and able to be reliably measured.

Employee’s end of service benefits

The company provides end of service benefits to its expatriate employees. The entitlement to these
benefits is based upon the employees’ salary and length of service, subject to the completion of a
minimum service period. The expected costs of these benefits are accrued over the period of employment.

With respect to its national employees, the company makes contributions to government pension scheme
calculated as a percentage of the employees’ salaries. The company’s obligation are limited to these
contributions, which are expensed when due.

Contingencies

Contingent liabilities are not recognized in the financial statements. They are disclosed unless the
possibility of an outflow of resources embodying economic benefits it remote. A contingent asset is not
recognized in the financial statements but disclosed when an inflow of economic benefits is probable.

Operating leases

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense in the income
statement on a straight-line basis over the lease term.
Derivative financial instruments

The company uses derivative financial instruments, such as forward commodity contracts, to hedge its
commodity price risk. Such derivative financial instruments are initially recognized at fair value on the
date on which a derivative contract is entered into and are subsequently re-measured at fair value.
Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when
the fair value is negative.

Any gains or losses arising from changes in the fair value of derivatives are taken directly to the income
statement, except for the effective portion of cash flow hedges, which is recognized in statement of other
comprehensive income.

Foreign currencies

Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at
the reporting date. All differences are taken to the statement of income.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated
using the exchange rates at the date of initial transactions. Non-monetary items measured at fair value in a
foreign currency are translated using the exchange rates at the date when the fair value is determined. The
gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the
recognition of gain or loss on change in fair value of the item.

Significant Accounting Judgments, Estimates And Assumptions

The preparation of the company’s financial statements requires management to make judgments,
estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities,
and the accompanying disclosures, and the disclosure of contingent liabilities.

Judgments

In the process of applying the company’s accounting policies, management has made the following
judgments, apart from those involving estimations, which has the most significant impact on the amounts
recognized in the financial statements.

Classification of investment

Management decides on acquisition of an investment whether it should be classified as held to maturity,

held for trading, carried at fair value through profit or loss or available-for-sale.

For those investments deemed to be held to maturity, management ensures that the requirements of IAS
39 are met and, in particular that the company has the intention and ability to hold these to maturity.

The company classifies investments as trading if they are acquired primarily for the purpose of making a
short-term profit.
Classification of properties

Management decided at the time of acquisition of a property whether it should be classified as held for
sale, property, plant and equipment or an investment property. The company classifies properties as
properties held for sale when it carrying amount will be recovered principally through a sale transaction
rather than through continuing use. The company also classifies properties as property, plant and
equipment when the properties are held for use by, or in the operations, of the company. Properties are
classified as investment properties when the intention is to hold them for capital appreciation, for rental or
for undetermined use. The company changes the classification when the intention changes.

Impairment of accounts receivable

An estimate of the collectible amount of trade accounts receivable is made when collection of the full
amount is no longer probable. For individually significant, but which are past due, are assessed
collectively and a provision is applied according to the length of time past due, based on historical
recovery rates and forward-looking information.

Impairment of Inventories

Inventories are held at the lower cost and net realizable value. When inventories become old or obsolete,
an estimate is made of their net realizable value. For individually significant amounts this estimation is
performed on an individual basis. Amount which are not individually significant, but which are old or
obsolete, are assessed collectively and a provision is applied according to the inventory type and the
degree of ageing or obsolescence, based on historical selling prices.

Useful lives and depreciation of property, plant and equipment

The management periodically reviews the estimated useful lives and depreciation method to ensure that
the method and period of depreciation are consistent with the expected pattern of economic benefits from
these assets.

Useful lives and amortization of intangible assets

The management periodically reviews the estimated useful lives and amortization method to ensure that
the method and period of amortization are consistent with the expected pattern of economic benefit from
these assets.

Derivatives

The fair values are obtained from quoted market prices available from the counter party bank, discounted
cash flow models and other valuation models as appropriate. The company uses widely recognized
valuation models for determining the fair value of forward commodity contracts. For these financial
instruments, inputs into models are market observable.
Financial Ratios for the year ended 31st Dec 2018-

1. Gross Profitability measures the margin on sales the company is achieving. It can be an
indication of manufacturing efficiency, or marketing effectiveness.
Gross Profitability Ratio= Gross Profit/Net Sales
= (191882/596009)*100
= 32%

2. Net Profitability measures the overall profitability of the company, or how much is being
brought to the bottom line.
Net Profitability Ratio = Net Profit/ Net Sales
= (42291/596009) * 100
= 7%

3. The Inventory turnover ratio measures how many times a company’s inventory is sold and
replaced over a given period:
Investment turnover Ratio: Net Sales/Total Assets
= 596009/1145217
=0.52:1

4. Current ratio is a liquidity ratio which measures a company's ability to pay its current liabilities
with cash generated from its current assets. It equals current assets divided by current liabilities.
Current Ratio: Current Assets/Current Liabilities
341359/204273
1.67:1

5. Quick Assets (cash, marketable securities, and receivables)/Current Liabilities—provides a stricter

definition of the company's ability to make payments on current obligations.
Acid-test ratio = Current assets – Inventories / Current liabilities
=341359- 52866/ 204273
= 1.41:1
Analysis & Interpretation: -

After analyzing and interpreting the company’s Financial Statements it can be concluded that,
DRC is in a good position to meet short-term liabilities with short-term assets as the current
ratio is 1.67 which is close to the general ratio of 2:1. Coming to the Quick ratio, as it is 1.41
the company may keep too much cash on hand or have a poor collection program for accounts
receivable. Ideally, this ratio should be 1:1.
A good asset turnover ratio will differ from business to business, but you’ll typically want an
asset turnover ratio of >1 and the asset turnover ratio here is 0.52 which is not good for the
company.
Net profit margin is 7% which shows how much net income is generated as a percentage of
revenue.

Conclusion
We believe that Pepsi has made its mark by integrating its marketing plans through the public
and a massive social media campaign. They are having a very close connection with their
target markets though different categories of their campaign. Therefore, it can be stated that
PepsiCo is giving a tough competition to their peers by maintaining adequate financial ratios as
stated above. Although they need to adopt a few measures in order to maintain their position
in the market.