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An analysis of
Pokka Corporation (Singapore) Limited
Prepared for:
ACCT 103
Financial Accounting (G3)
Professor Gan XX
Prepared by:
T XX
K XX
L XX
L XX
Y XX
L XX
2
Executive Summary
Pokka Singapore was incorporated on 18 January 1977 as a private limited company. It was converted into
a public limited company on 6 September 1994 at which time it changed to its present name of Pokka
Corporation (Singapore) Limited.
Financial Performance
The Group’s turnover experienced an increase of 1.1% from SGD 143.2 million in FY 2006 to SGD 144.7
million in FY 2007. Profit before taxation increased to SGD 3.6 million, up from SGD 0.1 million the
previous year. This was achieved through cost rationalization across companies under the Group. Profit
could have been higher if not for foreign exchange loss of SGD 0.5 million as compared to gain of SGD 0.1
million the previous year. The foreign exchange loss resulted from the weakening of the US dollar against
the Singapore dollar.
The Group’s tax expense increased from SGD 0.3 million to SGD 1.1 million mainly due to higher profits in
the current year.
Beverage Business
Revenue from its beverage business declined by 1.8%, from SGD 95.4 million to SGD 93.7 million. This
attributes to stiffer competition in local and overseas markets.
The Group maintained its position as an industry leader in Singapore despite the highly competitive business
environment. According to AC Nielsen market data for September-October 2007, the Group increased its
market share to 41.7% in the ready-to-drink tea segment through active sales and promotional activities, as
well as the introduction of new products and packaging such as the new Chrysanthemum White Tea. The
group continues to enjoy a dominant market share of 65.2% in the green tea segment.
The Group’s tea products have been reformulated to qualify as “Healthier Choice” products to cater to
consumers’ inclination for healthier food products.
3
International Markets
Revenue from international markets experienced an increase, propelled by growth in existing markets and
the development of new markets. The Middle East continued to contribute substantially to revenue through
the Group’s widening of channel coverage and expanding its range of products. The Group enlarged its
market share in Asia by offering products that cater to consumers’ growing preference for healthier food and
beverage.
Quality Recognition
The Company was awarded the British Retail Consortium Global Standard Food Grade “A” certification.
This achievement presents the hygiene and food safety endorsement that is required for the Company to
penetrate into hyper-supermarket chains in Europe and other parts in the West.
Restaurant Business
The restaurant business enjoyed a healthy growth of 6.9% from SGD 47.7 million to SGD 51.0 million due
to strong growth of its Hong Kong restaurant business. The business growth in Hong Kong was dampened
slightly by the weakening of the Hong Kong dollar against the Singapore dollar. The revenue of restaurant
business in Singapore experienced a slight drop following the closure of an under-performing outlet in FY
2007.
Future Outlook
The directors anticipate an increasingly challenging business environment the coming year. The main
challenges in the beverage industry facing the Group include new entrants, price competition and increased
operating costs, while the restaurant business faces the prospect of a tight supply of manpower resulting
from stronger economic sentiments and rising rental rates.
The Group will continue to expand its overseas beverage markets and further strengthen its domestic
beverage business to overcome these challenges. It aims to improve its service and quality of the restaurant
business, and establish new restaurants in locations that offer good growth prospects.
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Contents Page
1. Annual Report
2. Operating Activities
3. Corporate Governance
3.1 Board of Directors
3.1.1 Appointment of New Directors
3.1.2 Directors’ Remuneration
3.1.3 Directors’ Interests in Shares and Debentures
3.1.4 Share Options
3.1.5 Directors’ Appointments in Other Institutions
3.2 Audit Committee
3.3 Nominating Committee
3.4 Internal Control
3.5 Independent Auditors
4. Income Statement
4.1 Group Revenue According to Activities
4.2 Group Revenue According to Location
4.3 Revenue Recognition
4.4 Common Size Income Statement
4.5 Net Income Before Tax
4.6 Retained Earnings
4.7 Earnings Per Share
5. Taxes
6. Dividends
6.1 Residual Dividend Approach
6.2 Dividend Stability
6.3 Compromise Dividend Policy
6.4 Dividends paid by Pokka Corporation (Singapore) Ltd
7. Share Capital and Reserves
7.1 Bonus Issue
7.2 Stock Split
7.3 Rights Issue
7.4 Reserves
8. Current Assets and Current Liabilities
9. Inventories
9.1 Inventory Values
9.2 Inventory Valuation Policy
9.3 Gross Profit Percentage on Sale
9.4 Inventory Turnover
10. Accounts Receivable
10.1 Allowance for Doubtful Debts
10.2 Avoidance and Reduction of Credit Losses
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11. Long-term Assets, Impairment and Depreciation
11.1 Property, Plant and Equipment
11.2 Depreciation
11.3 Depreciation Expense
11.4 Impairment
11.5 Revaluation
12. Long-term Liabilities and Contingent Liabilities
12.1 Long-Term Liabilities
12.2 Security of Long-Term Liabilities
12.3 Total Assets Financed by Long-Term Borrowings
12.4 Long-Term Assets Finance Options
12.5 Contingent Items
13. Statement of Cash Flows
13.1 Cash Position
13.2 Operating, Investing and Financing
13.3 Preparation of Operating Cash Flows
13.4 Statement of Cash Flows
13.5 Positive Cash Flow from Operations Despite Recording Losses
13.6 Analysis of Statement of Cash Flows
14. Market Prices of Share
15. Conclusion
16. Appendix
16.1 Balance Sheet
16.2 Income Statement
16.3 Statement of Changes in Equity
16.4 Cash Flow Statement
16.5 Notes to the Financial Statements
6
1. Annual Report
Pokka Corporation (Singapore) Ltd’s Annual Report for FY 2007 comprises the following reports and
financial statements:
Reports Financial Statements Other Information
Chairman’s Statement
Corporate Information
Operations in Asia
Report on Corporate
Governance
Information on Directors
Information on Key
Executives
Directors’ Report
Statement by Directors
Independent Auditors’
Report
Balance Sheets
Consolidated Profit and
Loss Account
Statement of Changes in
Equity
Consolidated Cash Flow
Statement
Notes to the Financial
Statements
Additional
Information
Statistics of
Shareholdings
Notice of Annual
General Meeting
Proxy Form
External users of the annual report include present and potential investors (equity owners), employees of the
company, lenders of funds, customers, suppliers, government agencies and other members of the public1:
Investors. The providers of risk capital and their advisers are concerned with the risk inherent in,
and return provided by, their investments. They need information to help them determine whether
they should buy, hold or sell. Shareholders are also interested in information that enables them to
assess the ability of the enterprise to pay dividends.
Employees. Employees and their representative groups are interested in information about the
stability and profitability of their employers. They are also interested in information which enables
them to assess the ability of the enterprise to provide remuneration, retirement benefits and
employment opportunities.
Lenders. Lenders are interested in information that enables them to determine whether their loans,
and the interest attaching to them, will be paid when due.
Suppliers and other trade creditors. Suppliers and other creditors are interested in information
that enables them to determine whether amounts owing to them will be paid when due. Trade
creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are
dependent upon the continuation of the enterprise as a major customer.
1 CCDG – FRS Framework for the Preparation and Presentation of Financial Statements, Para 5
7
Customers. Customers have an interest in information about the continuance of an enterprise,
especially when they have a long-term involvement with, or are dependent on, the enterprise.
Governments and their agencies. Governments and their agencies are interested in the allocation
of resources and, therefore, the activities of enterprises. They also require information in order to
regulate the activities of enterprises, determine taxation policies and as the basis for national income
and similar statistics.
Public. Enterprises affect members of the public in a variety of ways. For example, enterprises
may make a substantial contribution to the local economy in many ways including the number of
people they employ and their patronage of local suppliers. Financial statements may assist the
public by providing information about the trends and recent developments in the prosperity of the
enterprise and the range of its activities.
While the objective of annual reports is to provide information about the financial position, performance and
changes in financial position of an enterprise, it cannot cater to all the information needs of users. However,
as investors are providers of risk capital to the enterprise, financial information from the annual report that
meet their needs will also meet the common needs of other users2.
Pokka Corporation (Singapore) Ltd’s annual report for FY 2007 provides a detailed and comprehensive
review of the operating and financial performance of the issuer of the annual report and its principal
subsidiaries in the last financial year.
A detailed and comprehensive review should also include an analysis of the business outlook, prospectus-
type information pertaining to the background of directors and key management staff, as well as prospectus-
type information pertaining to risk management policies and processes in addition to the financial
statements.
Pokka Corporation (Singapore) Ltd’s annual report not only provides information about its financial
position, performance and changes in its financial position for the year in review, it also shows the results of
2 CCDG – FRS Framework for the Preparation and Presentation of Financial Statements, Para 6
8
the stewardship of management, or the accountability of management for the resources entrusted to it. It
assists users in making economic decisions such as whether to hold or sell their investment in the enterprise
or whether to reappoint or replace the management3. Therefore, the annual report is useful to a wide range
of users and is able to satisfy most of their needs for information that is required to make sound economic
decisions.
