The Nestle Group Analysis
Table of Contents
The paper provides analysis of the financial reports’ principles, disclosures, and presentation of the leading international company in the industry of wellness and nutrition, the Nestle Group. The corporation, founded in 1866, is conducting its operations with 2,000 brands in almost 200 countries at the moment (Nestle 2015a). The company is headquartered in Vevey, Switzerland and its shares are quoted at the SIX Swiss Exchange at CHF 76.05 as of 17 March 2015 (Yahoo Finance 2015).
The company publishes annual financial reports based on the International Financial Reporting Standards (hereinafter – the IFRS) with the year end on 31 December and presentation currency in Swiss francs (CHF). The financial statements are consolidated by the parent company, Nestle S.A., using year-end foreign exchange rates for balance sheet items and weighted average rates for the income statements as the corporation’s subsidiaries and consolidated joint operations are located all over the world. The company also provides segmental reports for three geographical areas (Europe, Americas, and Asia/Africa/Oceania) and three “globally managed businesses” (Waters, Nutrition, and Others) (Nestle Group 2015).
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External Factors Influencing the Annual Reports
Since the group is listed on the SIX Swiss Exchange and has the head office located in Switzerland, its financial statements are critically influenced by local laws and regulations. First of all, the Directive on Financial Reporting regulates set of accounting standards, accepted by the stock exchange, for published financial reports (IFRS, US GAAP and Swiss GAAP FER), periodicity (interim reports to be published within 3 months after the reporting date and annual ones to be published within 4 months after the balance-sheet date), and general requirements for them (obligatory financial statements, submission, and publication ways) (SIX Exchange Regulation 2012). Second of all, SIX Exchange Regulation (2014) published listing rules for the companies indicating that quoted companies (including the Nestle Group) should follow special requirements imposed on their financial statements, such as the language of the publication, choice of auditors, provision of additional disclosures on the management operations, etc.
Local legislation also influences taxation of the corporation. Nestle S.A. is subject to the Swiss taxation system, which includes three layers: confederation, canton, and municipal levels. Due to its location in the canton of Vaud, the company is obliged to pay confederation corporate income tax of 8.5 % and VD (Vaud) canton corporate income tax of 9 %. Besides, the entity is subject to VAT standard rate tax of 8 % and tax on capital of 0.3 ‰. At the same time, as a global corporation, the Nestle Group is liable to pay taxes in each of its locations worldwide. For this reason, the company tries to generate most of its profits in the countries that have signed DTAs (“international double taxation agreements”) or TIEAs (“tax information exchange agreements”) with Switzerland to avoid or at least lessen the effect of double taxation on the consolidated financial result (Federal Department of Finance FDF 2015).
The corporate procedures also influence financial reports of the Nestle Group by requiring them to go through two steps of confirmation. First, the financial statements for the year should be allowed for issue by the Board of Directors and an independent auditors’ report. Second, the final reports are approved at the annual general meeting and, thus, the year’s financial data is declared to be final. Along with that, internal corporate procedures require that the annual report includes information on the group’s compliance with any changes in the company’s Code of Business Conduct (Nestle Group 2014).
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Another important factor for the company’s financial statements is the choice of accounting standards. In particular, the Nestle Group composes its reports according to the IFRS and, thus, is influenced to the largest extend by accounting practice adopted by the International Accounting Standards Board. The most recent financial statements of the company contain information that the latest amendments to the IFRS have not had critical impact on the company’s financial data and presentation (Nestle Group 2015).
European and local culture also impose a certain effect on the group’s annual report. We can note that the corporation voluntarily includes a special report on environmental and social effects of its operations that is proposed by the UN global compact principles for responsible investment and the global reporting initiative (Nestle Group 2014). Moreover, the corporation preserves ethical practice to disclose the compensation amount of its top management in the group’s annual publications.
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Voluntary and Mandatory Disclosures in the Annual Reports
The corporation composes annual financial statements in agreement with the IFRS and, as a result, is obliged to provide a certain list of mandatory disclosures on its financial data. In its notes to the statements, the company describes significant accounting policies and management estimations, recent changes thereof, important issues and specification regarding reported items, and information about their interest in subsidiaries, joint ventures, and associates companies.
