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Accounting Analysis

Key success factors ,such as exclusive casino licensing, customer satisfaction, tight

management control ,property management ,should be managed attentively and

efficiently to maintain SKY Citys competitive advantage in the gaming industry.And
those factors will be reflected in the accounting policies and numbers which are the
focus of the essay.
Revenue Recognition:
Policy:Regarding the large proportion of gaming revenue against total revenue( an
average of 77.56% in the past 5 years), the standards adopted and strategies employed
in revenue recognition is our top concern.Due to notes to financial statement, gaming
wagered and amounts won by casino patrons[Note(e)].This recognition method is in line with NZ
IAS8.Its competitor Tabcorp use same recognition method under AASB118, however it is less
explained than the latter about wagering revenue.
Flexibility :Based on the consumed tight control in the corporation,detailed and accurate records
about cash received,changed to chips,played,consumed,cashed out should be available.As a result
the accounting data are expected to be informative and reliable.The flexibility in earning
management is low.
Disclosure:There are two basic changes regarding the presentation of revenues.From 2011, The
Group has adopted External Reporting Board Standard A1 Accounting Standards Framework.
(XRB A1).As a Tier 1 Entity, revenue was further illustrated including information about gaming
and non-gaming GST.This is a sign of clearer disclosure complied with regulation.
Property Plant and Equipment

Policy:Casino business require magnificent investment in estate,machines and

associated decorations and maintenance.The company adopted straight line method
for all its PPE except land.[note(0)2014],which is allowed under NZ IAS 16.
Flexibility: Noticeably,the depreciation charges varies each year due to exchange
difference.The applicable deprecation rate is,without clear explanation ,
controversial.For example,plant and equipment are stated to have a life varies from 2
to 75 years,which largely depends on managements estimates. Financial costs and
subsequent costs are allowed to be capitalized.Thus, the flexibility of PPE
management is high.Despite,the purchase of Queenstown Casino Limited in 2013 and
the sale of Christchurch Casino Limited in 2011, rate of PPE to total assets have been
kept between 58% to 66% for the past 5 years and PPE turnover have been within
64%to 78%.All these signs have indicate a possible PPE management.
Accounting Strategy:Borrowing costs have been capitalized using the weighted
average cost of debt complying NZ IAS 23.This strategy results better asset and profit

results, and boost confidence on future returns of in-process projects.

Disclosure: The problem is that before 2011, this cost of debt is not indicated in the
financial statements.Lack of completion stage of the projects, capitalization numbers
are less convincing,which decrease the quality of disclosure.
Possible distortions:.In 2014 the weighted average cost of debt is 6.92% which is the lowest
among 2011 to 2014. At the same time,SKYCITY holds a relatively risky S&Ps Investment grade
rating of BBB.As a result, using 6.92% is possibly aggressive.It is suggested to stick to the 7.16%
rate when this lending is firstly granted[Annual report2011]
Intangible Assets-License
Policy:Casino licencing in New Zealand is governed by the Gambling Act 2003, which is
administered by the Gambling Commission and the Department of Internal Affairs.As expected,
accounting policy of SKC is same with industry standard.
Disclosure:License granted date ,term,possible renewal are all clearly listed in its
notes[2014FYnote15].Compared with information provided by Australasian Gaming Council], all
these data in financial statement are accurate.
Flexibility:Strict and close supervision leaves little flexibility for licensing management.
Employee Benefits:
Employee benefits including (1)wages,salaries and annual leave and(2) share-based payment.The
total expense constitute around 44%of operating expense.Though this number has been decreasing
slightly in recent years,but it is still enormous compared with its competitor
Tabcorp( 2014:43.38% ,11.33%respectively).Share-based payment is negligible with its share of
less than1%.Looking at its policy of wages,salaries and annual leave in note(t),it is with in the
scope of NZ IAS19.
Disclosure: There is a great need for further explanation of how employee benefits are
consumed.The SKY CITY website presents some benefits like cash incentive bonuses,free
medical insurance ,on the job training and discounts on entertainments.However, this is far less
enough to justify the surprisingly tremendous numbers.
Flexibility: There are both full time and part-time employees with different benefits.The stuff
discount facility makes it even harder to track each record.Besides,parent entity transferred a
provision of employee service of$13.8million to its subsidiaries in 2014.This related party
transaction,even though disclosed,still cause concern due to the high flexibility of employee
benefits management.
Red flags: From 2012, the section about employee remuneration, including short-term and long
term incentive plans ,disappeared in its financial statement.

In conclusion,as indicated in the independent auditors report provided by pwc,the financial

statements of SKC comply with GAAP NZ and IFRS and gives a true and fair view on its
financial positions and performance.There is one possible red flags about employee benefit and
possible distortion on capitalization rate is suggested.
Financial Analysis

To evaluate the companys performances in the context of its goal and strategy,
financial statements are reformatted to separate its operating activities and financial
activities. Ratio analysis is utilized to compare companys performance in both timeseries and cross-sectional way.Additionally, justified ratio analysis provide more
reliable forecast for the valuation purpose.
Return on Equity

Initial attention is drawn on ROE, revealing the overall profitability of SKC.