2. Operating Activities
The principal activities of the Company are the manufacture, sale, import and export of canned drinks and
the trading of food products4. Its subsidiaries are principally engaged in restaurant operations. The Group
currently operates 28 food and beverage outlets in the region - 7 in Singapore, 19 in Hong Kong, 1 in Macau
and 1 in Shautou5.
The Company comprises the following branches and subsidiaries:
Pokka Corporation (Singapore) Ltd – Malaysia Branch – Incorporated in 1995, the branch provides
sales and marketing support to the Malaysian distributors.
Pokka Food (Singapore) Pte Ltd – Established in 1991 and operates a total of 7 food outlets in
Singapore.
Pokka Corporation (Hong Kong) Ltd – Established in 1991 and operates 21 food outlets in Hong
Kong, Macau and Shantou.
PH Sales & Marketing Pte Ltd – Incorporated in 1998 in a joint venture between Pokka Singapore and
HSC Universal Marketing to distribute Pokka drinks and other products.
The Company's immediate and ultimate holding company is Pokka Corporation, incorporated in Japan.
3 CCDG – FRS Framework for the Preparation and Presentation of Financial Statements, Para 10 4http://info.sgx.com/webcorpinfo.nsf/904d579318f247aa48256db000109b95/703a14b
2e3af24b548256433001d9ae7?OpenDocument 5 Pokka Corporation (Singapore) Ltd Annual Report 2007, Chairman’s Statement, Pg 14
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The Pokka Group commits itself to being a leading food and beverage company in Singapore and Asia,
focusing on creative innovation and high-quality products targeting today’s modern health-conscious
consumers. The Group continues to expand its range of products in adapting to the changing tastes and
lifestyles of consumers6.
Pokka Corporation (Singapore) Ltd’s market base spans the whole of Asia, from Iran, U.A.E and Oman of
the Middle East to India, Pakistan and Nepal of South Asia, to Brunei, Thailand and Indonesia and Vietnam
in Southeast Asia, to Japan, Korea and Taiwan in East Asia7.
3. Corporate Governance
3.1 Board of Directors
Akifumi Ito - Chairman
Tatsuo Yoshioka - Chief Executive Officer (CEO)
Masahiro Hirata - Non-Executive Director
Masahiko Kusada - Non-Executive Director
Tom Yee Lat Shing - Independent Non-Executive Director
Keith Tay Ah Kee - Independent Non-Executive Director
Tan Eng Liang - Independent Non-Executive Director
Yoshiharu Naito - Resigned as Director and Chairman on 24 May 2007
Yukihisa Kato - Appointed as Director and Chairman on 24 May 2007
and subsequently resigned from positions on
20 November 2007
Shinsuke Yoshida - Resigned as Director and CEO on 30 November 2007
Shoichi Ota - Resigned as Director on 24 May 2007
3.1.1 Appointment of New Directors
The Singapore Companies Act (Chapter 50) states that persons of full age and capacity can qualify as a
director, excluding undischarged bankrupts, persons disqualified in courts and persons convicted of fraud8.
6 Pokka Corporation (Singapore) Ltd Annual Report 2007, Mission Statement, Pg 2 7 http://www.pokka.com.sg/aboutus/ourcustomers1.html 8 http://statutes.agc.gov.sg/
10
The person must also hold a specified share qualification in the Company. At incorporation, directors of
Pokka Singapore were appointed by its immediate and ultimate holding company Pokka Corporation in
Japan.
In the selection of new directors for a term, a set of performance criteria relevant for that new period is used
for the performance evaluation of the new board. Director nominees are considered by the Nominating
Committee based on their background, experience and competency that are critical to the Company’s
business. The number and nature of the director nominees’ other directorships and commitment are also
taken into account to ensure commitment to their new appointment9.
After the Nominating Committee approves the nominations, the new directors are appointed following a
board resolution. Such new directors must submit themselves for re-election at the next Annual General
Meeting (AGM) of the company. One third of the Board is required to retire by rotation at every AGM10.
3.1.2 Directors’ Remuneration
The Remuneration Committee (RC) comprises the following non-executive directors, majority of whom are
independent of Management:
Tan Eng Liang (Chairman)
Tom Yee Lat Shing
Keith Tay Ah Kee
Yoshiharu Naito (resigned on 24 May 2007)
The RC reviews and recommends to the Board a framework of remuneration and determines the specific
remuneration packages (fees, salaries, allowances, bonuses, options and benefits-in-kind) and terms of
employment of each of the executive directors of the Group11. In awarding remuneration packages, the RC
takes into account the company’s relative performance and the performance of the individual directors, and
ensures that remuneration packages commensurate with remuneration guidelines and directors’
appointments and responsibilities.
9 Pokka Corporation (Singapore) Ltd Annual Report 2007, Report on Corporate Governance, Pg 21 10 Pokka Corporation (Singapore) Ltd Annual Report 2007, Report on Corporate Governance, Pg 21 11 Pokka Corporation (Singapore) Ltd Annual Report 2007, Report on Corporate Governance, Pg 21
11
Directors’ fees are paid only to independent non-executive directors.
A breakdown of each director’s remuneration for FY 2007 is as follows12:
Executive Directors
Remuneration Bands Salary &
Fees Performance
Based Bonus Total
Remuneration
$250,000 to below $500,000
Shinksuke Yoshida
91%
9%
100%
Below $250,000
Tatsuo Yoshioka
100%
-
100%
Non-executive Directors and Independent Non-executive Directors
Remuneration Bands Salary &
Fees Performance
Based Bonus Total
Remuneration
Below $250,000
Yoshiahru Naito
Shoichi Ota
Yukihisa Kato
Akifumi Ito
Masahiro Hirata
Masahiko Kusada
Tom Yee Lat Shing
Tan Eng Liang
Keith Tay Ah Kee
-
-
-
-
-
-
100%
100%
100%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
100%
100%
100%
3.1.3 Directors’ Interests in Shares and Debentures
The following Directors of the Company who held office at the end of the financial year had, according to
the register of Directors’ shareholdings required to be kept under Section 164 of the Companies Act, Cap.
50, an interest in shares of the Company as follows13:
Pokka Corporation (Singapore) Ltd Ordinary Shares
Direct Interest Deemed Interest
Director Beginning of
Year End of Year
Beginning of
Year End of Year
Tatsuo Yoshioka 108,000 108,000 - -
Keith Tay Ah Kee 10,000 10,000 - -
12 Pokka Corporation (Singapore) Ltd Annual Report 2007, Report on Corporate Governance, Pg 22 13 Pokka Corporation (Singapore) Ltd Annual Report 2007, Directors’ Report, Pg 30
12
Except as disclosed above, no other Directors who held office at the end of the financial year had an interest
in shares or debentures of the Company or related corporations, either at the beginning of the financial year,
or date of appointment if later, or at the end of the financial year.
There was no change in any of the above-mentioned interests between the end of the financial year and 21
February 2007.
3.1.4 Share Options
Under the Pokka Executives’ Share Option Scheme (the “Scheme”), the Company can grant up to a
maximum of 15% of the issued share capital of the Company14. The Scheme is administered by the
Remuneration Committee, which comprises Dr Tan Eng Liang (Chairman), Mr Tom Yee Lat Shing and Mr
Keith Tay Ah Kee. Since the commencement of the Scheme, no share options have been granted by the
Company.
3.1.5 Directors’ Appointments in Other Institutions
The directors hold positions in other institutions as well15. They are as follows:
DIRECTORS COMPANY APPOINTMENT
Mr Akifumi Ito
Pokka Corporation (Japan)
Fukude Shokuhin Kogyo Co.,
Ltd
Foremost Blue Seal, Ltd.
Senior Managing Director
Board Member
Board Member
Mr Tatsuo Yoshioka
Pokka Four Seas(Suzhou)
Food Co., Ltd
Pokka Coffee (Macau) Ltd
PH Sales & Marketing Pte
Ltd
Board Member
Board Member
Board Member
Mr Masahiro Hirata
Pokka Corporation (Japan)
PH Sales & Marketing Pte
Ltd
Pokka Corporation (HK) Ltd.
General Manager of Corporate
Planning Department
Board Member
Board Member
14 Pokka Corporation (Singapore) Ltd Annual Report 2007, Directors’ Report, Pg 31 15 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 26 & 27
http://investing.businessweek.com/research/stocks/people/people.asp?symbol=POKG.SI
13
Mr Masahiko Kusada
Pokka Corporation (Japan)
PH Sales & Marketing Pte
Ltd
Pokka Australia Pty Ltd
General Manager of Corporate
Management
Board Member
Board Member
Mr Tom Yee Lat
Shing
Bonvests Holdings Ltd
Eagle Brand Holdings
Limited
General Magnetics Ltd
Independent Director
Independent Director
Independent Director
Mr Keith Tay Ah Kee
Singapore Institute of
Directors
Stirling Coleman Capital Ltd
Singapore Reinsurance
Corporation Ltd
Honorary Vice President
Chairman
Independent Director
Dr Tan Eng Liang
FHTK Holdings Ltd
Ezra Holdings Ltd
Tung Lok Restaurant (2000)
Ltd
Chairman
Independent Director
Independent Director
Multiple similar appointments in other companies held by directors may give rise to conflicts of interests, in
which personal, occupational or financial situations may affect a director’s ability to act in the best interests
of the company. A conflict of interest can arise between the company and another corporation in which a
director of the company has a material interest16.
