Accounting

WPP group is a group based in London, England and is one of the worlds largest media and communications group. Wire and Plastic Products (WPP) started in 1971 making plastic products but was purchased by Martin Sorrell in 1985 who was looking for a listed company to start its marketing services. WPP group is an umbrella to several media, advertising and PR giants such as JWT, Grey Global and Mindshare. It employs more than 130,000 employees in around 100 countries. WPP Group posted a profit of almost 7.5 billion in 2008. The company is listed on the London Stock Exchange and presents its annual statements in a consolidated form (Funding Universe, 2009).

Business Strategy
The company operates in the following business segments
Agency Networks
Media Investment Management
Information, Insight and Consultancy
Public Relations and Public Affairs
Branding  Identity
Healthcare Communications
Specialist Communications
WPP Digital
(WPP, 2009)

Section A
The financial statements section of the annual report starts off with discussing the accounting policies of the company. Then it shows the consolidated form of the income statement, cashflow statement and balance sheet.

The accounting policies start off with clarifying that the statements have been prepared under the IFRS which the company adopted in 2005. The policies section clearly explains the basis of preparation and consolidation for the readers. The policies are not in too much technical jargon. The goodwill is explained in detail also. A reason for giving detailed explanation for goodwill is that it is one intangible asset which can be manipulated by the management to window dress the statements to their liking. It would be helpful for the reader if they would have given the basis for classifying a brand as an indefinite intangible asset or a definite tangible asset. The depreciation policy on the fixed assets is clearly defined and the life of each asset is also mentioned in the accounting policy.
Since WPP is a truly global company, its financial statement will have a significant impact on fluctuation of foreign exchange rates. The paragraph also talks about the interest rate hedging that the company indulges in, to reduce their exposure. The policy also points out where to find the fair values of the derivates used for hedging and the derivates used for other purposes. This makes it easier for an average reason to understand the policy.

One of the important accounting policies is the revenue recognition policies of a company. This policy has assumed even more importance since the Enron scandal. The revenue recognition policy is separately defined for both business units. The advertising and media management recognizes revenue when the service has been performed and the quantitative targets have been met. The information, insight and consultancy unit recognizes revenue on the proportional basis where the input costs are used as the criteria for calculation of proportion.

The policies also list down the accounting policies which have come into effect through the enforcement of IFRS but have not been applied in these statements. This helps in avoiding confusion as to which standard has been applied and which of them have not been applied.

The accounting policies section concludes with the responsibility statement of the directors which adds credibility to the transparency of the financial statements.

Income Statement
The income statement starts off with the figure for the total gross billing made by the company. Since this is a new terminology for the new readers, it is difficult to understand as the revenue line is shown separately. The income statement shows the figures in two currencies, namely, dollar and pounds. However, the currencies should be highlighted more clearly since it can lead to a confusion and misinterpretation by the user. Other than that, the income statement is in a summarized form and easy to comprehend.

 EMBED Excel.Sheet.12  (Investor Centre, 2009)
The above table shows the gross and net profit margins for the company in the concluded fiscal year and the last two years. The company has seen an increase of approximately 20 increase in sales during 2008. But the company has failed to translate higher sales into higher profits. The net profit in absolute terms has remained the same while the margin has fallen from 8.33 in 2007 to 6.87 in 2008 (Stockopedia, 2009). The gross profit margin has remained stable throughout the period of three years. Just as the PBIT margin has been clearly shown in the income statement, the margin for net profit after tax should also be shown below the net income in the income statement.

The drop in the net profit margin can be attributed to the extraordinary increase in the finance costs of the company. The finance costs have seen a hefty increase of almost 30 from last year, which has eaten away the operating profits.

The company has clearly shown its headline earnings for investors to interpret the true performance of the company. But there is also a need for the management to clearly define headline earnings in the annual report. A reader who is unaware of this terminology may not be able to understand the use of it and might be misled by the figure.

Balance Sheet
The consolidated balance sheet of WPP is shown in a summarized form which gives a comprehensive snapshot of the financial position of the company. The balance sheet is shown in a vertical format with the net assets (assets less liabilities) on one side and the equity on the other. The noncurrent assets are heavily tilted towards intangibles in the form of goodwill. The goodwill has increased by 3 billion from last year. This increase is attributable to acquisitions made by WPP during 2008. The company has posted negative net current assets during 2008 and 2007. The major reason has been the huge amount of trade payables for the company. The current ratio has been 0.9 and 0.86 in 2008 and 2007 respectively which indicate a cause of concern for the management of the company.

