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Course/Unit Information
Course Extended Diploma in International Business and Strategy
Unit No. 4009
Unit Name Accounting for Next Generations Leaders
Unit code SQA/4009
Schedule Code

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 STUDENT DECLARATION

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 LEARNING OUTCOMES AND ASSESSMENT FEEDBACK

Name of the Assessor

Module Code & Title SQA/4009 Accounting for Next Generation Leaders

Module Learning Outcomes

Critically analyze Financial Accounting Principles to measure Bottom Line impact
LO1
and develop competitive strategies.
Critique the relevance and significance of Budgeting Process, Techniques and
LO2
Methods in driving Organisational Performance.

LO3 Evaluate Financial Statements and business performance using Ratio Analysis.

LO4 Evaluate investment appraisal techniques to support decision-making..

Assessment Types Marks Marks Achieved

Organisational Study (Project Format)
Introduction – Profiles of Organisations selected 10
Application of Financial & Management Accounting
Principles and Core Finance Strategies to measure 25
Bottom Line Impact and Decision Making
Relevance of Budgets in driving Organisational
25
Performance
Ratio Analysis & Performance Review 25
Investment Appraisal Techniques 15
Overall Score 100
Overall Grade Click or tap to enter a date.

Summative Feedback:

Overall Feedback on
current work with
emphasis on how the
student can further
improve in future.
 Internal Verification Report
Internal Verification Done By Date
Assignment Brief
Assessors Decision

The following grading criteria will be applicable for the course, Executive Diploma in
International Business and Strategy:

Marks Grade
70 to 100 A - Distinction
60 to 69 B - Merit
50 to 59 Pass
Fail with
40 to 49
Resubmit
0 to 39 Fail with Retake

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of 75% and/or a minimum of 50% under extenuating circumstances approved and ratified
by the Academic Director. The student has to repeat the module (with additional fees
applicable) if the attendance is below 50%.

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Assignment Accounting for Next Generation Leaders

Learning Outcome 1: Critically analyze Financial Accounting Principles to measure Bottom Line
impact and develop competitive strategies.

▪ PC 1.1: Evaluate the financial and operational performance of an organization

▪ PC 1.2: Critically review the influence of Accounting Standards and Accounting Policies in a
financial and (macro) economic environment.
▪ PC 1.3: Critically discuss financial accounting and management accounting practices that
highlight the use/ misuse of financial data.
▪ PC 1.4: Discuss how a plan and execution strategy can ensure competitive financial
management.

Learning Outcome 2: Critique the relevance and significance of Budgeting Process, Techniques
and Methods in driving Organizational Performance.

▪ PC 2.1: Critically analyze the relevance of Traditional Budgets versus “new age” Alternative
Budgeting Types and Techniques.
▪ PC 2.2: Conceptualize the budgeting approaches required to link performance management to
improved operational planning and management strategies.
▪ PC 2.3: Apply Smart Technologies in Budgeting, Forecasting and Management Control Processes
to investigate performance management issues.

Learning Outcome 3: Evaluate Financial Statements and business performance using Ratio
Analysis.

▪ PC 3.1: Apply Ratio Analysis to interpret the historic business performance of your chosen
organization.
▪ PC 3.2: Critically discuss how forefront developments or disruptions in the external operating
environment have impacted the financial performance of your chosen organization.
▪ PC 3.3: Evaluate future strategies for financial changes that will improve organizational
sustainability.
Learning Outcome 4: Evaluate investment appraisal techniques to support decision-making.

▪ PC 4.1: Critically discuss the importance of investment appraisal techniques when approving
capital expenditure investment proposals.
▪ PC 4.2: Conduct discounted and non – discounted flow analysis.
▪ PC 4.3: Evaluate at least two investment appraisal techniques and apply them to your chosen
organization.

Assignment Task Report [100 Marks] [6000 Words (+/-10%)

Read the following Scenario and prepare a Formal Business & Financial Review Document with
the guidelines provided.

Scenario:

The assignment below will help you to review and critically analyze financial and management accounting
principles, relevant accounting standards/ policies applicable, and apply the relevant knowledge to evaluate
the overall business and management performance based on the current complex, volatile, competitive and
uncertain economic/business environment by reviewing their impact on businesses.