To minimize such instances, directors should fully disclose any potential conflicts of interest, and provide
details of the nature of the conflict. An assessment of whether the conflict of interest really exists will be
conducted to determine if the interested director’s suggestions should be taken into consideration when
making decisions.
An independent director is a person whose only connection to the company is his/her directorship17, and is
free of material relations with the Company’s management, controllers, or others that might possibly
16 http://www.moga.mo.gov/statutes/C300-399/3550000416.HTM 17 http://cii.org.previewyoursite.com/policies/ind_dir_defn.htm
14
interfere with the independent exercise of his/her best judgment for the exclusive interest of the company18.
Put simply, an independent director is one who does not hold positions in related companies. Independent
directors making up at least one-third of the board19 ensures that there are directors who can effectively
exercise their best judgment for the exclusive benefit of the Company, thus helping to resolve any conflicts
of interest that may arise.
In the case of Pokka Corporation (Singapore) Ltd, independent directors make up more than one-third of the
board (3 out of 7), hence the independent element on the board is strong, helping to minimize ‘conflict of
interest’ situations. In addition, most of the related companies that Pokka Corporation (Singapore) Ltd’s
non-independent directors have vested interests in are joint ventures with the Company, such as PH Sales &
Marketing Pte Ltd. Therefore, most decisions made by such non-independent directors would probably be
in line with the interests of Pokka Corporation (Singapore) Ltd.
3.2 Audit Committee
Pokka Corporation (Singapore) Ltd’s Audit Committee comprises Mr Tom Yee Lat Shing (Chairman), Mr
Keith Tay Ah Kee and Mr Tan Eng Liang. Members of the committee do not possess executive powers.
An Audit Committee mainly performs an oversight function and is ultimately accountable for the company's
financial reporting processes and the quality of its financial reporting20. The committee is responsible for
the following functions21:
Recommends to the Board of Directors the external auditors to be nominated.
Reviews the scope, audit plans, results and effectiveness of the external and internal auditors.
Reviews any related significant findings and recommendations of the external and internal auditors
together with Management’s responses thereto.
18 http://www.ifc.org/ifcext/corporategovernance.nsf/AttachmentsByTitle/Independent+Director+ Definitio n.doc
/$FILE/Independent+Director+Definition.doc 19 http://www.ccdg.gov.sg/attachments/CodeofCorporateGovernance.doc 20 http://www.aicpa.org/audcommctr/guidance_resources/improve_function/build_foundation_go vernance/25.htm 21 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 20
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Reviews the adequacy of the Group’s system of accounting controls, financial and management
reporting systems.
Reviews significant risks or exposures with Management and the external and internal auditors and
assess the steps Management has taken to minimize such risks to the Group.
Reviews with management external and internal auditors the announcement of the interim and full
year results of the Group and its financial statements.
Reviews interested person transactions as may be required by the regulatory authorities, or the
provisions of the Companies Act.
Reviews legal and regulatory matters that may have a material impact on the financial statements.
Reports actions of the Audit Committee to the Board of Directors with such recommendations as the
AC considers appropriate.
3.3 Nominating Committee
Pokka Corporation (Singapore) Ltd’s Nominating Committee comprises Mr Keith Tay Ah Kee (Chairman),
Mr Tom Yee Lat Shing and Mr Tan Eng Liang. The committee performs the following principal
functions22:
Makes recommendations to the Board on the appointment of new executive and non-executive
directors, including making recommendations as to the composition of the Board generally and the
balance between executive and non-executive directors appointed to the Board.
Reviews Board structure, size and composition and makes recommendations to the Board with
regards to any adjustments that are deemed necessary.
Assumes responsibility for identifying and nominating candidates for the approval of the Board,
determines annually whether or not a director is independent, to fill board vacancies as and when
they arise as well as putting in place plans for succession, in particular for the Chairman and for the
Chief Executive Officer (“CEO”).
Recommends directors who are retiring by rotation to be put forward for re-election, if appropriate.
22 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 21
16
Decides whether a director has been and is able to adequately carry out his duties as a director of the
Company, particularly when he has multiple directorships.
Assumes responsibility for assessing the effectiveness of the Board as a whole and for assessing the
contributions of directors to the effectiveness of the Board.
3.4 Internal Control
Internal control assists in the company’s effective and efficient operations by helping it to react suitably to
significant business, operational, financial, compliance and other risks to achieve the company’s aims. This
includes the safeguarding of assets from improper use or from loss and fraud, and ensuring that liabilities are
identified and managed. It also helps to ensure the quality of internal and external reporting. In addition,
internal control ensures compliance with applicable laws and regulations, and also internal policies with
respect to the conduct of business23.
The Company has in place an internal audit function to review the internal controls of the Company.
Internal audits are constantly performed to monitor and support the Audit Committee in its tasks of
reviewing the effectiveness of the Group’s overall system of operational and financial controls and assisting
in the implementation of a risk management framework24.
3.5 Independent Auditors
Ernst & Young were appointed as auditors of the Company for the financial year FY 2007, and have
expressed their willingness to accept re-appointment for the following financial year25.
The audit performed by Ernst & Young entailed performing procedures to obtain audit evidence on the
information disclosed in the Company’s financial statements. The audit also included an evaluation of the
appropriateness and relevance of accounting policies adopted and the fairness of accounting estimates made
by directors, as well as an evaluation of the overall presentation of the financial statements26.
23 http://www.ecgi.org/codes/documents/kpmg_internal_control_practical_guide.pdf 24 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 25 25 Pokka Corporation (Singapore) Ltd Annual Report 2007, Directors’ Report, Pg 31 26 Pokka Corporation (Singapore) Ltd Annual Report 2007, Independent Auditors’ Report, Pg 33
17
The audit procedures were selected based on the auditor’s judgment in assessing the risks of material
misstatements of financial statements due to fraud or error. In doing so, the auditor considers the internal
control relevant to the company’s preparation and fair presentation of the financial statements, so as to
design audit procedures that are suitable according to circumstances27.
The company’s audited annual report ensures objectivity, accuracy and reliability in the information
reflected in order for users to make informed decisions. An un-audited annual report may on the other hand,
reflect skewed and biased information that may favour the Company.
Apart from audit, Ernst & Young also provided non-audit services in carrying out a review of the
effectiveness of the Company’s financial controls in areas which could have a material impact on the
financial statements. Material non-compliances and flaws in internal control, together with their own
recommendations were reported to the Audit Committee28. Non-audit fees amounted to SGD 42,000 for the
year in review29.
Invariably, companies usually employ the same auditors to carry out non-audit services due to familiarity
and lower fees incurred as compared to engaging a separate and different audit firm. However, as per stated
in the Council on Corporate Disclosure and Governance’s Code of Corporate Governance, where auditors
also supply a substantial volume of non-audit services to a company, the Audit Committee should keep the
nature and extent of such services under review, seeking to balance the maintenance of objectivity and value
for money30. The Audit Committee should also review the independence of the external auditors annually.
The following functions are non-audit services that may impair the independence of the external auditor31:
Bookkeeping or other services related to the accounting records or financial statements of the audit
client
Financial information systems design and implementation
27 Pokka Corporation (Singapore) Ltd Annual Report 2007, Independent Auditors’ Report, Pg 33 28 Pokka Corporation (Singapore) Ltd Annual Report 2007, Independent Auditors’ Report, Pg 33 29 Pokka Corporation (Singapore) Ltd Annual Report 2007, Notes to the Financial Statements, Pg 71 30 Council on Corporate Disclosure and Governance, Code of Corporate Governance 31 http://www.otpp.com/web/website.nsf/web/Guidelines_Non_Audit_Fees_Compromise_ Independence
18
Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
Actuarial services
Internal audit outsourcing services
Management functions or human resources consulting
Broker or dealer, investment advisor or banking services
Legal or expert services unrelated to the audit
The Accounting and Corporate Regulatory Authority Code of Professional Conduct and Ethics suggests that
the significance of a threat to auditor independence should be evaluated by the Audit Committee in cases
where the amount of fees received for non-audit services compared to the total annual audit fees is 50% or
more, or the total size of the non-audit fees paid for the services is significant32.
Upon evaluating the nature and fees of Ernst & Young’s non-audit services for Pokka Corporation
(Singapore) Ltd, it is unlikely that the provision of these services during the year comprised their
independence.
4. Income Statement
The Group’s income statement period is from 1 February 2006 to 31 January 200733.
