Financial Statement Analysis Group Assignment

A. Macro-economic Analysis

1. Global economy prospects

Since 2012, World gross product (WGP) has performed at a median annual ratio of 2.5 per
cent, appreciably below the average of 3.4 per cent recorded at a decade preceding the
financial crisis (Figure 1) (United Nations 2016). Driven by prolongation of enfeebled global
investment, dwindling world trade growth, low inflation, receding productivity, weak wage
growth as well as high debt levels, 2016 marked as a slowest pace for the global growth of
output (United Nations 2017). In comparison with 2008, 2016’s WGP is merely higher than
0.3 per cent. Besides mentioned factors, the heavy economic losses are also contributed by
low commodity prices and heightened conflicts and geopolitical tensions in various regions
(Global Conflict Tracker 2017).

Figure 1 (United Nations 2017, p. 2)

At issue is whether a sluggish economy growth will be ingrained for a longer period.
According to some projections, with the end of American destocking cycle and Japan’s
supporting policies, there will be a slight increase for developed economies in gross
domestic product growth (United Nations 2017). Even though fiscal incentive, if effectuated,
may boost global growth, risks to growth forecast could tilt to the downside, including
heightened policy uncertainty, financial market disruptions (World Bank Group 2017).

Furthermore, commodity exporters in developing nations are forecast to grow modestly, as

stabilisation of commodity prices and inflation pressures influenced by depreciations of
exchange rate ease (United Nations 2017). World gross product is projected to swell by 2.7
and 2.9 per cent in 2017 and 2018 (Appendix Table 2), respectively, with this moderate
improvement more like a signal of stabilization than an indication of a robust amelioration of
global economy.

2. Regional economies

2.1 Australia

In 2012-2013, Australian GDP increased 3.75% (Budget 2012-2013). The growth was below-
trend due to mining investment cut down, average growth of consumer expenditure as well
as continuing fiscal restraint (RBA 2013). Being impacted by the downturn of global economy,
the decline of commodity prices and the threat of international financial status which might
turn negative, in 2012, RBA decided to cut down interest rate in by 25 basis points (Janda
2012). Until 2013, the rate reached 2.5%, which was historically low (McGrath 2013). It
encouraged dwelling price and construction as well as the turnover housing market (RBA
2013). According to data from the ATO (2017), CPI of June 2012 was 100.4, below the target
set. A boost from the incline of fuel prices led to the rise of inflation rate in September
Quarter, however, a decline happened at the end of the year as a direct result of the drop of
carbon price (RBA, 2013). With a not-too-bright economy picture, Blackmore sales only rose
$65,771 from 2012 to 2013 (Blackmores 2016).

Australian GDP in 2014 climbed due to 0.4% rise in household spending, 0.8% in net exports,
however, being pulled by 0.5% drop in business investment together with 0.2% fall in
government investment (Janda 2014). In 2015, GDP slightly increased from 2.7% of 2014 to
2.5% (Tang 2016). In September quarter of 2015, the Australian inflation rate experienced a
growth of 0.5%, which was lower than expected (Cauchi 2015). Consequently, the interest
rate in 2015 was remained the same as a decision of the RBA (Parker 2015). The cut of
interest rate offers consumers more discretionary money, which has positive affect on their
spending willingness (Parker 2015). A positive economy influenced the boost by $124,855 of
Blackmore sales (Blackmores 2016).

Due to eases of the detraction from mining investment, in 2015-2016 and 2016-2017,
Australian economy is expected to rise 2.5% then surge to 3% in 2017-2018. The slowdown
in the growth of non-mining investment is a risk of real GDP. And if it continues to remain
unchanged in 2016-2017 and 2017-2018, real GDP would be 0.5% lower than forecast
(Treasury 2016). Over 2016, the Australian inflation rate was 1.5% with CPI went up by 0.5%,
which was lower than prediction. Consequently, pricing dropped all over the year. Moreover,
the unemployment rate has experienced a decrease from 6.1% to 5.5% from 2014-2017 and
is expected to remain until 2020. Generally, Australian economy has significantly gone up
since 2015. As a result, a surge has been occurred in Blackmores sales from $471,615 of
2015 to $717,211 of 2016. With a brighter picture predicted for the economy, Blackmores
might also have a better future if the company’s managers still maintain and develop good
strategy.