You are required to present a Formal Business Report, that would contain a neatly designed Table of
Contents to capture the main and sub-topics in an orderly fashion which should adhere to meeting the
assessment standards and grading criterion:

Required: Choose a public listed corporation related to your current work domain or preferred area of
industry. Questions below would require candidates to research relevant financial and operational
performance of the organization by reviewing and understanding the 2018 & 2019 Annual Reports on the
chosen public listed company. The facts and figures will help the candidate to answer below questions, and
validate with relevant statistics for analysis or examples (wherever applicable).

1. Introduction: Introduce the organization in the context of prevailing macro-economic and business
conditions by discussing the vision, mission and planning strategies of the company. For the chosen
organizations, evaluate the financial and operational performance of the organizations by reviewing
the company’s annual performance (use financial data/annual report of the company for the year
2018 and 2019 for specific information) [10 marks]

2. Financial Principles and Bottom Line impact [600 to 1200 words]: Demonstrate meaningful
understanding of accounting policies and accounting standards by critically reviewing academic
and non-academic literature pertaining to its implications on the financial and macro-environment.
Critically debate the use/ misuse of financial data in the practice of management accounting and
financial accounting.
 Discuss as how a plan and execution can lead to effective financial management in the chosen
company. Students can use financial and strategic information of the chosen company to validate
their explanations. [25 marks]

3. Ratio Analysis & Financial Interpretations [2000 words]: For the question below, in addition to
the chosen organization above, also select a competitor organization for the chosen company.
Financial data for FY 2018 and 2019 for both the organizations will be used here.

Calculate two ratios for liquidity, profitability, activity, capital structure and growth which should
be critically interpreted and evaluated by comparing each ratio between the chosen and the
competitor organization. Interpretation should follow with final comments on their business
performance which should be supported with the critical analysis of the macro developments with
impact of external operating environment on the performance of the organizations.

Finally, evaluate and recommend future strategies which will improve organizational sustainability.
[25 marks]

4. Literature Review on Budgeting Practices [1700 words]: Carry out a critical analysis which
exhibits a suitable understanding of current issues/concepts that are relevant for investigating
existing practices of ‘Traditional Budgets’ versus ‘Modern Age’ types of alternative budgeting and
techniques in large corporations.

Contextualize these budgeting approaches which can lead to enhancing operational performance
by linking them to the overall operational strategies & decision-making of the companies.

Present critical debate to review the impact of ‘smarter’ technologies in the overall budgeting
processes when examining forecasting and management control processes. (Students may use
examples from chosen organization). [25 marks]

5. Investment Appraisal Techniques [700 words]: If you were a Director of a public listed
company and had to present a significantly high value capital expenditure proposal to the CEO,
how would you critically evaluate investment appraisal techniques that remain important when
seeking an approval from the CEO.

Any capital expenditure involves protecting shareholder interests & maintaining a careful balance
between risk and rewards, using the concept of ‘time value of money’, to study the impact of
choices between discounted cash flows and non-discounted cash flow methods. Therefore,
conduct a discounted and non-discounted cash flow analysis.

You are required to apply necessary knowledge and understanding to evaluate at least two popular
investment appraisal techniques that can be used & considered by managers/decision-makers in the
light of dynamic business & economic conditions. (Examples/data from the chosen organization
can be used to support the explanations). [15 marks]

6. Presentation & References: You should present the whole document in methodical manner and
should remain aligned to appropriately demonstrate correct application of the Harvard Referencing
System (HRS).
 Performance Descriptors

Performance descriptors indicate how marks will be arrived at against each of the above criteria. The
descriptors indicate the likely characteristics of work that is marked within the percentage bands
indicated.
Assessment (70-100%) (60-69%) (50-59%) D (40-49%) E (0-39%)
Criteria Work of an Work of a Work of a Fail Fail
outstanding, good standard. pass standard.
excellent & v.
good
standard (*)
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presents reviewing the ‘websites’ & presented is of language grammar
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Ratio Analysis Assignment Assignment Assignment Assignment Assignment
& Financial produces an produces a very produces an produces a limited produces a limited
Interpretations excellent analysis good analysis of analysis of the analysis of the analysis of the
(25%) of the company’s the company’s company’s company’s company’s
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Relevance of Assignment Assignment Assignment Assignment Assignment fails