Turnover represents net invoiced sales and it excludes intra-group transactions34. The Group’s turnover is as
follows:
2007 ($’000) 2006 ($’000) Absolute Change
($’000)
% Change
Turnover 144,688 143,163 1,525 1.01
32 Accounting & Corporate Regulatory Authority, Code of Professional Conduct and Ethics Consultation Paper July
2007, SG290.206B 33 Pokka Corporation (Singapore) Ltd Annual Report 2007, Consolidated Profit & Loss Account, Pg 35 34 Pokka Corporation (Singapore) Ltd Annual Report 2007, Notes to Financial Statement, Pg 69
19
The increase of 1.01% in turnover from FY 2006 was achieved from an increase in restaurant business,
offsetting the decrease in turnover from beverage business. This increase in turnover was very little as
compared to other F&B companies such as F&N, which experienced a turnover increase of 8.8%35.
4.1 Group Revenue According to Activities
2007 ($’000) 2006 ($’000)
Manufacturing, trading & distribution of beverage products
93,661 95,415
Operations of restaurants, bakeries & food-counters 51,027 47,748
Total 144,688 143,163
The Group’s beverage business decreased by about 0.02% whereas their food business increased by 1.07%,
thereby resulting in an overall increase of only 1.01%36. This illustrates the importance in diversification of
activities by the Group. If not for the latter, they would have experienced a decline in turnover.
4.2 Group Revenue According to Location
2007 ($’000) 2006 ($’000)
Singapore & Malaysia 66,869 71,590 Asia Pacific 51,845 48,261
Middle East 14,416 13,067
Europe 10,433 7,229
Africa 1,125 3,016
Singapore and Malaysia generated the most profits for the Group, accounting for 46% of total turnover,
followed by the Asia Pacific region37. Their combined total turnover was 82%. The production and sale of
beverage form the core business activity of the Group. Pokka’s beverages are mainly coffee, tea and fruit
drinks, all of which cater mostly to East Asian taste buds38.
35 Frasier and Neave Ltd Annual Report 2006, Pg 9 36 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 69 37 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 74 38 www.pokka.com.sg
20
4.3 Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group, and
the revenue can be reliably measured. The following specific recognition criteria must also be met before
revenue is recognized39:
Revenue from the sale of goods is recognized upon passage of title to the customer which generally
coincides with their delivery and acceptance.
Revenue from restaurants, café and bakery operations is recognized upon delivery and acceptance of
goods sold.
Dividend income is recognized when the shareholder’s right to receive payment is established.
Interest income from bank deposits is recognized as interest accrues (using the effective interest
method) unless collectibility is in doubt.
4.4 Common Size Income Statement
The Common Size Income Statement is as follows40:
2007
%
2006
%
Change
%
Net Sales 100 100 -
Cost & Expenses
Changes in Inventory of finished goods and
trading goods 0.6 0.4 0.2
Raw & packaging materials consumed
44.4
46.9
(2.5)
Staff costs 18.3
17.3
1.0
Depreciation and amortization expenses 3.8
3.8
0
Foreign exchange differences
0.3
0.1
0.2
Other operating expense
29.3 31.9 (2.6)
Finance costs 0.7 0.7 0
Share of results of an associated company 0.04 0.03 0.01
Exceptional items
- Gain on sale of an ice cream counter
- Loss on closure of restaurants
-
0.03
0.2
0.1
-
(0.07)
Total costs and expenses 97.5
99.9
(2.4)
Profit before taxation 2.5
0.06
2.44
Taxation 0.8
0.2
0.6
Profit / (Loss) for Year 1.7
0.001
1.699
39 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 52 40 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Consolidated Profit & Loss Account Pg 35
21
Raw and packaging materials expense decreased by 2.5% and other operating expense also decreased by
2.6%, while staff costs increased by 1%. This decrease in expense more than offset the increase in expense.
Coupled with the increase in revenue, this resulted in profit increase of 1.7% as a percentage of revenue.
4.5 Net Income Before Tax
The Net Income before tax is as follows41:
2007 ($’000) 2006 ($’000) Absolute
Change % Change
Net Income before tax 3,620 93 3527 +3,892
The profits earned by the Group increased by an approximate SGD 3,527,000. The percentage increase was
about 3900%, which was extremely huge, giving the impression that Pokka Corporation (Singapore) Ltd
performed exceptionally well and grew at a tremendous rate in FY 2007. However, total revenue only grew
by 1% and the large increase in profits was due to cost rationalization by the Group, hence it cannot be said
that Pokka Corporation (Singapore) Ltd is experiencing rapid growth in its business. Since the change only
took place in FY 2007, it remains to be seen whether the increase in profits through cost reduction can be
sustained in the following year.
4.6 Retained Earnings
The retained earnings are as follows42:
Retained Earnings (Accumulated Losses) 2007 ($’000) 2006 ($’000)
Balance at 1 February (1858) (2034)
Net Profit 965 512
Dividend Paid 336 336
Accumulated Losses at 31 January (1,229) (1,858)
According to the Annual Report, Pokka Corporation (Singapore) Ltd has negative retained earnings and is
classified as accumulated losses. It experienced a decline in accumulated losses of SGD 629,000 from FY
2006 to FY 2007 as the net profit generated was used to reduce the deficit.
41 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 72 42 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Statement of Changes in Equity, Pg 37
22
4.7 Earnings Per Share
The Earnings Per Share is as follows43:
2007 2006 Change (%)
Basic and diluted earnings per share 1.15 cents 0.61 cents 188
The earnings per share increased from 0.61 cents to 1.15 cents, a 188% change. The basic earnings per
share is calculated by dividing the Group’s profit attributable to ordinary equity holders of the Company by
the weighted number of ordinary shares outstanding during the year, which is 84 million. There was no
change in the number of ordinary shares outstanding.
5. Taxes
The breakdown of income tax expense for FY 2007 and FY 2006 is as follows44:
2007 ($’000) 2006 ($’000)
Tax Expense 1,093 267
The tax expense increased by 409% from SGD 267,000 in FY 2006 to SGD 1,093,000 in FY 2007. Pokka
Corporation (Singapore) Ltd paid SGD 300,000 of income tax in the financial year ending 31st January
200645.
6. Dividends
Dividend is a payment paid out of a firm’s earnings to its owners, in the form of either cash or stock. This
amount is set by the firm’s dividend policy, which is the time pattern of dividend payout, in particular, the
percentage of its earnings. There are 3 main dividend policy strategies, mainly the Residual Dividend
Approach, Dividend Stability and Compromise Dividend Policy46.
43 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 72 44 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 72 45 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Consolidated Cash Flow Statement, Pg 40 46 Fundamentals of Corporate Finance by Ross, Westerfield & Jordan, Chapter 17, Pg 535
23
6.1 Residual Dividend Approach
This is a policy under which a firm pays dividends only after it meets its investment needs, while
maintaining a desired debt-equity ratio. Hence, a firm which has many investment opportunities is more
likely to pay a small percentage of their earnings as dividends while a firm with fewer opportunities will pay
a higher percentage.
6.2 Dividend Stability
This policy reduces uncertainty and provides income for investors by two ways. The first way is the cyclical
dividend policy whereby each quarter’s dividend can be a fixed fraction of that quarter’s earnings, thus
dividends will vary throughout the year. The second way is the stable dividend policy whereby each
quarter’s dividend can be a fixed fraction of yearly earnings, implying that all dividend payments will be
equal.
6.3 Compromise Dividend Policy
This approach is a balance between the above two approaches. Under this approach, the debt-equity ratio is
viewed as a long-term goal and is allowed to vary in the short run if necessary to avoid dividend cut or the
need to sell new equity.
Besides these three approaches, falling stock price also plays a part in the dividend policy as a firm can pay
out dividends to stabilize the price. This increases investors’ confidence in the stock and thus slows down
the decline.
High tax rates may also affect dividend payouts and influence a firm to keep its earnings than paying
dividends. Because taxes are imposed both on dividends and profits, a firm will avoid paying double taxes
by not declaring dividends and choose to retain its earnings.
24
6.4 Dividends paid by Pokka Corporation (Singapore) Ltd
Pokka Corporation (Singapore) Ltd did not pay any interim dividend during the year. The total amount of
dividend paid during the year is $525,000, of which $336,000 is paid on ordinary share holders while
$189,000 is paid to minority shareholders of a subsidiary company47.
The directors of the company proposed the following dividends for the year ended as the following:
2007 ($’000)
Proposed first and final dividend of $0.005 per
ordinary share less tax at 18% 334
Proposed special dividend of $0.005 per
ordinary share less tax at 18% 334
Total Dividends 688
If the proposed final and special dividends are approved, the total dividend payout for FY 2006 would be
$688,00048.
7. Share Capital and Reserves
Pokka Corporation (Singapore) Ltd only has one class of shares, which is the Ordinary Shares49. It
represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders
in proportion to their percentage ownership in the company.
The total capital of the Group is SGD 26,800,000 with 84,000,000 shares. There is no change in the capital
for the year as well as the number of shares issued.
The only class of shares, Ordinary Shares, has 2,525 shareholders at the date of the Annual Report. Only
one shareholder, Pokka Corporation, holds more than 50% of the Group’s shares at 51%50.