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Figure 2 – Blackmores operations and markets (Blackmores 2016, p. 3).

Figure 3 – Blackmores Geographical Segments – Revenue (IBIS World 2016, p. 8).

Figure 4 – Blackmores Revenue & Net Profit After Tax (IBIS World 2016, p. 6).

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2.2 East Asia and Pacific

2.2.1 China

In 2016, national output estimated at 6.7 per cent, marginally decreased from last year
growth of 6.9 per cent (Figure 5). As being projected, the economic growth in China would
continue to decelerate steadily and is likely to hit 6.4 per cent in 2017-19 (Zhang 2016). After
several years (2012-15) of being negative, producer price inflation eventually bottomed out.
This is mainly contributed by overcapacity eased and recovery of raw material prices (World
Bank Group 2017). The low inflation of 2 per cent along with benign financing conditions are
direct factors in making strong domestic demand growth in 2016 (World Bank Group 2017).

Figure 5 (World Bank Group 2017, pp. 86-88)

Varied accommodative policies have been promulgated to support economic activity,

multiple policies to cut down interest rates in 2015, for example (World Bank Group 2017).
Whilst total credit of non-financial sector reached a new GDP high – 255 per cent in the
2016 second quarter (BIS 2016), financial markets have endured steady since the first.
Capital outflows have also eased (at less than 4 per cent of GDP in quarter two of 2016),
however still maintain sizable compared to period of 2011-14 (Figure 6).

Figure 6 (World Bank Group 2017, pp. 84-85)

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Foreign reserves continued to drop in 2016 (depreciating at $3 trillion for the year ending),
yet more optimistic than the previous year (Dufour 2017). In comparison with 2015, the
Renminbi has devalued almost half against the Australian dollar (AUD) and touched bottom
at 0.19 AUD for a Chinese Yuan during 2016 last quarter (Figure 7).

Figure 7 – Chinese Yuan to Australian Dollar Chart 2015-2016 (XE 2016).

2.2.2 Rest of the region

Growth in other East Asia Pacific regions maintained at 4.8 per cent. The major factor is the
weakened external demand was primarily offset by resilient domestic demand (World Bank
2017). Low and dwindling inflation (3 per cent) permitted regional central banks to keep
accommodating monetary policy standpoints (Figure 5) (World Bank Group 2017). Economic
growth recovered in importers of commodity, preceded by Philippines and Thailand (World
Bank 2017).

In Malaysia, as a consequence of diminished revenue from exporting energy, the current

account surplus was narrowed and growth rate was burdened, but strong domestic demand
has made up at some aspects (World Bank Group 2017). Meanwhile, in Indonesia,
accommodative monetary policy lifted domestic demand, boosting Indonesian growth to 5.1
per cent (World Bank Group 2017).

In the last quarter of the year, majority of regional currencies have come under renewed
strain, especially the Malaysian Ringgit, reflecting intensified world volatility and deficiency
of stimulated measures to enhance the foreign exchange market liquidity (World Bank
Group 2017).

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2.2.3 Impacts

To build on substantial trading relationship between China and Australia, the China-Australia
Free Trade Agreement has entered into force on 20 December 2015, and shall be fully
implemented on 1 January 2029 (‘China-Australia Free Trade Aggreement’ 2016). Particularly
with pharmaceuticals including vitamins and health products, the elimination of tariffs is up
to 10 per cent (‘China-Australia Free Trade Aggreement’ 2016).