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driving and concise and concise analysis of some analysis of a few analysis of the
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Introduction

Aldar Properties PJSC based in Abu Dhabi is one of the largest developers in the Middle East
and North Africa region, with over US$ 12 billion worth of assets. The Key objective in
establishing Al Dar company from its beginnings in 2005 through to today, is to enhance the
shape and real estate industry in Abu Dhabi by serving high quality and professionally
managed properties. Through strong partnership with Abu Dhabi Government who is a major
shareholder in Al Dar.
Aldar is a listed company and its shares are traded on the Abu Dhabi Securities Exchange.
Aldar Properties has a diversified and balanced property portfolio, diversified between
residential property, retail, commercial and hospitality.
Aldar is playing a leading role in the development and provision of world class retail - Yas
Mall, iconic entertainment venues such as the Yas Marina Circuit, and community amenities
across its entire portfolio.
The business is aligned with the Emirate’s “Vision 2030” strategy of economic
diversification and social infrastructure development. (Al Dar Property, 2019)
In 2013 Al Dar and Sorouh merged to form one of the biggest real estate development entity
in the UAE and middle east with total assets exceeding AED 41 billion. All Al Dar projects
and developments are mainly in Abu Dhabi. Currently Al Dar does not have a competitor in
Abu Dhabi.

Strategy Vision and Mission

Aldar's strategy has three principal pillars:

To maximise value of its recurring revenue assets through value accredited growth and
optimisation of the asset management portfolio.
Monetise the land bank through launching new developments and enhancing its existing three
destinations, Yas Island, Al Raha Beach and Shams Abu Dhabi.
Optimising its capital structure through a clear financial policy.
The focus of Aldar's development strategy will centre around its key locations such as Yas
Island and Saadiyat Island, which benefit from well-developed infrastructure already in place.
Al Dar Vision: Aldar is driven by a vision to be the most trusted and recognized real estate
lifestyle developer in Abu Dhabi and beyond.
Al Dar Mission: To maximise its stakeholder value by passionately creating and managing
quality living spaces. (Al Dar Property , 2018)
 ▪ PC 1.1: Evaluate the financial and operational performance of an organization

Economical Highlights for the year 2019

- Economic growth in the Gulf Cooperation Council (GCC) states significantly
weakened in 2019; overall real GDP growth is estimated to drop to 0.8% in 2019 from
2% in 2018 before gradually recovering in 2020-21. (The world Bank, 2019)
- As per Abu Dhabi Vision 2030, the government of Abu Dhabi is supporting the
investment and business growth in Abu Dhabi, by contributing to enhance business
environment through further legislative reform and by ensuring that all economic
policy is formulated with reference to rigorous data sources and statistical
information. Enhancing the economy and business climate will also help to integrate
Abu Dhabi further into the global economy by attracting foreign as well as local
investment, and by facilitating export of capital through targeted investments with
international partners. (Abu Dhabi Government, Nov 2008)

Economical Highlights for the year 2019 related to real estate business
- The UAE Economy grew 2.9% in 2019.
- Abu Dhabi property prices fell by 11 percent in 2019 as compared to 2018 while
rental rates dropped by 9.3 percent. (Arabian Business Magazine, 2020)
- Residential sales prices in Abu Dhabi fell on average by 7.5% in 2019. (Frank, 2020)
Al Dar Properties recognize revenues from the following the below major sources:
• Sale of properties
• Service charges from the tenants
• Hospitality and leisure
• Others (cooling, school fees “Aldar academies”) and management fees

Financial statements highlight

FY 2019 FY 2018 change % change (vs.

AED M (Al AED M (Al AED M FY 2018)
Dar Property, Dar Property,
2019) 2019)

Revenue 7,148 6,286 +862 +14%

Gross profit 2,770 2,632 +138 +5%

Gross profit % 38.7% 41.9%

Net profit 1,925 1,854 +71 +4%

Total assets 41,266 38,543 +2,723 +7%

Total liabilities 16,315 14,308 +2,007 +14%

Equity 24,951 24,235 +716 +3%

Cash and cash 5,686 5,014 +672 +13%

equivalent

Overall analysis:
Even though Abu Dhabi property prices and rental prices fell during 2019, Aldar Properties,
reported 4% increase in 2019 net profit to AED 1.925 billion, driven by growth across both
its development and asset management businesses.
Below is a detailed analysis of Al Dar financial statements:
- Aldar revenues has increased by AED 862 million 14% as compared to prior year,
increase is related to the AED 284 increase in property management and AED 372 in
sales of property. (no significant increase in leasing and leisure, as compared to prior
year AED 59m).

