Good Company Profile Case Study Example
Type of paper: Case Study
Topic: Finance, Wealth, Investment, Company, Money, Capital, Banking, Value
Magna International is a company that deals in automotive products. The company is headquartered in Aurora in Ontario, Canada. It was founded in 1957 as Multimatic Motorsports and became Magna International Inc. in 1973 after the merger between Magna Electronics and Multimatic Motorsports. It develops, manufactures and sells automotive products. It operates in the United States, Asia, Europe and other parts of the world. Its products include seating systems, body and chassis systems, interior components, door panels, powertrain systems, overhead systems, among other products. In addition, it offers vehicle engineering support services as well as contract assembly services. It is one of the largest firms in the automotive sector. In 2012, the company had the highest sales among the automobile parts manufacturers in the entire North America. The company is headed by Mr. Donald James Walker, who is the Chief Executive Officer and a director.
Tangible capital assets
Magna International’s tangible capital assets consist of land, buildings machinery, and equipment. The value of fixed assets at as December 31, 2011 was $4,236 million. This amount increased to $5,273 million in 2012 and then to $5,441 million in 2013. This indicates that the company increased its investment in tangible capital assets throughout the period from the year 2011 to 2013. Magna’s total assets were $14,679 million as December 2011 then increased to $17,109 million in 2012. On the same date in 2013, the firm’s total assets were $17,990 million. The above figures indicate the total tangible capital assets were 19.13% of Magna’s total assets as at December 31, 2011. It then increased to 30.82% in 2012 before falling to 30.24% in 2013. This trend implies that the company increased its investment in tangible capital assets relative to total assets in 2012 but slightly reduced the investment in 2013.
Accounting policies disclosed in the notes to financial statements
The company has disclosed that it prepared its consolidated financial statements in US Dollars and based on US GAAPs. The following accounting policies relating to property, plant and equipment have been disclosed in the Magna International’s annual report for the year ended December 31, 2013.
Magna International records its fixed assets at historical cost and provides on a straight-line basis over the assets’ useful lives. Buildings are depreciated at annual rates of between 2.5% and 5%. The company also depreciates general purpose equipment at between 7% and 10% and special purpose equipment at annual rates of 10% to 33%.
The fixed assets of Magna International include land, buildings, machinery, and equipment. The company includes the expenditures on construction in progress in the cost of fixed assets. It does not charge depreciation on constructions in progress.
The corporation assesses fixed assets for recoverability when it realizes the existence of impairment indicators. In this case, it compares the carrying value of the asset with the expected undiscounted cash flows from the use of the asset. If the value of expected undiscounted cash flows from the use of a fixed asset is less than the asset’s carrying value, there is an impairment loss. Magna recognizes the impairment loss and writes down the value of the asset to fair value. In the finding the fair value of long-lived assets, Magna uses the estimated discounted future cash flows.
The impairment charges are also recognized for the fixed assets acquired through business acquisition. For instance, the company recorded $23 million long-lived asset impairment charges in the year ended 31st December, 2013. This was relating to battery research equipment located in Canada.
The cost of fixed assets also included the fixed assets acquired through business acquisitions. For instance, in the year ended December 2013, Magna acquired 49% control of Textile Competence Centre and other small acquisitions. The effect of these acquisitions was an increase in the company’s fixed assets by $5 million.
Expenditures on new capital asset acquisitions
The company’s cash flow statement of Magna indicates the amount the company spent on additions of fixed assets. In the year ended December 2013, the company paid $1,236 million in acquiring new fixed assets. In the year ended December 2012, the company increased its fixed asset acquisitions to $1,279 million. The amount then declined in the year 2013 to $1,169 million. These amounts exclude the amounts of fixed assets acquired through the purchase of subsidiaries. The expenditure on purchase of subsidiaries was $9 million, $525 million and $120 million in 2013, 2012 and 2011 respectively.
Analysis of the cash flow statement of the company indicates the sources of funds in the company for each of the three years. The sources indicate the ways in which the firm funded the addition of capital assets. One of the sources was the cash flow from operating activities. In the year 2013, Magna’s net cash flow from operating activities was $2567 million. The positive cash flow indicates that the company had more than enough funds to finance its operating activities. The excess funds could, therefore, be used to finance capital projects such as fixed asset additions. In 2012, the company also had a positive net cash flow from operations of $2,206 million while in 2011; the amount was $1,210 million.
The addition of capital assets may have also been financed through the issue of debt instruments. Magna received $151 million, $348 million and $146 million in 2013, 2012 and 2013 respectively from the issue of debt. It also funded the acquisition of new capital assets from the proceeds from disposition. The proceeds were $168 million in 2011 and $106 million in the year 2012. In 2013, the proceeds from disposal increased to $163 million.
Accounting for government assistance
Magna exploits opportunities available for government assistance by applying for government aid in several jurisdictions that it operates. When a government advances grants to Magna, the company records it as a reduction of the cost of the asset. Grants are issued on a particular capital expenditure. In this case, the company will recognize the grant and reduce the cost of the asset or project with the amount of government grant. For grants relating to operating expenditures, Magna International records them as a deduction of the operating expense. These grants are only recorded when the related operating expenditure is incurred or when the particular asset is purchased.
When the company receives tax credits and tax allowances, it records them as a reduction of its income tax expense for the year in which the credit or allowance is granted. The company may also benefit from government loans. If it receives a government loan, it records at as a liability in the amount of actual cash received. Sometimes the government offers loans to companies at an interest rate lower than the market rate. Magna accounts for the benefit of loans advanced by the government at a lower interest rate as grants. This implies that if the loan is borrowed to finance a capital project, the cost of the capital project is reduced by the value of the benefit from the government’s loan. The value of the benefit is determined by getting the difference the cash proceeds received and the initial carrying value of the loan. The company initially records a government loan at its net present value. The loan is then accreted over the loan period by adding interest accrued to the face value for each of the years to maturity.