With the strong growth in China domestic demand, Blackmores (2016) estimates that earned
revenue of 2016 from the second largest economy operations accounted for 6.7% total
revenue (Figure 4) (AU$48 million), much higher than approximately 7.5 million recorded in
2015. The extended scale, at the outcome of Asia growth, has enhanced Blackmores’s
profitability, and has permitted over 100 job opportunities in Australia (MarketLine 2016).

The falling strength of the Renminbi was expected to soften the demand for imports as they
become more expensive for domestic buyers. Nonetheless, final data tell the otherwise. As
being stated in 2016 annual report, sales revenue of year to the China market increased by
636% (Blackmores 2016). This reflects the firm’s strategy to target in middle and upper class
consumers. As a result of the strong performance of Australian dollar in recent years, Asian
imports have become cheaper, which enables Blackmores to obtain procurement benefits
from the exchange rate movements (Clearly 2017).

B. Industry Analysis

Allday (2016) states that the industry is forecast to develop significantly due to the rise of
consumer expenditure as well as positive export opportunities. Consumer health awareness,
real household discretionary income and downstream demand from food together affect the
industry Allday (2016). Furthermore, the industry can also be influenced by exchange rate
and consumer sentiment (Allday 2016).

There are ‘five forces’ that contribute to the average profitability of an industry.

1. Rivalry among existing firms – Moderate

1.1 Industry Growth

According to Allday (2016), an incline in Australian health consciousness has led to the rise of
10.8% in the industry revenue, reaches $1.4 billion total revenue. Remaining healthy life
style by purchasing and consuming imported goods is a trend in middle class consumers of
Asian countries, especially China, which is predicted to the dramatically growth of vitamin
and supplement industry in these countries (Allday 2016). Also, Allday (2016) expects that
there will be a strong but slower increase of 3.9% annually over five years through 2021-
2022.

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Figure 8 (Allday 2016, p. 7)

1.2 Concentration

According to Allday (2016), due to the brand-recognition demand, an increase of market

share has occurred critically over the past five years. With an average level of concentration,
major players of the industry still take into account of 2/3 of the industry revenue (Allday
2016). Two biggest companies of the industry, Blackmores and Swisse, are expected to
endure preeminent in the next 5 years thanks to their growing of scales and worldwide
presence (Allday 2016).

Figure 9 (Allday 2016, p. 24)

1.3 Differentiation

Vitamin and supplement industry differentiates themselves by a wide range of product lines.
Allday (2016, p. 12) states that there are 3 main segments including 65.9% of health and
wellbeing products, 18 % of dietary and weight control products and fitness and functional
supplement accounting of 16.1%.

1.4 Scale and learning economies

Allday (2016) highlighted that in order to lower marginal costs and increase profit margins,
vitamin and supplement manufacturers could produce greater volumes, spread production
cost over a wider amount of goods to lower cost-per-unit.

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Figure 10 (Allday 2016, p. 13)

1.5 Excess capacity and exit barriers

According to Allday (2016), purchase cost, wages cost as well as rent and utilities cost of
vitamin and supplement industry has experienced a growth in 2016-2017. Allday (2016)
indicates that a high level of capital intensity is the reason that drives the entry and exit cost
of the industry expensive.

2. Threat of new entrants – Medium

An expectation of increase in the industry new entrants concentrating on niche or specialty

products has been forecasted, which drives higher competition in the industry and puts a
burden on prices (Allday 2016).

2.1 Economies of scale

Over the past 5 years, the increased real household discretionary causes the rise in demand
of vitamin and supplement market. Consequently, major players have raised the volume of
manufacturing which results in the growth of economies of scale (Allday 2016). This is a
challenge for new entrants to approach the market.

2.2 Access to channels of distribution and relationships

Following Allday (2016), with the domination of all the existing firms on the distribution
channels, it causes difficulties for new companies those want to enter the industry.
Moreover, in the coming years, all the material players will be expected to carry on
expanding their relationship with channels of distribution to secure their position in the
market towards in entrance of new competitors.