The format of the balance sheet makes it a little difficult to compare the equity and the debt section of the balance sheet in order to calculate the debt-to-equity ratio. The capital structure of WPP in 2008 was 24 equity and 76 debt the major financing coming from trade payables. The breakup of long term liabilities is also clearly shown in terms of its sub components where bank loans are the biggest form of long term liabilities. Another notable change is a substantial increase in the merger reserve resulting from mergers and acquisition of subsidiaries and associate companies.

Although the balance sheet looks in fine form, but a couple of changes will increase its effectiveness. The management should consider giving sub totals for each sub components such as current assets and current liabilities in order to make the balance sheet easier to comprehend for new readers. The figures should be shown two years in retrospect and also in dollar terms just as the income statement to ensure consistency.

Cash flow statement
The corporate report uses an indirect cash flow approach for the calculation of net cash flow from operating activities. The calculation is shown in the notes to the financial statements. The operating profit has been adjusted for the non cash transactions and the changes in working capital from the last balance sheet. The taxes paid, interest and dividend income received have all been classified under operating activities.  Under IFRS, the company has the choice to classify interest income and dividend income as either operating or investing activity.

The net cash flow from operating activities has increased over the last two years which is a positive sign. Overall, the cash has increased in 2008 while it registered a decrease in the previous two years. Net debt has been on a decrease which shows that the company has been repaying its debt and reducing its interest expenses also in the process.

Notes to the financial statement
The notes to the financial statements also show the breakup of the sales and PBIT according to the business segments and geographical regions. The notes also show the balance sheet position of each business segment and geographical region.

The break up for the operating sectors shows that the highest revenue has been posted by the Advertising and Media Investment Management Segment which posted revenue of 3.3 billion which is almost 45 of the total revenue for 2008. Furthermore, the share of Advertising and Media Investment Management increases to more than 50 in the total profit before interest and tax.
The management should also add a column to show the revenue of each segment as a percentage of total revenue.  This will help the reader interpret this data much more effectively since so many numbers tend to confuse people.

Revenues by Geographical Region
Since WPP is a global company with operations in more than 100 countries, the readers of the financial statement want to know which geographical region is generating the most revenue for the company. Analysis of the breakup shows that the revenue share is 35, 28 and 24 for North America, Continental Europe and Asia Pacific respectively during 2008. The revenue from UK contributed only 13 of the total revenue of the company. This shows the global nature of the company. These percentages should be clearly mentioned in the statement to give the users of the statement an idea of the revenue stream. Further analysis shows that the PBIT margin is highest for North America while it is the lowest for the UK region.

Finally, the basic EPS and diluted EPS for the company in 2008 has been calculated to stand at 38.4p and 37.6p respectively. (Investor Chronicle, 2009)

To round it off, it can be said that the statements are fairly well presented and give an accurate representation of the financial position of the company. The shortcomings that were seen have been identified at appropriate places in the above paragraphs. These include showing more statistics to summarize data, more graphs to show performance trends and ensuring consistency among the income statement and balance sheet formats in terms of retrospective data.

SECTION B
The annual report starts off with a detailed table of contents which gives a snapshot of what the readers can expect to find in the annual report. The sub headings in the table of contents carry an unconventional touch as the media company has attempted to add their streak of creativity to their annual report. The headings such as Who we are and How we behave might be really creative for the marketing professional, but may not appeal too much to a conservative stock investor sifting through the report.

The first section is the fast read which summarizes the whole report in only a few pages. This is a very attractive feature which allows the reader to skim through the important information. It also gives a snapshot of the financial position and future prospects of the company in just 2 pages. An investor who is short on time and sifting through the report can find these two pages extremely useful to make a split second decision whether to invest in the company or not.

 The Who we are section talks about the nature of business of WPP and the different business segments in which it operates. The report lists down 8 business segments in total, but the lions share of the revenue is generated through Advertising, Media Investment Management and Public Relations. The WPP group is an umbrella to more than 150 companies across the globe and employs around 135,000 people globally and it is important to summarize its operations in such a way that the reader can grasp the magnitude and scale of the operations of WPP group and its subsidiaries.