The financial statements of the company disclose all necessary information in separate lines as required by the standards. Thus, the consolidated income statement includes mandatory disclosures of sales and expenses, separate figure for the profits received from joint ventures and associated companies, specifies the amount of tax expense, and provides the sums of net income attributable to the group’s shareholders and non-controlling interest as well as of the basic and diluted earnings per share. It also includes detailed composition of the other comprehensive income of the corporation. Presentation of the consolidated balance sheet is also provided in compliance with the requirements of the International Accounting Standard 1 (hereinafter – the IAS 1), paragraph 54 that specifies minimum disclosures of the statement of financial position (International Accounting Standards Board 2012). Along with proper classification of the items, the company also provides separate lines to disclose the amounts of assets and liabilities held for sale, derivatives, investment in associated companies, employee benefit plans, and non-controlling interest in equity. Notes to the financial statements include such important mandatory disclosures as related party transactions (required by the IAS 24), segment analysis (required by the IFRS 8), and contingent liabilities (required by the IAS 37) that contain important additional information for investors’ decisions (Mackenzie et al. 2013).
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The Nestle Group also utilizes a range of additional reports and disclosures that are voluntarily included into its annual reports. In 2013 the company included the compliance report, financial review, and shareholders’ information into the annual publishing. Analysing published financial statements for 2014, it has been noticed that the corporation provided several voluntary disclosures in the notes to them. These disclosures, provided in a separate note, include data on the risk exposures and risk management procedures of the company with particular attention to the risk of the group due to its operations in Venezuela (a hyperinflationary economy) where the corporation lost over CHF 600 million last year. Another voluntary disclosure reveals information on the group companies that are listed in a separate report. Besides, the company included a voluntary overview of its financial data over the past five years into the last year’s report.
Usage of Impression Management in the Voluntary Disclosures
Impression management is widely used by companies’ management to influence the investors’ perception (Yuthas, Rogers & Dillard 2002). The most popular and widely used tools are implementation of graphs, narrative tools, and the choice of qualitative versus quantitative presentation of data. In this paper will be described the tools implemented by the Nestle Group in its financial statements for the year 2014 and further.
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Graphs are not included by Nestle in its financial report for the last year, although the full annual report for the year 2013 included some of them (there is no full annual report published for the year 2014 yet). Abuse of graphs’ implementation in the financial report is also a tool of impression management (Beattie & Jones 1999). It is possible to evaluate this as the traditional presentation of financial reports that is common and acceptable in Switzerland. So, by refusing to use any graphs in its financial report, the corporation acts in accordance with the expectations of the society and local investors.
A popular strategy in the narrative techniques is to provide greater emphasis on the good news and attempt to shadow the bad ones (Brennan, Guillamon-Saorin & Pierce 2009). We can see implementation of this tool in the second note to the financial statements of the corporation. Although, the Nestle Group is obliged to provide disclosures on acquisitions and disposals, specification of the included data is the matter of choice. Its management provided full and detailed information on two acquisitions conducted in 2014 that resulted in positive outcomes for the company. At the same time, there were only a few words regarding disposal of the performance nutrition business resulted in sale of assets and losses for the group. It is worth noticing the same strategy implemented in the presentation of employee benefit plans (note 10 of the financial report). The corporation provides a lot of voluntary disclosures on the retirement and other benefit plans including mortality rates by regions of presence, sensitivity analysis, and duration of the plans. In such a way, the management enhances the importance of employee benefits for the company and ensures positive impression of the society regarding its ethical values.
Further, the company chooses to provide qualitative description on impairment charges in the note 9 “Goodwill and intangible assets”. The disclosure includes mandatory presentation of goodwill and intangible movement and voluntarily provided details of the impairment test. The company releases only descriptive information on the amount of impairment with a detailed explanation of reasons. Investigations show that in most cases the bad news are presented in qualitative form (and the Nestle Group has chosen to provide description) while more quantitative details concern good news (Skinner 1994). The same notion refers to the note 23, which contains only qualitative evaluation of the group’s risk exposure in Venezuela, a country with hyperinflation at the moment. This is an attempt to influence investors’ perception by hiding quantitative impact of the group’s exposure in Venezuela or, at least, by eliminating emphasis on it.
On balance, the Nestle Group presented its financial report for the last year in line with the requirements of the IFRS and the Swiss legislation. The content and presentation of the report create a positive impact on those who use this accounting information. Along with the mandatory disclosures, Nestle has included a range of voluntary notes that are either aimed to provide impact of the company management’s fairness or to enhance the corporation’s positive outlook in the society. Besides, the group also implements impression management techniques in the published financial and annual reports and prefers using narrative tools to influence on the investors’ perception.