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2.3 Legal barriers

Allday (2016) notes that all the vitamin and supplement products are governed by
Therapeutic Goods Act 1989 under regulation by the Australian Therapeutic Goods
Administration (TGA). The act also mentioned about the manner and social responsibility of
the products marketing as well as adequate and appropriate labelling (Allday 2016). With
that high level of regulatory barriers, there will be difficulty for any companies that want to
join the industry.

3. Threat of substitute products

There are no risks of substitution for vitamin and supplement industry. However, according
to Dr. Jill Silverman, people can be provided sufficiently vitamin from all the fruits and
vegetable that they eat (Becker and Salahi 2010). Moreover, Dr. William Kormos also insisted
that obtaining nutrients from food is better than depending on vitamin and supplement
products (Willett, Sesso and Rimm 2013). To an extent, published opinion of specialists may
create impact on consumers’ thoughts towards vitamin and supplement products and
influenced the sales of firms in the industry.

4. Bargaining power of buyers

4.1 Key buyers

Vitamin and supplement manufacturers primarily supply direct-to-consumer retailers (Allday

2016). These encompass:

• Supermarkets and grocery stores;

• Pharmacies;
• Specialty stores;
• Others (department stores, direct mail orders from consumers, Internet orders from
manufacturers’ and wholesaler websites, and health service providers).

Figure 11 (Allday 2016, p. 14)

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4.2 The bargaining power

4.2.1 Price Sensitivity

Price sensitivity of buyers depends on whether the manufacture using differentiation or

switching costs as strategy, and emphasis of goods on their cost structure (Palepu 2013).
Additional, the significance of the product to buyers’ quality of products can also be in
consideration of whether price is the key component of purchase (Palepu 2013).

One characteristic of the industry is rather than price competitiveness, quality of goods;
investment in manufacturing appliances; and number of available products are more a
concern for vitamin and supplement manufacturers. This is principally due to differentiation
to meet diverse demand of health conscious consumers.

4.2.2 Relative Bargaining Power

The bargaining power of buyers is governed by the correlativity of number of buyers to

number of suppliers, each buyer’s volume of purchases, and number of available substitute
products for buyers to switch (Palepu 2013).

Vitamin and supplement manufacturers are more likely to produce high-quality goods in an
efficient manner. Manufactures that have a good reputation in the market and wide product
offerings are favoured and dominated at approximately 60% the market. Because of this
number of alternative products is somehow limited. Similarly, with only few vitamin and
supplement suppliers in the market – 184 firms, it is unlikely to meet the constantly rising
demand (Allday 2016).

5. Bargaining power of suppliers – Limited

Most domestic vitamin companies source largely ingredients from overseas including the big
names. While the outsourcing makes 90 per cent of Blackmores’ product, it accounts for 70
per cent of Swisse’s supplement (Clearly 2017). This is part of cost cutting strategy and
capturing the surge demand of general wellbeing products in Chinese market.

Said by Richard Henfrey – the Blackmores chief operating officer, the major source of supply
for its vitamin C and glucosamine was China (Clearly 2017). Additional, krill oil – main
ingredient for the famous krill oil capsules was supplied by a Norwegian fishing and biotech
company - Aker Biomarine Antarctic (Marine Stewardship Council n.d). Blackmores also
approaches load production from Canada, America, Germany, Sweden and Holland such as
its probiotics from BioGaia (AB) – a Swedish enterprise (Table 2), and only uses local
producers to meet demand when necessary. For key contractors in Australia, Blackmores
works with Lipa Pharmaceutical in Sydney, and Catalent in Melbourne.

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Vitamin and supplement ingredients and sources are the crucial component to businesses
within the industry. However, as the diversity in types of suppliers and competitive prices,
buyers have a great deal of power over suppliers and are able to switch one from another
easily.

