Name: Jayvan Ponce
Subject: Pre 4 Auditing and Assurance: Specialized Industry
SPECIALIZED INDUSTRIES
Airlines
Airline industry solely provide air transportation for passengers and cargo which utilizes
an aircraft which includes helicopters and the most common one, airplanes. This industry
encompasses a wide scope of businesses called airlines. The main goal of this industry is to offer
air transport service for paying customers and their business partners. This industry offers
scheduled and chartered services and forms a key part of the wider travel industry which provides
paying customers the ability to purchase and book a seat on flights to travel to different parts of
the world.
The airline industry is somehow grouped in many categories. However, the most common
types of airlines are the international, national, and regional airlines. International Airlines are a
group of the largest and most high-profile airlines. They make billions of revenues each year and
operates large passenger jets. They focus more on offering global services on large distances.
National Airlines offer both medium-sized and large-sized jets and focuses on offering services to
its home country. It has a smaller fleet size and offer flights to are influenced by seasonal
fluctuations on demand. Lastly, Regional Airlines are the smallest of the three main types and
focuses on giving services within specific regions only. They have lower level of demands and
their services aren’t offered by either international and national airlines.
Accounting for Airlines is categorized as special industries. Selecting and implementing
cash management is the key challenge the airlines often face. Most airlines todays avail the
Treasury Management System (TMS) which provides them the ease of finance handling solutions.
Every airline needs to deal with these following costs: Capital investments, inventory costs, fuel
costs, labor costs, employee costs, and aircraft spare costs. There costs are categorized as Startup
cost, Operating costs and Depreciation costs.
Airlines a great challenge in managing their cash. Cash management of airlines are tackled
with the help of cash forecasting. This forecasting is done at short-term and long-term. They do
this to determine operating cash requirements, anticipating the need for cash requirements,
investing on surplus cash and maintaining relations to their banking partners. These forecasting
methods includes casual forecasting, trend forecasting, cyclical variations, seasonal variations
and irregular variations.
The unique thing about airlines is that they are extremely exposed to the changes in
aviation fuel or jet fuel. The slightest fluctuation in the fuel prices can affect greatly the business
operation and financing. In order to deal with this price changes, they use a tool named Fuel
Hedging. Fuel Hedging is a contract where airlines protect themselves for the changes in fuel
rates.
With the competitive world of airlines. They have formulated a lot of strategy in order to
generate more revenues. Most of the revenues of airlines comes from their taxes and fees, A la
Carte pricing policy, add-on services, on-board sales and advertising sales.
Banking
Banking industry handles cash, credit and other financial transactions. Banks provides a
safe place for us to safekeep extra cash and credits. They offer savings accounts, certificate of
deposit and checking accounts. Banks uses these deposits to make loans which includes home
mortgage, business loans and car loans. Banks solely provides the liquidity needed for businesses
and people to invest in the future. Bank loans and credit mean families don't have to save up
before going to college or buying a house. Companies use loans to start hiring immediately to
build for future demand and expansion.
Banks can be categorized bases on the type of business the conduct. They are categorized
as Commercial banks, Community banks, Retail banks, Internet banking and Investment banking
banks. Commercial banks provide services to private individuals and businesses. Retail banks
provides credit, deposit and money management to individuals and families. Community banks
are smaller than commercial banks. They are more on local markets and provides personalized
services and build relationships to their customers. Internet banking provides services via the
worldwide web. It is also called E-banking, online banking and net banking. Fortunately, most of
the banks now offers online services. Investment banking finds funding for corporations through
initial public stock offerings or bonds. They also facilitate mergers and acquisitions.
The major financial statements are designed to provide a picture of the overall financial
position and performance of the bank. To provide this overall picture, the Financial accounting
system will normally produce three major financial statements on a regular basis: The Statement
of Financial position, Profit and Loss Statement and Cash flow Statement.
In the bank’s financial position, one key feature is that loans are recorded as assets.
Another important feature of a bank’s balance sheet is whether a contract is an asset in the
banking book or whether it is in the trading book. What distinguishes a bank’s (as opposed to a
company’s) liabilities is the amount of money it owes to its depositors. The proportion of assets
that are “owned” by the bank is, relative to most large companies, very small. In financial jargon
this is called being highly leveraged and banks are extremely highly leveraged. In the extreme, if
a bank does not have enough shareholder funds to cope with a series of bad loans it will go bust.
For this reason, regulations require a certain minimum amount of shareholder funds be used to
make loans.
In the bank’s P/L statement, income is not very intuitive. In other types of industry, sales
are present regularly. But, in banks, their income is broken down into: Non interest income and
Net interest income. Non-interest income refers to fees and charges while Net interest income is
the total amount of interest earned less interest paid out. Bank expenses is composed of
provisions, tax, goodwill and integration.