47 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Consolidated Cash Flow Statement, Pg 40 48 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 80 49 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 68 50 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Statistics of Shareholdings, Pg 82
25
7.1 Bonus Issue
In a bonus issue, ordinary shares are issued to existing shareholders free of charge. They are issued
proportionately to the ordinary shares outstanding held. The number of ordinary shares outstanding is
increased without an increase in equity. For example, on a two-for-one bonus issue, the number of ordinary
shares outstanding before the issue is multiplied by three to obtain the new total number of ordinary shares,
or by two to obtain the number of additional ordinary shares.
7.2 Stock Split
A stock split is an increase in a firm’s shares outstanding without any change in owners’ equity. A firm’s
existing shares are divided into multiple shares and although the amount of shares outstanding increases by a
specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts. The
reason for a stock split is to make shares more affordable for potential investors51.
7.3 Rights Issue
In a Rights Issue, each shareholder is issued rights to buy a specified number of new shares from the firm at
a specified price within a specified time, after which time the rights are said to expire. The terms of the
rights offering are evidenced by certificates known as share warrants or rights. Such rights are often traded
on securities exchanges or over the counter52.
The Group did not buy back any of its shares during the year.
7.4 Reserves
The composition of reserves in the Company is as follows53:
2007 ($’000) 2006 ($’000)
Accumulated Losses (1,229) (1,858)
Foreign Currency Translation
Reserves 976 996
Total Reserves (253) (862)
51 http://www.investopedia.com/terms/s/stocksplit.asp 52 Fundamentals of Corporate Finance by Ross, Westerfield & Jordan, Chapter 15, Pg 466 53 Pokka Corporation (Singapore) Ltd, Annual Report 2007, Notes to Financial Statement, Pg 69
26
Foreign currency translation reserve is used to record exchange differences arising from the translation of
financial statements of foreign operations whose functional currencies are different from that of the Group’s
presentation currency.
There is an increase in the total reserves of 70.6%. However, it is important to note that the amount of total
reserves is still negative.
Accumulated losses decreased from $1,858,000 to $1,229,000 by 33.9%. This is likely due to an increase in
net income of $453,000 from FY 2006 to FY 2007.
8. Current Assets and Current Liabilities
Current assets and current liabilities for the year in review and FY 2006 are as follow:
Current Assets54
Current Assets 2007
($’000)
2007
($’000)
2006
($’000)
2006
($’000)
Cash and Cash Equivalents
Cash and bank balances
Fixed deposits
5,326
8,950
4,769
3,373
14,276 8,142
Trade Receivables
External parties
Immediate holding company
Subsidiary companies
Associated company
Related party
GST Receivable
16,915
39
-
140
1,852
255
16,856
192
-
-
683
6
19,201 17,737
Allowance for doubtful receivables (858) (707)
18,343 17,030
Other Receivables
Advance payment on behalf of suppliers
Rental and other deposits
Other recoverables
Staff advances
991
1,078
307
16
1,406
1,550
359
19
54 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40, 61-64
27
Amounts due from:
Immediate holding company
Subsidiary companies
Associated company
Related party
23
-
22
377
-
-
9
277
2,814 3,620
Allowance for doubtful receivables (859) (412)
1,955 3,208
Other Current Assets
Prepayments
Income tax recoverable
855
-
733
283
855 1,016
Inventories
Goods purchased for resale
Raw and packaging materials
Finished goods
5,245
2,602
5,757
6,111
2,705
6,801
Total inventories at lower of cost and net
realizable value
13,604 15,617
Total Current Assets 49,033 45,013
The total current assets increased substantially by 8.93% in FY 2007 as compared to FY 2006. This was
largely attributable to the increase in cash and cash equivalents, specifically for fixed deposits, in FY 2007.
The increase was offset by declines in other receivables as well as inventories. The decrease in other
receivables could be due to faster collections. There was a decrease of SGD 2,013,000 in the value of
inventories, which can be attributed to a write-down of SGD 1,300,00055. Possible reasons to account for
the remaining losses could be due to the Group purchasing fewer inventories, or that the price of new stocks
has declined.
Current Liabilities56
Current Liabilities 2007
($’000)
2007
($’000)
2006
($’000)
2006
($’000)
Trade and other payables
Trade payables
Due to external parties
Due to the immediate holding company
Due to subsidiary companies
Due to an associated company
Due to a related party
Accrued operating expenses
GST payable
11,250
1,215
-
1,236
2,790
8,795
71
25,357
9,371
648
-
979
2,112
4,753
121
17,984
55 Pokka Corporation (Singapore) Ltd Annual Report 2007, Notes to Financial Statements, Pg 64 56 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40, 64-68
28
Other payables
Advances from customers
Sundry payables
Due to the immediate holding company
Due to subsidiary companies
Due to a minority shareholder
Due to an associated company
93
1,789
234
-
502
-
282
1,993
369
-
185
11
27,975 20,824
Interest-bearing loans and borrowings
Bank loan, secured
Bank loans, unsecured
Bank overdrafts, secured
Bill payables, secured
Current portion of:
Bank term loan at prevailing Enterprise
Financing rate + 1.00% (2006: +0.75%), secured
Finance lease liabilities
-
13,000
363
1,637
356
1,348
2,420
13,735
279
2,807
348
1,695
16,704 21,284
Provision for taxation 621 109
Total Current Liabilities 45,300 42,217
The total current liabilities have increased by 7.3% (SGD 3.083 million) from SGD 42,217,000 in FY 2006
to SGD 45,300,000 in FY 2007. This is mainly due to the huge increase in trade and other payables, as well
as the increase in provision for taxation, offsetting the drop in interest-bearing loans and borrowings,
resulting in the overall rise in total current liabilities.
Trade and other payables increased by 34.3% (SGD 7.151 million) from FY 2006 to FY 2007 mostly due to
the increase in trade payables due to external parties. This may have been due to the immense increase in
operating activities57 of the Company from FY 2006 to FY 2007. Provision for taxation increased by about
5.7 times from FY 2006 to FY 2007 due to the huge rise in income of the Company.
As for the decrease in interest-bearing loans and borrowings by 21.5% from FY 2006 to FY 2007, it was
chiefly due to the drop in bank loans and bill payables. A contributing factor could have been the decrease
in purchases of fixed assets58.
57 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40 58 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40
29
The calculated figures for working capital, current ratio and quick ratio are as follows:
2007 2006
Working Capital $3,733,000 $2,796,000
Current Ratio 1.08 1.07
Quick Ratio 0.76 0.67
Working capital is a measure of a company’s efficiency and short-term financial health59. The 33.5 % (SGD
937,000) increase in working capital in FY 2007 signifies healthier liquidity.
The current ratio measures an entity’s ability to repay its short-term obligations. The current ratio increased
only slightly from 1.07 in FY 2006 to 1.08 in FY 2007. This was due to proportionate increases in both
current assets and current liabilities from FY 2006 to FY 2007.
The quick ratio reflects the ability of a company to repay its short-term obligations with its more liquid
assets. It is a more stringent measure as compared to the current ratio. The 13.4% increase in FY 2007
indicates a better capability of the Group in meeting its current liabilities with its available liquid assets.
This increase was effected mainly due to the large increase in cash and cash equivalents coupled with the
drop in current liabilities.
9. Inventories
9.1 Inventory Values
The Company’s inventories are tabulated as follows:
2007
($‘000)
2006
($’000)
Goods purchased for resale 5,245 6,111
Raw and packaging materials 2,602 2,705
Finished goods 5,757 6,801
Total inventories at lower of cost and net
realizable value 13,604 15,617
59 http://www.investopedia.com/terms/w/workingcapital.asp
30
9.2 Inventory Valuation Policy
At Pokka Corporation (Singapore) Ltd, inventories are stated at the lower of cost and net realizable value.
Inventory values include costs incurred in bringing inventories to its present location and condition. Goods
purchased for resale, as well as raw and packaging materials are accounted for under the weighted average
basis. Finished goods comprises of manufactured products, where costs are calculated using the weighted
average cost formula and this includes costs of direct materials and labor and a proportion of manufacturing
overheads based on normal operating capacity. In addition, it also comprises of restaurant inventories,
where purchase costs are accounted on a first-in-first-out basis. Net realizable value is the estimated selling
price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary
to make the sale60. During the year, a total of SGD 1,311,000 of inventories was written-off.
9.3 Gross Profit Percentage on Sale
2007
($‘000)
2006
($’000)
Revenue 145,521 144,132
Cost of goods sold 13,604 15,617
Gross profit 131,917 128.515
Gross profit percentage 90.65% 89.16%
Gross profit percentage has remained relatively constant compared to the previous year. An increase of 1%
might be an indication that cost of sale is understated, or an overstating of revenue.
9.4 Inventory Turnover
2007
($‘000)
2006
($’000)
Beginning inventory 15,617 15,616
Ending inventory 13,604 15,617
Average inventory 14,610.5 15,616.5
Cost of goods sold 13,604 15,617
Inventory turnover 0.93 1.0
Inventory turnover measures the sale-ability of the inventory, i.e. the number of times the inventory is sold
and replaced completely. Inventory turnover ratio is 0.07 lower than the previous year, showing that Pokka
Corporation (Singapore Ltd) was not able to clear its stock within FY 2007 compared to FY 2006.