Table 1

Price sensitivity Relative bargaining power

Level Fraction of buyers’ cost Level
Supermarkets Low Moderate Medium
Sales of grocery play as the main Number of businesses in industry
income rather than supplements of supermarkets and grocery stores
consumption. is accumulated to more than 2000
(Allday 2016), while only 184
authorised vitamin and supplement
manufacturers (Allday 2016).
Further, health products account
for 10.7% of supermarket
segmentation (Cloutman 2017).
Pharmacies Medium Large Medium
Specialised in pharmaceutical Over 4000 businesses with 79% of
products and vitamin and prescription and non-prescription
supplements medicines of products
segmentation (Richardson 2017).
Specialty Stores Medium Large Low-to-medium
Income largely based on sales of specialist products including dietary and
weight control products, and fitness and functional supplements
Others High Small-to-moderate Low
Orders from firms that are likely with limited capital, therefore, price is
most influenced purchasing factor.

6. Conclusion

Within vitamin and supplement industry, rival among existing companies remains moderate.
Due to the rise in purchase, wages as well as rent and utilities costs from 2016-2017, the
industry is considered as expensive to enter and exit. For new entrants to participate into
the market, economies of scale increase, the lack of possibility to approach channels of
distribution due to all the big players existing relationships and heavy legal barriers are
challenges they might have to overcome to sustain. There are no threats of substitute for
this industry but natural healthy foods such as vegetables. Buyers bargain power is medium
while it is low for suppliers. Overall, the competitive level in this industry is moderate to high.

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Table 2 – Blackmores Product Pipeline (Medtrack 2016).

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Figure 12 – Porters’ five forces

DEGREE OF ACTUAL AND POTENTIAL COMPETITION

Moderate rivalry among Medium threat of New Threat of Substitute

Existing firms Entrants Products

• 10% industry growth • Arise economies of • No substitute

rate in 2016 scale products.
• Moderate degree of • Moderate access to
concentration distribution channels
• Differentiation
• Heavy level of
• Medium scale
regulation and
• Medium-high
continue to remain.
entry/exit barriers.

INDUSTRY PROFITABILITY

BARGAINING POWER IN INPUT AND OUTPUT MARKETS

Bargaining Power of Buyers Limited bargaining Power of Suppliers

• Various retailers including super • Dominance of overseas
markets, pharmacies and specialty outsourcing
stores with significant purchase
• Buyers have power over suppliers
volume
• Price sensitivity and Relative
bargaining power depend on the
number of purchases and fraction of
the buyers in cost structure of
suppliers.

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 C. Business Strategy Analysis

3.1. Key success factors

In 2016, Blackmores Company has achieved a successfully growth as a result of well

complying and developing their strategies, which consists of: Consumer Centricity, Asia
Growth, Product leadership and Operational effectiveness.

3.1.1 Consumer Centricity

Suppliers provide Blackmores with the highest quality source of raw material and offer the
company a chance to select the best ingredients available (Blackmores 2016). Despite out of
stock, Blackmores’s products are committed to be qualified. In such situation, the company
will work with suppliers to improve the availability of raw ingredients and raise the
production’s capacity (Haggan 2015). The company also has the leading position in the
vitamin and supplement industry. Furthermore, due to the fact that the number of Chinese
bulk buyers of Blackmores’ products has a great impact on Australian retailers, the firm
decide to serve those customers by sustaining and developing their China business
(Blackmores 2017).

3.1.2 Asia Growth

To develop the differentiation strategy, within 2016, Blackmores have produced 117 new
products with the new invent in medicinal cannabis of their partnership- BioCeuticals
(Blackmores 2016). According to Buresti, Hill and Clift (2016), the brand differentiation and
brand relevance of Blackmores have gain an incline of 10% in 2016. Due to Magyer (2016),
Blackmores participate in the infant formula market through a joint venture with Bellamy’s
supplier in 2015. It is an opportunity for the firm to capitalize and promote their brand in
such booming market. According to Blackmores (2017), in spite of the complexity and
challenges, direct sales from China is $64 million, which has risen 92% comparing to previous
periods. Other Asian countries have contributed $40 million with the firmly gain in sales of
principal markets such as Taiwan (93%), Hong Kong (49%), Singapore (19%), Malaysia (20%)
and Thailand (6%) in local currencies Blackmores (2017). Moreover, a $2 million sales is
occurred by the launch in Indonesia with limited range (Blackmores 2017). However, due to
the adverse movements of foreign exchange, the company has to suffer a loss of $4 million
dollars comparing to prior period (Blackmores 2017).