Insurance
Insurance is a contract, represented by a policy, in which an individual or entity receives
protection financially or receive compensation contrary to losses from insurance company. The
company pools clients' risks to make payments affordable for the insured. Insurance policies are
used to hedge against the risk of financial losses, both big and small, that may result from damage
to the insured or her property, or from liability for damage or injury caused to a third party. There
many types of insurance policies. Life, health, homeowners, and auto are the most common
forms of insurance.
The core components that make up most insurance policies are the deductible, policy
limit, and premium. Premium is expressed as cost as monthly payments. It is determined by the
insurer based on the insured’s business profile and background to assess their creditworthiness.
Policy limit is the max amount than an insurer can pay under a covered loss. These may be set
for periods, per injury and losses or over lifetime maximum which is the life of the policy.
Typically, higher limits carry higher premiums.
For a general life insurance policy, the maximum amount the insurer will pay is referred
to as the face value, which is the amount paid to a beneficiary upon the death of the insured.
Deductible is a certain amount the policy-holder must pay put-of-pocket before the insurer pays
the claim. It serves as a deterrent to large volumes of small and insignificant claims.
Insurance accounting is governed by special accounting rules known as statutory
accounting principles (SAP). It has a focus on the solvency of insurance companies. Insurance
accounting is regulated by the Insurance Commissioner. It is the Commissioner who defines the
accounting rules. An insurance company’s annual statement indicates its value as if it were in
liquidation rather than continuing in business. This is a more conservative value, as a company
cannot include revenue that has not been invoiced.
The IFRS permits the introduction of an accounting policy that involves remeasuring
designated insurance liabilities consistently in each period to reflect current market interest rates
(and, if the insurer so elects, other current estimates and assumptions).
Without this permission, an insurer would have been required to apply the change in
accounting policies consistently to all similar liabilities. The IFRS exempts an insurer temporarily
(until completion of Phase II of the Insurance Project) from some requirements of other IFRSs,
including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors in selecting accounting policies for insurance contracts.
Agriculture
Agriculture is the science and art of cultivating plants and livestock. Agriculture was the
key development in the rise of sedentary human civilization, whereby farming of domesticated
species created food surpluses that enabled people to live in cities. It includes the preparation of
plant and animal products for people to use and their distribution to markets. It provides most
of the world’s food and fabrics. Cotton, wool, and leather are all agricultural products. Agriculture
also provides wood for construction and paper products. These products, as well as the
agricultural methods used, may vary from one part of the world to another.
IAS 41 Agriculture sets out the accounting for agricultural activity – the transformation of
biological assets (living plants and animals) into agricultural produce (harvested product of the
entity's biological assets). The standard generally requires biological assets to be measured at fair
value less costs to sell. IAS 41 applies to biological assets with the exception of bearer plants,
agricultural produce at the point of harvest, and government grants related to these biological
assets. It does not apply to land related to agricultural activity, intangible assets related to
agricultural activity, government grants related to bearer plants, and bearer plants. However, it
does apply to produce growing on bearer plants
An entity recognizes a biological asset or agriculture produce only when the entity
controls the asset as a result of past events, it is probable that future economic benefits will flow
to the entity, and the fair value or cost of the asset can be measured reliably. Biological assets
within the scope of IAS 41 are measured on initial recognition and at subsequent reporting dates
at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12]
Agricultural produce is measured at fair value less estimated costs to sell at the point of
harvest. [IAS 41.13] Because harvested produce is a marketable commodity, there is no
'measurement reliability' exception for produce.
The gain on initial recognition of biological assets at fair value less costs to sell, and
changes in fair value less costs to sell of biological assets during a period, are included in profit or
loss. [IAS 41.26] A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce
at fair value less costs to sell are included in profit or loss for the period in which it arises. [IAS
41.28]. All costs related to biological assets that are measured at fair value are recognized as
expenses when incurred, other than costs to purchase biological assets.
IAS 41 presumes that fair value can be reliably measured for most biological assets.
However, that presumption can be rebutted for a biological asset that, at the time it is initially
recognized, does not have a quoted market price in an active market and for which alternative
fair value measurements are determined to be clearly unreliable. In such a case, the asset is
measured at cost less accumulated depreciation and impairment losses. But the entity must still
measure all of its other biological assets at fair value less costs to sell.
Oil Extractions
The objective of oil and gas operations is to find, extract, refine and sell oil and gas, refined
products and related products. It requires substantial capital investment and long lead times to
find and extract the hydrocarbons in challenging environmental conditions with uncertain
outcomes. Exploration, development and production often take place in joint ventures or joint
activities to share the substantial capital costs.