Over the past five years[FY2010-FY2014],ROE peaked in 2011 reaching 17.99%
when Christchurch casino reopened on February after severe earthquake and its
NPAT(Net Profit After Tax increased by 35.47% than previous year. A down tread is
observed after 2011 and the number fall to 12.41%(lower than 2010 ROE of
13.57%).This can be broken down into the decrease in RNOA(Return on Operating
assets)and the narrowing of spread( RNOA-NBC).The change in NOA and NBC is
not significant compared to NOPAT, which dropped from $170m to $135m during the
examined period.The speed of increase in expense outnumbered the growth in
Since 2011, SKC has seen periodic restructuring.For example, in 2014only, the restructuring
cost,including Adelaide transformation costs,amount to a total of $9.2m.Some of the expenditure
is covered by cash(cash balance decreased almost half of its value from $105m in 2011 to $54m in
2014) others are financed by long term borrowings, and this explained the interest expense
increasing.Disappointingly, these restructuring has not yet generating decent revenue.This can be
partially explained by the drop in participation of gambling since 2005(Australian Gaming
Council) and the squeezing in profit margin.
Profit Margin(PM)

Overall,Profit Margin followed a similar pattern as the other main ratios (e.g. NOPAT,
NROA and ROE).From 2011 to 2014,SKC has seen a continuing fall in PM from 21.04% to
16.46%.Looking at Tabcorp Holdings Limited (TAH)and Crown Resort Limited(CWN)[Appendix
4], SKCs performance remains medium. From the industry perspective, with the moving toward
digital interactive gaming, pacification is physical gaming like casino table games, keno are
beaten down.This pressing substitute weakens SKCs competitive advantage now and in the
future.As has shown above,the drop of NOPAT and its inadequate revenue generation have not

only dragged ROE down but also PM. we can see that SKC has tightening its expense on
Marketing and communications until now only take up 3.69% of sales.However, the expense on
Employee benefits expense,Direct consumables,and Depreciation and amortisation expense are
expanding which are the main cause of narrowing PM.Employee benefits are the main factor that
can be worked on.

Asset Turnover(ATO)
Starting with 1.96 in 2010,ATO gradually dropped during the years until in 2014,this
trend revered and increased from the bottom 1.69 in 2013 to 1.75 2014. The slowing
down of net operating asset reflect a redundant problem in its investment decisions
from 2010. From the data, the new International Convention Center caused attention
and brought rewards to the company and its intangible assets increased by 38%
compared with 2013.This is the main reason for the down trend to be reversed.
Financial ratios and cash flow analysis
Short-term Solvency
Current ratio has been dropping from 10.17% to 6.68% with the exception of
2011(11.93%).It is understandable that casino companies have most of its asset to be
non-current asset. Nevertheless,this low number still needs stakeholders attention.
Comparatively,TAH has an average current ratio of 38.33% for the same period,which
further signs an alert on SKCs short-term solvency.
A further examination is taken on interest coverage ratio.It has been kept above 2.67.
It seems that, even with heavy commitments to pay interests, SKC has been managing
safely with its repayment.
Long-term Solvency
Debt to equity ratio has been stable during the period, varying between 79.86%
to87.56%.The use of capital notes and derivatives are mean to finance recent projects
and manage exchange risks for its international business[FY2014 Annual Report].As
a result,non-current interesting liabilities constitute around53.32% of its total
Dividend payout ratio
Dividend payout ratio is generally increasing from 48.03% in 2010 to 89.79%(except
59.84%in 2011). On appearance, shareholders receive more return on each dollar they
invested,however, this is a sign of lack of promising investment opportunity,
Realizing the probable low returns on resort expansion and restructure, management
chose to increase its payout ratio to keep investors happy. Correspondingly, the
sustainable growth rate has been declining .The average growth rate in the past five
years is5.89%.

To sum up, from both short-term and long-term view, the financial stability of SKC is
medium.While holding its focus on it core casino business, investment in innovation
with its facility, service, digital area is another essential.
Cash flow analysis

CFO (Cash Flow of Operating activities) has been stable above $2 million, and its
trend is basically in line with revenue.This shows a less possibility of earning
management.For financial activities, from 2011,parent entity started receive advance
from its subsidiaries and increased its purchase of treasury shares. This pair of
financial activities contributed to the stability of CFF. CFI experienced ups and
downs.From 2012, with $164m investment outflow ,pay more to intangible
assets,mainly its licenses,which is six times of that in 2011.In 2013, this number go
back to $48m due to its receipt of sale of 50% interest in Christchurch Casino
Limited. In the recent 2014, CFI increased further to $167 million with its NZICC
Master Plan and Adelaide Expansionproject.

In conclusion, through accounting and financial analysis, it is believed that the

company is extending its business progressively. Multiple financial instrument to
finance those projects and manage risk. Still, more control and disclosure of employee
benefits are suggested.

Appendix 1
Reformatted Income Statement
Appendix 2
Reformatted Balance Sheet
Appendix 3
Ratio Analysis
Appendix 4
ratio excel