3.1.3 Product Leadership

To ensure high quality products will be provided to customers, Blackmores put their
concentration on research and development activities as well as engineering skills. For
instance, in 2016, the firm cooperates with Griffith University to develop and deliver an
attributed course in evidence-based complementary medicine (Blackmores 2016).

Beside, a Blackmores Institute is also established approach natural health area through
education, research and professional advisory services (Blackmores 2016). Additionally,

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Blackmores (2016) notes that there are more than 20 involving clinical trials research
projects have been proceeded in Blackmores. Furthermore, to provide effective health
solutions, based on the latest research and scientific discovery, the company have produced
a strong new product pipeline with $2 million of expense on development and innovation
every year (Blackmores 2016). Blackmores (2017) states that strong performances of
BioCeuticals and Global Therapeutics contribute $51 million of sales, which is 54% higher
than previous years. The company is also benefit from acquisition of Global Therapeutics in
May 2016. Apart from the acquisition, division sales has been up 19% together with the rise
of all brands in this portfolio (Blackmores 2017). In spite of regulatory changes and volatile
market conditions, the infant nutrition range developed in partnership with Bega Cheese
remains growing constantly (Blackmores 2017). Consequently, Blackmores carries on
establishing the right strategy to sustain this business in a future place. In addition, $2
million inventory provision is recorded in the first half financial outcome (Blackmores 2017).

3.1.4 Operational effectiveness

According to (Blackmores 2017), decreasing and redirecting costs is still a management

concentration in the business. In the first half, company has recorded a flat in other
operating costs (Blackmores 2017). Moreover, to develop brand and infrastructure for the
future, Blackmores invests in the lease as well as additional warehousing fit-out in Western
Sydney, Indonesian new business and operating expenses of Global Therapeutics
(Blackmores 2017).

3.2 Key risks

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Table 3 – Key risks of the Blackmores’s strategies
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3.3 Forecast the future performance

3.3.1 Sustainability

Blackmores (2017) highlights that sustainability is the basic principal objective of the
company, including 4 sustainability commitments:

• Responsible Facility Management: To lower the burden for the environment by

cutting down carbon foot print in the firm’s operation activities and provisions.

• Sustainable Supply Chain Management: To provide social as well as environmental

encouragement, support and facilitation to the supply chain administration.

• Industry Leadership: To maintain the leader position in natural health solutions via
innovation, research and education.

• People and community: To give feedback and construct auxiliary labor force,
community and marketplace. Also, Blackmores has a commitment of sharing
perception and knowledge with their suppliers, partnerships, shareholders and
government.

Figure 13 (Blackmores 2016).

3.3.2 Forecasting

Despite the average growth in sales of Asian markets excluding China, Korean operations
had quite a tough year and eventually resulted in earnings reduction of $2,798 thousand in
the 2016 financial year (Blackmores 2016). This principally because of the heightened
competitiveness in Korea, since Korea also has an extreme developed pharmaceutical
production, and participation of high-quality Japanese vitamin and nutritional manufacturers.
Additional, the release of any sensitive information regarding unfavourable changes in tax
commerce or regulation of operating markets, may also adversely affect in the future
financial performance of Blackmores and the enterprise’s share value.
Nevertheless, impact of those mentioned factors will only be temporary. In terms of
Australia, remarkable participation in the total sales revenue of Chinese tourists and
students and the increasing in health consciousness over years, it is likely to maintain the
present growth. Additionally, the promising land – China is expected to surge in demand
further next year due to prejudice towards local pharmaceutical goods and future strategy in
developing differentiated product lines that concentrate on Chinese herbal medicine –
Global Therapeutics and expanding more operations. Therefore, it is potential that in long
term Blackmores will sustain and even keep growing.