The outputs often need to be transported significant distances through pipelines and
tankers; gas volumes are increasingly liquefied, transported by special carriers and then
regasified on arrival at destination. Gas remains challenging to transport; thus, many producers
and utilities look for long-term contracts to support the infrastructure required to develop a
major field, particularly off-shore. The industry is exposed significantly to macroeconomic factors
such as commodity prices, currency fluctuations, interest rate risk and political developments.
The assessment of commercial viability and technical feasibility to extract hydrocarbons is
complex, and includes a number of significant variables.
The industry can have a significant impact on the environment consequential to its
operations and is often obligated to remediate any resulting damage. Despite all of these
challenges, taxation of oil and gas extractive activity and the resultant profits is a major source
of revenue for many governments. Governments are also increasingly sophisticated and looking
to secure a significant share of any oil and gas produced on their sovereign territory.
Exploration costs are incurred to discover hydrocarbon resources. Evaluation costs are
incurred to assess the technical feasibility and commercial viability of the resources found.
Exploration, as defined in IFRS 6 Exploration and evaluation of mineral resources, starts when the
legal rights to explore have been obtained. The accounting treatment of exploration and
evaluation (“E&E”) expenditures (capitalizing or expensing) can have a significant impact on the
financial statements and reported financial results, particularly for entities at the exploration
stage with no production activities. Exploration and evaluate expenditures include acquisition of
rights to explore, topographical and geological studies, exploratory drilling, trenching, sampling
and general costs directly attributed to exploration and evaluation activities.
Exploration and evaluation asset shall be measured initially at cost. After initial
recognition, an entity shall apply either the cost model or revaluation method. Exploration and
evaluation asset is classified either as tangible and intangible asset. The removal, extraction and
exhaustion of a natural resource is called depletion. Depletion is a systematic allocation of the
depletable amount of a wasting asset over the period the natural resource is extracted or
produced. In essence, depletion is recognized as the cost of the materials used in production and
thus become the finished product of the extractive entity since the wasting asset is conceived as
the total cost of the materials available for production.
BPOs
Business process outsourcing (BPO) is a method of subcontracting various businessrelated operations to third-party vendors. Although BPO originally applied solely to
manufacturing entities, such as soft drink manufacturers that outsourced large segments of their
supply chains, BPO now applies to the outsourcing of services, as well. any businesses, from small
startups to large companies, opt to outsource processes, as new and innovative services are
increasingly available in today's ever-changing, highly competitive business climate.
Broadly speaking, companies adopt BPO practices in the two main areas of back office
and front office operations. Back office BPO refers to a company contracting its core business
support operations such as accounting, payment processing, IT services, human resources,
regulatory compliance, and quality assurance to outside professionals who ensure the business
runs smoothly.
By contrast, front office BPO tasks commonly include customer-related services such as
tech support, sales, and marketing. BPO is referred to as "nearshore outsourcing" if the job is
contracted to a neighboring country. Such would be the case if some companies partnered with
a BPO vendor located in Canada. A third option, known as "onshore outsourcing" or "domestic
sourcing," occurs when BPO is contracted within the company’s own country, even if its vendor
partners are located in different cities or states.
Companies are often drawn to BPO because it affords them greater operational flexibility.
By outsourcing non-core and administrative functions, companies can reallocate time and
resources to core competencies like customer relations and product leadership, which ultimately
results in advantages over competing businesses in its industry. BPO offers businesses access to
innovative technological resources that they might not otherwise have exposure to. BPO partners
and companies constantly strive to improve their processes by adopting the most recent
technologies and practices.
Business process outsourcing is not an option but a compulsion in the global world. In
intense competitive scenario, it has become imperative for companies that the talent pools
across the regions are utilized. Cost efficiency is another major factor behind business process
outsourcing to diverse places often located offshore. Companies that follow collaborative,
partnership-based approach are better to outsource.
They follow risk/reward based, flexible business models offering innovative,
improvement-led solutions. A competent business process outsourcing company will enhance its
services with strong human resources, thriving technology infrastructure, customized training
program and a transition framework. Operational model they deliver is the key for customer
satisfaction and cost reduction. Their team is an integral part of the client firms’ regular services.
Cooperatives
A cooperative is an association of persons (organization) that is owned and controlled by
the people to meet their common economic, social, and/or cultural needs and aspirations
through a jointly-owned and democratically controlled business (enterprise). The people of the
cooperative are those who use its products, supplies, and/or services. Profits are also often
returned back to the members of the cooperative, however, cooperatives are often more focused
on services for members than for investments. Cooperatives can be created for a number of
different reasons or to fulfill a number of different needs: jointly process goods, split costs, split
control over work, purchasing power (bulk buys), shared employees, shared wages, etc.