60 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 50
31
10. Accounts Receivable
The Company’s accounts receivable are as follows61:
2007
($’000)
2006
($’000)
Trade receivables 18,343 17,030
Other receivables 1,955 3,208
Total receivables 20,298 20,238
10.1 Allowance for Doubtful Debts
The allowance for doubtful debts for FY 2006 and FY 2007 are as follows62:
2007
($’000)
2006
($’000)
Allowance for doubtful debts 858 707
10.2 Avoidance and Reduction of Credit Losses
Companies are able to avoid and reduce credit losses through the following:
Monitor and assess a customer’s creditworthiness through trade and bank references, and credit
agencies (e.g. Credit Bureau Singapore), and only extend credit to those customers with good credit
histories.
Companies may set a credit limit on each customer’s account which must not be exceeded.
If customers are not paying, second and third statements should be sent out to remind customers.
Companies could also opt to purchase business credit insurance to substantially reduce the risk of
exposure to non-payment, and the accompanying bad debt loss. Commercial credit risk coverage
can be written to include all customers, or it may be targeted to cover only certain buyers.
11. Long-Term Assets, Impairment and Depreciation
11.1 Property, Plant and Equipment
The breakdown of property, plant and equipment as at balance date by type and amount, compared with
those of the previous year, is as follows63:
61 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 36 62 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 64
32
Group 2007 ($’000) 2006 ($’000) Increase/(Decrease)
($’000)
Leasehold factory buildings and
structures 17,361 17,561 (200)
Leasehold improvement 17,847 17,007 840
Machinery and equipment 48,174 45,946 2,228
Motor vehicles 1,676 1,601 75
Total 85,058 82,115 2,943
The amount of fixed assets has increased from FY 2006 to FY 2007 by SGD 2,943,000. This is because the
only decrease in fixed assets arose from leasehold factory buildings and structures, while there were
increases in the other three fixed assets, namely leasehold improvement, machinery and equipment, and
motor vehicles.
11.2 Depreciation
The depreciation method the company uses for financial reporting is to depreciate the costs of fixed assets
on a straight-line basis over their estimated useful lives. The carrying amount of the Group’s fixed assets as
at Balance Sheet date is SGD 29,000,000, while that in FY 2006 is SGD 30,384,00064, hence showing a
decrease of SGD 1,384,000 from the previous year.
Fixed assets are stated at cost less accumulated depreciation and any impairment losses. The cost of an asset
comprises its purchase price and any directly attributable cost of bringing the asset to working condition for
its intended use. Expenditure for additions, improvements and renewals are capitalized, and expenditure for
maintenance and repair are charged to profit and loss account.
The estimated useful lives of fixed assets are as follows65:
Fixed Assets Estimated useful lives
Leasehold factory buildings and structures Over a lease term of 30 to 50 years
Leasehold improvement 5 years
Machinery and equipment 3 to 10 years
Motor vehicles 4 to 10 years
63 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 54 64 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 43 65 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 48
33
11.3 Depreciation Expense
The amount of depreciation expense for the year, indicated by type and amount, is as follows66:
Depreciation Expense 2007 ($’000)
Leasehold factory buildings and structures 197
Leasehold improvement 90
Machinery and equipment 11
Motor vehicles 11
Total 309
11.4 Impairment
The company accounted for impairment in the carrying value of leasehold improvements and machinery and
equipment. The breakdown of impairment accounted for is as follows67:
Impairment losses 2007 (S’000)
Leasehold factory buildings and structures -
Leasehold improvement 78
Machinery and equipment 50
Motor vehicles -
Total 128
The carrying values of fixed assets are reviewed for impairment when events or changes in circumstances
indicate that the carrying value may not be recoverable. The residual values, useful lives, and depreciation
method are reviewed at each financial year-end to ensure that the amount, method, and period of
depreciation are consistent with previous estimates and the expected pattern of consumption of the future
economic benefits embodied in the fixed asset68.
The management of a subsidiary company carried out a review of the recoverable amount of its renovations
and machinery and equipment during FY 2007 because a particular restaurant outlet had been persistently
making losses. Impairment losses amounting to SGD 128,000, as shown above, in relation to certain
renovations and machinery and equipment have been recognized in other operation expenses. There was no
impairment accounted for in the carrying value of assets in FY 2006, hence a SGD 128,000 increase in
impairment losses is represented69.
66 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 56 67 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 55 68 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 48 69 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 57
34
Revaluation
The company did not revalue any of its long-term assets.
12. Long-Term Liabilities and Contingent Liabilities
12.1 Long-Term Liabilities
Pokka Corporation (Singapore) Ltd’s long-term liabilities are tabulated as follows70:
Non-current liabilities 2007
($‘000)
2006
($’000)
Interest-bearing loans and borrowings 4,533 6,150
Deferred tax liabilities 1,041 697
Total 5,574 6,847
The Company’s long-term liabilities fell by SGD 1,273,000 in FY 2007, as compared with the previous
financial year.
12.2 Security of Long-Term Liabilities
The bank loan is secured by receivables from a subsidiary company. The secured bank overdrafts, bill
payables and term loan from a bank are secured by a charge on a subsidiary company’s leasehold factory
building. Lastly, the leasehold factory building of a subsidiary company with a net book value of SGD
5,029,000 (2006 : SGD 5,152,000) was pledged to a bank to secure a term loan, bill payables and bank
overdraft facility71.
12.3 Total Assets Financed by Long-Term Borrowings
2007
($‘000)
2006
($’000)
Total non-current assets 34,303 35,288
Total current assets 49,033 45,013
Total assets 83,336 80,301
Total non-current liabilities excluding deferred
tax 4,533 6,150
Proportion of the total assets of the company
financed by long-term borrowings (%) 5.439 7.658
70 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 67 71 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 68
35
The percentage fell by about 2%. This means that Pokka Corporation (Singapore) Ltd is just slightly less
reliant on external parties to finance its total assets. However, the slight decrease in liabilities can be
attributed to the increase in profit in FY 2007.
12.4 Long-term Assets Finance Options
The purchase of long-term assets can be financed in three ways - internally generated funds, shareholders’
contributions and external borrowings.
Internally generated funds refer to profits generated by the company as well as the shareholders’ equity. The
use of internally generated funds as a finance option does not incur any future interest costs. Moreover,
investment projects can be undertaken without involving either the shareholders or any outsiders. However,
it is evident that Pokka has negative retained earnings, or accumulated losses of SGD 1,229,000. Hence,
utilizing internally generated funding for the purchase of long-term assets is a less feasible option, as it will
hamper the recovery of the company’s accumulated losses.
Long-term bank loans are a viable option. The loans are secured by mortgage of long-term assets. Pokka
already has bank loan liabilities secured by receivables from a subsidiary company, as well as a charge on a
subsidiary company’s leasehold factory building.72 Pokka’s debt ratio fell by 2% from 7.7% 2006 to 5.5% in
2007. Considering the fact that Pokka will probably not require substantially large sums for expansion of
property, plant and equipment, it would be a helpful source of financing.
As for funds from shareholders’ contributions, issuing shares creates no liabilities and in addition, there is no
demand for repayment. Shareholder’s contributions comprises mainly of ordinary and preference shares.
Issuing new ordinary shares to the public is will generate the required funds for the company. This would,
however, dilute the holdings of the shareholders and may cause disapproval among shareholders. Issuance of
new shares also implies that a larger amount of dividend needs to be paid in future, owing to the increase in
outstanding shares. On the other hand, issuance of preference shares is advantageous for Pokka because
dividends do not have to be paid in a year in which the company’s performance is poor.
72 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 66
36
Given Pokka’s current financial position, and considering the benefits and drawbacks associated with each
method of financing, it would be most optimum to turn to external borrowings to finance the purchases of
their long-term assets, given the healthy debt ratio in 2007.
12.5 Contingent Items
A subsidiary company of the Group has a contingent liability in respect of a possible compensation claim
payable to a plaintiff with a maximum possible amount of SGD 196,000 plus interest.
The contingent liability arose because, at the balance sheet date, a plaintiff filed a District Court Case
against the subsidiary company and the court case result was not available. A provision was not made in
respect of such possible compensation, as the directors of the subsidiary company considered that it was not
probable that the subsidiary company would lose in the case and result in a material future outflow of
resources73.
13. Statement of Cash Flows
13.1 Cash Position
The table below shows the breakdown of the cash position of Pokka Corporation (Singapore) Ltd in FY
2006 and FY 200774.
Cash Position 2007 ($’000) 2006 ($’000)
Cash and cash equivalents at beginning of year 7,863 12,790
Effects of exchange rate changes on opening cash and cash
equivalents
(134) (5)
Net increase/(decrease) in cash and cash equivalents 6,184 (4,922)
Cash and cash equivalents at end of year 13,913 7,863
Pokka Corporation (Singapore) Ltd experienced a stronger cash position in FY 2007 as compared to FY
2006. There is a net increase in cash and cash equivalents in FY 2007, while there is a net decrease in cash
73 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 78 74 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40
37
and cash equivalents in FY 2006. Furthermore, cash and cash equivalents at financial year-end of 2007
showed an increase of SGD 6,050,000.