D. Accounting analysis

Accounting analysis aims to facilitate managerial decision making and assess the liquidity,
stability and profitability of a business entity which keeps investors informed about the
firm’s financial situation. By examining the information obtained from various financial
statements carried out by professionals, it extrapolates the firm’s historical statistics into
estimates of future performance by improving the reliability of its financial accounting
reports. (Palepu 2013)

1. Step1 – Identify Accounting Policy

Blackmores has an accounting system for manufacturer. Sales of goods are main income for
the company. Blackmores records sales as the ownership of goods is transferred and the
legal title is passed. In addition, the amount of revenue, the economic benefits inflow and
the costs are measured reliably. Secondly, Blackmores uses production costing system to
valuing inventory. The production costs included ingredients, raw materials and finished
goods. The inventory cost is traced by direct labor, direct material and overhead costs. The
company chooses the most appropriate method to allocate overhead costs for each class of
inventory. Blackmores uses first in first out basis to calculate inventory costs. Its means the
assets come first are used first. Research and development cost is recognized as expenses in
period when is incurred. Those costs shall be recognized as asset if the company can
demonstrate the all in following table 1 from Balckmores annual report 2016:

Table 3

As a consequence, the intangible asset is recorded at cost less accumulated amortization and
impairment loss. From 2014 annual report, the company recognize brand name as an
intangible asset with indefinite useful life and cannot be amortized (AASB 138.63, 2015).

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Depreciation is applied on property, plant and equipment. Land is not depreciable.
Depreciation costs are determined using straight-line basis. The asset will be written off to
the estimated residual value in the same basis. To estimate useful lives, residual values and
depreciation method will be reviewed at the end of the period. The table 1 from Blackmores
annual report 2016 has shown forecasted useful lives are used in the straight-line basis.

Table 4

Similarly, amortization of intangible assets with finite lives, which are acquired separately,
are equal to cost less accumulated amortization and impairment losses. Its also use straight
line basis over their useful life. At the end of each period, Blackmores assesses amortization
method and estimated useful life. However, intangible assets with indefinite lives are equal
to cost less accumulated impairment losses. Finally, the amount of receivables must be fixed
and specific, not quoted by a floating market. Blackmores measure receivable at amortized
cost. It means that receivables are calculated by effective interest method less impairment.
The effective interest rate will be used to calculate long-term receivables. However, the
short-term receivables are not counting due to the insignificant interest.

2. Step 2 – Access Accounting Flexibility

Blackmores are flexible to choose the policy for calculating inventory depreciation and
receivables. The requirement for sale, and research and development is robust. Therefore
they are lacks of flexibility. Sales must be recorded at specific time and measurable amount.
Inventory is hard to estimate, they are flexible policy lead to increase accuracy. Allocate
overhead can through three methods, which are plan wide, depreciation and ABC. To choose
one of these based on the product’s features. They also have options on accounting policy
for product costing through LIFO and weighted average. For R&D activities which normally
recognises as expenses, if Blackmores want to recognise as asset, it need to meet all the
criteria from AASB138.57 (2009).The asset recognition of R&D will help company to better
show its financial position. There are three methods for business to account for depreciation
account, which are straight-line, diminishing balance and unit of production method.
Businesses can choose the most suitable method based on the economic benefit inflow
pattern and the accessibility to the accounting information. The reason for that is that
businesses have different ways to use their assets and some method requires more cost to
collect information and calculate than other in large scale. The same flexibility is also applied
for amortization for intangible asset with finite life. However, AASB 138.104 (2009) requires
business not to amortize intangible asset with indefinite useful life. AASB 139.AG26 (2010)
has a robust policy for businesses to record the amount of receivables. However, the

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effective interest method provided flexibility for companies to account for amortized cost
for financial asset.