Three financial reports commonly used in business are the balance sheet, income
statement, and the statement of cash flows. They report the financial position of the cooperative,
its performance over a given time period, and its ability to meet cash obligations. They are the
basis for planning future operations. Each report contains different, but interrelated information
that together give a complete picture of the financial operations of the cooperative. Managers,
bookkeepers and board members should be able to understand and interpret these reports so
they can make informed business decisions about the future of the cooperative. ets.
Current assets include cash and those assets that are expected to be converted into cash
within one year, such as saleable inventory and accounts receivable. Fixed assets are iteming the
cooperative will use during normal operations, such as buildings, machinery, and equipment.
Liabilities are shown in two categories-current or long-term. Current liabilities are those paid
within 1 year such as accounts payable, short-term operating loans, or the current portion of
long-term loans. Those due beyond the next 12 months, such as mortgages, are long-term
liabilities. The equity section of the balance sheet shows the amount of capital the members have
invested in the cooperative through stock purchases, allocated reserves, and per-unit retains.
The income statement reports the results of all business transactions of the cooperative that
occurred during a certain time period, such as month, quarter or year. It shows the total dollar
revenue of the cooperative, the total expenses, and the resulting net income (or loss). Revenue
is the dollar amount earned by the cooperative from operations. It can come from several
sources, such as selling merchandise in a supply cooperative, charging members for services or
marketing their products. In multi-functional cooperatives it is useful to separate the revenue
from each function on the income statement.
Cash flow from operations gives the net cash from providing goods and services to
members and all other cash flows not from investment or financing transactions. This includes
net income, adjustments to net income, and changes in balance sheet items. Adjustments to net
income offset the non-cash items included on the income statement that do not result in an
actual inflow or outflow of cash, such as depreciation, a gain (loss) from the sale of an asset, and
deferred taxes. Changes in balance sheet items are assets and liabilities where changes result in
positive or negative cash flows, such as accounts receivable, accounts payable, patronage refunds
payable, or other accrued expenses.
Digitized Industries
The Digitized Industry are companies that provides a wide scope of products and offer
services primarily online through their Web sites. Their operations include, retailers, search
engines, travel services, as well as dial-up and broadband access service. As product offerings can
vary widely within the industry, participants don't all compete with each other. The industry is
not particularly capital concentrated, although some participants must continually invest in their
operations to remain competitive. Many companies have a great cash flow, which can be used
for capital expenditures, to make repurchase shares and acquisitions. The presentation of
historical figures, estimates, and projections for Internet companies follows the standard value
line page format.
Digitized Industry operate in a competitive environment, subject to quick technological
developments. Barriers to entry vary, depending upon the particular markets served. Internet
companies operate on the global stage, and results often depend upon the performance of
overseas markets and currency exchange rates. Moreover, weakness in the retail economy or
lower online advertising expenditures can hinder the performance of many participants. Still,
long-term prospects for the industry are fairly encouraging. Trends such as increasing worldwide
Internet usage, overseas expansion, and the continued popularity of online advertising ought to
further benefit companies in this industry. As a result, many industry participants seem wellpositioned in attractive markets.
One important measure that potential investors ought to consider when examining
Internet companies is revenue growth. The performance of a particular market, along with a
company's share of that market, are important drivers of top-line growth. Revenues can also be
impacted by such factors as subscriber growth and transaction volume. A strong top-line advance
is much more difficult to achieve during periods of economic weakness.
Profitability can vary considerably among industry participants, depending upon the
markets they serve and the cost structure of their operations. Recent trends in profit margins can
signal investors about a company's operating health, or lack thereof. Return on equity is another
important measure that investors ought to consider. Companies with a strong competitive
advantage and capable management are more likely to sport wide profit margins and earn high
returns on equity. Share earnings are perhaps the most important driver of stock prices, and
industry participants with strong earnings growth over an extended period will most likely
experience healthy stock price appreciation during that time frame. Several Internet companies
have been active in share repurchases, and it seems likely that buybacks will continue to be a
feature of this group.
Acquisitions and strategic partnerships are not unusual for companies in the Internet
Industry. These moves allow participants to better serve customers and gain market share. The
acquisition of a rival can reduce competitive pressure, whereas the purchase of a new technology
can allow a company to better serve its own markets and enter new ones.
Ideally, these activities allow a company to diversify its revenue stream and will
ultimately prove accretive to earnings. Smaller companies may even find themselves the target
of an acquisition. In sum, Internet companies will likely continue to make acquisitions and form
partnership agreements, though their timing and scope are uncertain.
During a challenging economic period, industry participants can engage in a number of
measures to improve performance. The divestiture of underperforming, noncore operations is
one strategy. A realignment of a company's operations is another. Furthermore, many companies
initiate measures to improve their cost structure during difficult times.
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