13.2 Operating, Investing and Financing
The table below shows the amounts derived/invested in each of the following activities: operating, investing
and financing75.
Cash 2007 ($’000) 2006 ($’000)
Net cash generated from operating activities 19,325 4,005
Net cash used in investing activities (5,783) (4,768)
Net cash used in financing activities (7,358) (4,159)
Referring to the table above, the net cash generated from operating activities increased by SGD 15,320,000,
a 383% increase. This 383% increase in net cash generated from operating activities is what mainly accounts
for the improvement in cash position from FY 2006 to FY 2007.
The net cash used in investing activities increases by SGD 1,015,000 from FY 2006 to FY 2007. Therefore,
the net cash used in investing activities increases by only 21% from FY 2006 to FY 2007, even though net
cash generated from operating activities increased by 383%. While net cash used in investing activities
represents a negative figure when calculating the cash and cash equivalents, investing more is actually
beneficial to Pokka Corporation (Singapore) Ltd in the long run. Hence, judging from the strong cash
position, more cash could have been considered to be used in investing activities.
The net cash used in financing activities increased by SGD 3,199,000 from FY 2006 to FY 2007. Thus, this
shows a 77% increase in net cash used in financing activities, which is a larger increase from FY 2006 to FY
2007, as compared to net cash used in investing activities.
13.3 Preparation of Operating Cash Flows
As with 99% of public companies, Pokka Corporation (Singapore) Ltd used the indirect method in the
preparation of operation cash flow76.
75 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40 76 Horngren, Harrison: Accounting, 7th Edition, 2007, Ch 16, Pg 786
38
13.4 Statement of Cash Flows
The Statement of Cash Flows complements the information provided by the Balance Sheet and the Income
Statement. Also, the Statement of Cash Flows helps Pokka Corporation (Singapore) Ltd to predict future
cash flows, evaluate management decisions, and to predict ability to pay its debts and dividends.
The Balance Sheet and Income Statement reports financial position; and balance sheets for two periods
shows whether cash increased or decreased. However, the balance sheet is unable to show why cash
increased or decreased. Therefore, the Statement of Cash Flows adds information to those provided by the
balance sheet in this aspect.
Cash receipts and cash payments are reported in the cash flows statement, hence the cash receipts show
exactly where cash came from, and the cash payments show exactly where cash was spent. Therefore, the
cash flows statement reports why cash increased or decreased during the period, which is information that
the Balance Sheet and Income Statement does not provide.
In addition, the statement of cash flow also helps to predict future cash flows, as past cash receipts and
payments help predict future cash flows through trends and patterns. Investors and creditors also use cash
flow information to evaluate manager’s decisions, since wise investment decisions help the business to
prosper, while unwise investments decisions cause problems. Furthermore, the Statement of Cash Flows
helps to make predictions on Pokka Corporation (Singapore) Ltd’s ability to pay its debts and dividends.
This information is especially crucial as lenders would want to know whether they will be able to collect
their loans, and stockholders would want to earn dividends on their investments.
Therefore, the Statement of Cash Flows complements the information provided by the Balance Sheet and the
Income Statement to give a more holistic view of the reasons for, in this case, an increase in net cash
generated from operating activities for Pokka Corporation (Singapore) Ltd. Hence the Statement of Cash
Flows does add information to those provided by the Balance Sheet and the Income Statement77.
77 Horngren, Harrison: Accounting 7th Edition, 2007, Ch 16, Pg 784
39
13.5 Positive Cash Flow from Operations Despite Recording Losses
It is possible for a company to record a loss and yet have a positive cash flow from operations. This is due
to accrued expenses, unearned revenues and depreciation expenses and impairment losses.
The Statement of Cash Flows is prepared under cash basis accounting, which means that revenues and
expenses are recognized only when cash is received or payments are made. Therefore, using the cash basis
accounting method to prepare the Statement of Cash Flows may not adhere to the matching concept, where
all costs and expenses incurred in generating revenues must be recognized in the same reporting period as
the related revenue, and the process of matching expenses with recognized revenues determine the amount
of net income. On the other hand, the Balance Sheet and the Income Statement are prepared under the
accrual basis of accounting, and hence adheres to the matching concept.
Therefore, since the Statement of Cash Flows is prepared under cash basis accounting, it is possible for a
company to record a loss and yet have a positive cash flow from operations. Pokka Corporation (Singapore)
Ltd may incur expenses which they do not have to pay during the same accounting period. Hence, under
accrual basis accounting, such expenses are recorded in the Balance Sheet and the Income Statement in the
same accounting period the expenses are incurred. However, under cash basis accounting, such expenses
are recorded when the payments are made, which may result in the same expense being recorded in the
Balance Sheet and the Income Statement, and in the Statement of Cash Flows, of different accounting
periods.
Therefore, if Pokka Corporation (Singapore) Ltd were to incur large amounts of accrued expenses, it is
possible for the company to record a loss and yet have a positive cash flow from operations. For example, if
the company were to incur large supplies, rent, and insurance payables, it is possible for its cash inflows to
be larger than its cash outflows, since these expenses would only be recorded in the Statement of Cash
Flows of the accounting period in which they are being paid.
Also, it is possible for Pokka Corporation (Singapore) Ltd to record a loss and yet have a positive cash flow
from operations if they have large amounts of unearned revenue. For example, they may receive payment in
40
advance for a large order of canned drinks, of which they are to deliver a fixed amount to the customer each
month for a year. Therefore, this payment received will be recorded in the Statement of Cash Flows for the
current accounting period, but will only be recorded in the Balance Sheet and Income Statement of the
accounting period of which the revenue is earned, which is when the company delivers the canned drinks to
the customer.
In addition, depreciation expenses and impairment losses are reflected in the Balance Sheet and Income
Statement, but not in the Statement of Cash Flows. As such, if the company’s depreciation expenses and
impairment losses for the year in review is significant, it may cause the company to record a loss. Since the
depreciation expenses and impairment losses are not reflected in the Statement of Cash Flows, the company
may record a positive cash flow from operations.
13.6 Analysis of Statement of Cash Flows
The table below shows whether the cash flows from operating, investing and financing activities are positive
or negative78.
Year Operating Investing Financing
2007 + - -
2006 + - -
Therefore, as we can see, for both FY 2006 and FY 2007, cash flows from operating activities is positive,
from investing activities is negative, and from financing activities is negative. Hence, Pokka Corporation
(Singapore) Ltd’s Statement of Cash Flows is healthy since their operating cash is being used to buy fixed
assets and pay off their debts. As such, the cash outflow for investing and financing activities shows that the
company is using its operating cash to finance its investments and payment of debts.
This is favorable as by investing in fixed assets, the company ensures its long-term growth. Furthermore, by
paying off its debts, Pokka Corporation (Singapore) Ltd’s interest payment will be a lot less in the following
year. Hence, this decrease in long-term debts helps the company to save on interest payments. In addition,
the same trend is shown for both years FY 2006 and FY 2007, which shows that the company has healthy
78 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40
41
cash inflows from its operating activities, and is constantly using this operating cash to finance its
investments and payment of debts.
The table below shows the breakdown of cash inflows and outflows for operating, investing and financing
activities, and shows the percentage change as well79.
Year 2007 2006 Percentage Change
(%)
Operating ($’000) 19,325 4,005 380
Investing ($’000) (5,783) (4,768) 21
Financing ($’000) (7,358) (4,159) 77
Therefore, as can be seen, there is a 380% increase in cash inflows from operating activities from FY 2006
to FY 2007, while a 21% and 77% increase in cash outflows from investing and financing activities
respectively. This shows that cash from operating activities is increasing favorably and Pokka Corporation
(Singapore) Ltd is also increasing its financing of investments and debt payments. However, since there was
a 380% increase in cash inflows from operating activities, more could have been used to finance investments
and payment of long-term debts.
14. Market Prices of Shares
According to Singapore Exchange Stock Chart, at balance sheet date 31 Jan 2007, the market price of Pokka
Corporation (Singapore) Ltd was SGD 0.27.
2007
Total Shareholder’s Equity ($’000) 26,547
No. of Ordinary Shares Issued (‘000) 84,000
Book Value per Share ($) 0.32
The book value per share is an accounting value which measures the net assets that are attributable to each
share. It is a reflection of firm’s current situation with no consideration of its future. Investors normally
79 Pokka Corporation (Singapore) Ltd Annual Report 2007, Pg 40
42
evaluate a firm’s earning prospects and hence may be willing to pay more or less than book value for the
share80. This price at which the share is bought or sold is known as the market price per share.
15. Conclusion
The Company had a good financial year. Net Income increased by around 3900% from FY 2006. This is
mainly attributed to the new cost rationalization implemented, which caused the total cost and expense to
decrease by 2.4%. The Company enjoyed a large increase of 380% in cash flow from operating activities.