3. Step 3 – Evaluate Accounting Strategy

The accounting policy used by the company help to meet the company strategy and optimise
their process .The requirements of sales recognition from AASB 118.35 (2010) and receivable
from AASB 139.AG26 clear and specific. Therefore, Blackmores don't have any adjustment in
sales in last 5 years. The company have variety products range. Consequently, each class of
product need a suitable method to allocate overhead costs. Hence, the application of several
methods helps Blackmore to gain accuracy in inventory valuing. The FIFO method is well
qualified for their inventory process. Since, the vitamins and supplements are their main
products. Thus, most of the raw materials and ingredients don't have long expiration date.
Internal generated intangible assets recognised from R&D activates improve BM’s financial
position. As its priority for ongoing success is to have leading position in industry, BM invests
significantly on R&D activities. Additionally, these actives contribute to the value of the
company. However, there are harsh criteria to satisfy to recognise asset from R&D. It shows
in the several adjustments of R&D expenditures in the annual report of 2012 and 2013.
Brand name haven been recognised from 2014 as intangible asset with indefinite useful life.
Therefore, the intangible asset balance developed will illustrate usage of asset. However,
brand name account is essential for Blackmores as it is becoming famous globally. In
contrast, Vitaco (2016) having similar business model and product doesn't recognise brand
name asset. Straight method simplifies the accounting process, however it is not the
appropriate for some types of product. The method is the best option for deprecation when
the business cannot predict the usage pattern of asset and it can fit most types of business
(Keythman n.d). The accounting information required for the method is also easy to collect.
Weighted average will better reflect the asset usage in some situation. Nevertheless, the
method demand for more information to be collected and it may cost remarkably for large
firms.

4. Step 4 – Evaluate The Quality of Disclosure

In Blackmores’ annual report 2016, has provided auditor’s independence declaration, the
auditor has provided their own opinion and stated Blackmores provide true and fair view of
its financial position and its performance in the last five year and complying with Australian
Accounting Standards and the cooperate regulations 2001.

5. Step 5 – Indentify potential red flags

Despite restrictive accounting rules, Blackmores Limited uses the same accounting policy for
the past 5 years. As a result, there are no accounting distortions found in the company’s
annual report.
6. Step 6 – Undo any accounting distortions
As there is free from potential flag ship, no adjustments need to be conducted.

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Table 5

Conclusion
Overall, until this point, Blackmores Limited remains its leading position in vitamin and
supplement industry. This report has provided a brief analysis for the world economy as well
as the economies of countries where Blackmores accounts of a considerable market share
such as Australia, China and other Asian countries. Also, the report utilises Porter’s Five
Forces to analyse the moderate rivalry among existing firms in the industry, the medium
level of new- entrant risk, the average power of bargain towards buyers as well as the
limited suppliers bargain. Moreover, the report lists out Blackmores’ key of success thanks to
complying their 4 strategies: Consumer Centricity, Asia Growth, Product leadership and
Operational effectiveness. Risks for the business are also noted and predicted consisting of:
supply constraints; product quality issue; brand damage; treasury risk; regulatory changes;
reliance on customers and markets; competitors; threat of “grey market”; and transition to
cost leadership and after that is the sustainability analysis. Lastly, 6 steps comprising identify
accounting policy; access accounting flexibility; evaluate accounting strategy; evaluate the
quality of disclosure; are used to analyse Blackmores’s accounting system. In order to
maintain being the leader in the industry, Blackmores Company should continue to develop
their strategy to adapt with the change of the economy as well as day-to-day changing of
customer’s demand.

5
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11
APPENDIX

Table 1 – Growth of world output 2008-2014 and projections of 2015-2016 (United Nations
2015, p. 2).

12
Table 2 – (United Nations 2017, p. 3)

13