As a stepping stone into the WPP world, the report defines the mission of the organizations existence. A very good part of the report is that they have included a section by the title How we are doing which the section under Who runs WPP introduces the top management of the company to the reader. The management and the editorial team have made a wise decision by not adding photos of the top management in this section which beefs up the report unnecessarily.

The next section under How we behave talks about the corporate governance and corporate social responsibility. The writer believes that this section deserves a bit more detail and space in the annual report. The corporate governance has become a serious issue in this age and the investors are more than concerned about the credibility and transparency of the financial statements of the company being scrutinized. Therefore, being the umbrella company, WPP should talk in detail about the corporate governance and the value it shares with its subsidiaries and associate companies. The section on share ownership explains the distribution of ownership in very colorful and easy to understand charts which show the breakup by geographical region and type.

Following all this, is shown a list of all the companies under WPP. The list contains the names and website of each company. If a reader requires further details about a particular company, he or she can access the website for it.

Another very interesting section in the report is What we think, where the management gives their subjective opinion of the prior and future events and their effect on the operations and profitability of the company. However, the report fails to disclose that this note is more of an unofficial nature and should not be taken as a substitute for the directors report. This section talks about the overall economic growth globally, opportunities popping up, and WPPs position among the top companies of the world.

The letter to the shareholders, which is supposed to be an extension of the directors report, talks about the decline in share price despite increase in sales. The letter seeks to address the concerns that a common shareholder might have in his mind. The letter tries to give a brief explanation to changes in important variables such as revenues, billing, Headline profit etc. The letter also seeks to explain the effect of fluctuation in the foreign currency exchange rates on the profits of the company. The management does a fair job in allaying the concerns of the shareholders and giving them hope for the future. Therefore, we can say that the management has been fairly successful in communicating their message to the shareholders.

The letter also talks about the industry prospects in the upcoming years. It is stated that the advertising industry grew only by 2-3 globally in 2008. WPP expects a surge in the industry figures from 2010. The letter discusses the financial crisis and the opportunities that lie ahead of the crisis. Even in the directors report, the directors have tried to give tried to satisfy the shareholders that the company is in safe hands and they should expect better results in the future.

All the information mentioned above help potential investors and current shareholders to understand where WPP stands in the future, how have the current events affected it, how did WPP overcome them and what does future hold in store for WPP and its shareholders All these questions have to be answered through this medium to eliminate any uncertainty the investors might have in their minds about the WPPs performance and its future potential.

When the management talks about its key priorities, it clearly outlines its short term, medium term and long term plans. The management is looking to weather the financial crisis in the short term. In the medium term, their strategy is to build upon the base they have built through acquisitions and organic growth both.  Finally, in the long term, the management plans to increase its revenue from the emerging markets of Asia Pacific, Middle East and Latin America

Overall, the graphs and figures used in the narratives have been made more attractive in terms of colors and graphics to make them more appealing to the reader and give it a flavor of creativity. However, it would be better if they used clearer and distinct scales and larger graphs for readers convenience. Also, when discussing the operating brands, the report only highlights its star subsidiaries. It gives a slightly false impression about the future prospects of the rest of the subsidiaries which may not be expected to do so well. The directors remuneration has also been presented in a very user friendly manner which makes it very easy for the readers to comprehend the information which has been presented in the form of tables and charts.

Since WPP is a marketing and communication firm, it has done an impressive job in communicating its performance and results to the potential and existing shareholders. It has made sure that the data is well presented and understandable to an average reader who does identify with financial terms. The use of graphs can be, however, increased. Other than that, the narrative non financial information section of the annual report is highly impressive and can be recommended to other companies for guidance. Another improvement which can be made in the report is that the headings according to the legal requirements of the IFRS should be mentioned more clearly. The report tends to use innovation and unconventional headings which might make life difficult for someone looking for specific information according to the conventional titles. For example, a reader looking for the auditors report might miss the heading. If some these changes are incorporated, the annual report will become a brilliant combination of artistic creativity and financial expertise exhibited by a team consisting of marketing and finance professionals.