This allows the Company to have substantial cash should it expand its businesses in the future. The current
ratio is 1.08, which also means that it has sufficient current assets to cover its current liabilities. Pokka
Corporation (Singapore) Ltd’s Return on Equity (ROE) for FY 2006 was 0.0036, compared to 0.14 in FY
2007, thus reflecting the Company’s increase in profitability.
From an investor’s point of view, there are several reasons for buying Pokka Corporation (Singapore) Ltd’s
shares, such as the strong growth of 6.9% of its restaurant businesses in FY 2006, and with Hong Kong’s
economy expanding, this represents a potential for the business to grow even more. Pokka Corporation
(Singapore) Ltd also enjoys an extremely healthy cash inflow where cash from operating activities is
increasing and is being used to pay off liabilities and invest in its fixed assets. This is the best possible
scenario for a company’s cash flow.
However, there are also several good reasons why Pokka Corporation (Singapore) Ltd’s shares should be
avoided. For this financial year, the main reason for the increase in their Net Income is due to the new cost
rationalization policy. Without it, Net Income would only experience a minimal increase from FY 2006. It
is important to note whether this policy can be sustained in the long run as there is a limit as to how much
cost can be reduced. It would be better to invest in a company which is able to generate high income due to
both cost reduction and increase in turnover. Furthermore, Pokka Corporation (Singapore) Ltd’s financial
80 http://www.investopedia.com/university/ratios/bookvaluepershare.asp
43
statements also reflect accumulated losses in its reserves, and its retained earnings are being used to reduce
this large deficit81.
The table below shows Pokka Corporation (Singapore) Ltd’s Return on Equity (ROE), Return on Asset
(ROA), P/E ratio and Dividend Yield relative to its main competitors in the F&B industry at Pokka
Corporation (Singapore) Ltd’s balance sheet date 31 January 2007.
As illustrated in the table, out of the three companies, Pokka Corporation (Singapore) Ltd has the lowest
ROE and ROA. This means that Pokka Corporation (Singapore) Ltd generates the least income for each
dollar invested by common shareholders and it is also the least successful in generating profits using its
assets. Looking at dividend yield, it will be wiser to invest in YHS Ltd as it gives a significantly much
higher yield than its competitors. The Company’s P/E ratio is also the highest and this could be an
indication of an overbought stock. There is a possibility for the stock price to fall in the future in order to
align to industry average, as can be seen from YHS Ltd and F&N Ltd’s P/E ratio.
On the whole, questions must be asked regarding Pokka Corporation (Singapore) Ltd’s ability to sustain
growth in the long run through cost reduction and expansion in the food & beverage business in the light of
fierce competition. Due to these uncertainties and taking a conservative approach, we do not recommend the
purchase of Pokka Corporation (Singapore) Ltd’s shares as a long-term investment.
81 Pokka Corporation (Singapore) Ltd Annual Report 2007, Notes to Financial Statement, Pg 69 82 Yeo Hiap Seng Ltd Annual Report 2006 83 Fraser & Neave, Ltd Annual Report 2006
ROE ROA
Dividend
Yield P/E ratio
Pokka Corporation (Singapore) Ltd 0.14 0.057 0.019 23.5 Yeo Hiap Seng Ltd82 1.2 0.82 0.109 7.16
Fraser & Neave Ltd83 0.16 0.44 0.019 15.2
44
16. Appendix
16.1 Balance Sheet (Pg 34 of Annual Report)
Group
2007 ($’000) 2006 ($’000)
Non-Current Assets
Fixed assets 29,000 30,384
Investments in subsidiary companies - -
Investment in an associated company - -
Intangible assets 124 134
Deferred tax assets 167 216
Rental deposits 1,173 820
34,303 35,288
Current Assets
Cash and bank balances 5,326 4,769
Fixed deposits 8,950 3,373
Trade receivables 18,343 17,030
Other receivables 1,955 3,208
Other current assets 855 1,016
Inventories 13,604 15,617
49,033 45,013
Current Liabilities
Trade and other payables 27,975 20,824
Interest-bearing loans and borrowings 16,704 21,284
Provision for taxation 621 109
45,300 42,217
Net Current Assets 3,733 2,796
Non-Current Liabilities
Interest-bearing loans and borrowings 4,533 6,150
Deferred tax liabilities 1,041 697
5,574 6,847
32,462 31,237
Equity attributable to equity holders
of the Company
Share capital 26,800 26,800
Reserves (253) (862)
26,547 25,938
Minority interests 5,915 5,299
32,462 31,237
45
16.2 Income Statement (Pg 35 of Annual Report)
Group
2007 ($’000) 2006 ($’000)
Revenue
Turnover 144,688 143,163
Other revenue 833 969
Total revenue 145,521 144,132
Costs and expenses
Changes in inventory of finished goods and trading goods (857) 525
Raw and packaging materials consumed (64,622) (67,528)
Staff costs (26,675) (24,917)
Depreciation and amortisation expenses (5,529) (5,406)
Foreign exchange differences (478) 82
Other operating expenses (42,705) (45,936)
Finance costs (1,049) (1,008)
Share of results of an associated company 55 37
Exceptional items
- Gain on sale of an ice cream counter - 286
- Loss on closure of restaurants (41) (174)
Total costs and expenses (141,901) (144,039)
Profit before taxation 3,620 93
Taxation (1093) (267)
Profit/(loss) for the year 2,527 (174)
Attributable to:
Ordinary equity holders of the Company 965 512
Minority interests 1,562 (686)
2,527 (174)
Basic and diluted earnings per share 1.15 cents 0.61 cents
46
16.3 Statement of Changes in Equity (Pg 37 of Annual Report)
Attributable to equity holders of the Company
Share
Capital
Accumulated
Losses
Foreign
Currency
translation
reserves
Total
Reserves
Minority
Interests
Total
Equity
$'000 $'000 $'000 $'000 $'000 $'000
The Group
Balance as at 1 February 2006 26,800 (1,858) 996 (862) 5,299 31,237
Changes in equity for the year:
- Net effect of exchange
differences - - (20) (20) (431) (451)
- Net Loss recognised directly
in equity - - (20) (20) (431) (451)
- Profit for the year - 965 - 965 1,562 2,527
- Total recognised income and
expenses for the year - 965 (20) 945 1,131 2,076
- Dividends on ordinary
shares - (336) - (336) - (336)
- Dividends to Minority
shareholder of a subsidiary
company - - - - (515) (515)
Balance as at 31 January 2007 26,800 (1,229) 976 (253) 5,915 32,462
47
16.4 Cash Flow Statement (Pg 40 of Annual Report)
Group
2007
($’000)
2006
($’000)
Cash flows from operating activities:
Profit before taxation 3,620 93
Adjustments for:
Depreciation and amortisation expenses 5,529 5,406
Impairment loss on intangible assets - 58
Share of results of an associated company (55) (37)
Interest expense 1,049 1,008
Interest income (227) (128)
Loss on disposal of fixed assets 59 36
Fixed assets written off 35 196
Impairment loss on fixed assets 128 -
Operating income before working capital changes 10,138 6,632
Decrease/(increase)in receivables 1,724 (1,813)
Increase/(decrease) in payables 5,417 (459)
Decrease/(increase) in inventories 2,013 (1)
Cash generated from operations 19,292 4,359
Income taxes refund/(paid) 33 (354)
Net cash generated from operating activities 19,325 4,005
Cash flows from investing activities:
Interest income received 227 128
(Advances to)/repayments from a related party and an
associated company (1,196) 978
Proceeds from disposal of fixed assets 106 153
Purchase of fixed assets (4,920) (6,027)
Net cash used in investing activities (5,783) (4,768)
Cash flows from financing activities:
Interest paid (1,049) (1,008)
(Repayments of)/proceeds from bank borrowings (5,254) 302
Advances from the immediate holding company 561 249
Repayments of fi nance lease obligations (1,091) (2,325)
Dividends paid to a minority shareholder of a subsidiary
company (189) (1,041)
Dividends paid on ordinary shares by the Company (336) (336)
48
Net cash used in financing activities (7,358) (4,159)
Net increase/(decrease) in cash and cash equivalents 6,184 (4,922)
Cash and cash equivalents at beginning of the year 7,863 12,790
Effects of exchange rate changes on opening cash and cash
equivalents (134) (5)
Cash and cash equivalents at end of the year 13,913 7,863
During the year, the Group acquired fixed assets with an aggregate cost of $5,051,000 (2006:
$6,579,000) of which $131,000 (2006: $552,000) was acquired by means of finance lease
agreements.
49
16.5 Notes to the Financial Statements
(Pg 43 of Annual Report)
(Pg 48 of Annual Report)
50
(Pg 54 of Annual Report)
51
(Pg 61 of Annual Report)
52
(Pg 62 of Annual Report)
53
(Pg 63 of Annual Report)
54
(Pg 64 of Annual Report)
55
(Pg 65 of Annual Report)
56
(Pg 69 of Annual Report)
(Pg 71 of Annual Report)
57
(Pg 72 of Annual Report)
58
(Pg 74 of Annual Report)
(Pg 80 of Annual Report)
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