- The decrease in real estate prices in 2019 as compared to 2018, has resulted in decrease
in the gross profit margin from 41.9% in 2018 to 38.7%.

- The increase in revenues countered with the decrease in margin have resulted in
increase in gross profit AED 138 million.
- Aldar reported AED 71 million 4% year on year increase in 2019 net profit to AED
1.925 billion as compared to AED 1.854 billion in 2018, driven by growth across both
its development and asset management businesses.

- The increase in total assets is mainly due to the increase in current assets, which was
noticed through the increase in:

1- Trade receivables by AED 1.2 billion, due to the increase in sales.

2- Land held for sale by AED 0.9 billion due to additional assets bough during the year.
3- Cash by AED 0.6 billion (see below explanation under cash)

- The increase in total liabilities is mainly due to increase in non-current liabilities due to
the increase in Non-convertible Sukuk by AED 1.8 billion to finance the operations of
the company and increase in trade and other payables by AED 0.6 billion due to the
increase in the cost of sales.

- The increase in equity reflects the net movement between the net profits and dividends
paid of AED 1.1 billion.

- The increase in cash was due to

1- Increase in cash from operating activities by AED 1.3 billion coming from adjusted
profit and net movement from working capital which indicate that the core business
of the company is generating cash along with efficiency of the company in dealing
with its working capital.
2- Increase in cash from investing activities by AED 0.5 billion. Cash flow from
investing activities reflect the movement of long-term assets, investments,
equipment, and finance income received. The net movement reflects the net effect
of the acquisition of assets (fixed assets and investment properties) and proceed
from sale of assets (fixed assets and investment properties). While the negative cash
out flow from investing activities might indicates that a company is investing in
assets to generate future revenues, and the positive cash inflow might indicate that
a company is selling part of its fixed assets and investment property, however in Al
Dar, the company positive cash positing in investing activities was mainly due to
finance income received which means that the company is financing its customers
and have along with that interest income from bank deposits.
3- Decrease in cash flow in financing by AED 0.9 billion. Cash flow from financing
activities shows the net results of bank borrowing, settlement of borrowings and
dividends paid to shareholders. The positive cash inflow from financing might
indicate that a company is borrowing to finance its operations while the negative
outflow might indicate that a company is settling its own debts. In case of Al Dar
the cash outflow was mainly coming from dividend paid to shareholders.
 ▪ PC 1.2: Critically review the influence of Accounting Standards and Accounting
Policies in a financial and (macro) economic environment.

Accounting Standards Definition: Accounting standard means a rule or guideline set up by

governing bodies, like FASB and IASB, for how financial activities are recorded and reported
to third parties. to keep accounting practices consistent and understandable across all
companies and industries. (Investopedia, 2020)

Accounting Policies Definition: are the internal policies set by the entity to process,
measure, recognize, record, and disclose a specific item or transaction in the financial
statements. These policies may be different from company to company, but all accounting
policies are required to conform to generally accepted accounting principles (GAAP) and/or
international financial reporting standards (IFRS). (WIKI accounting, 2019)

The flexibility in accounting policies gives the company’s management team several options
to choose specific accounting policies that are advantageous to the financial reporting of the
company as long as the company is transparent in regards to the accounting policies used
which should be clearly mentioned in the notes to the financial statements. Based on the
selected accounting policies, the user of the financial statements might notice whether the
management is aggressive in recognized and reporting profits or conservative to assess the
quality of earnings. Also, external auditors who are hired to review a company's financial
statements should review the company's policies to ensure they conform to a specific
standard such as IFRS, GAAP, or as regulated. (Investopedia, 2019)

These Accounting Standards and Policies have an impact both on a national economy and on
the economic and fiscal policy. With the implementation of accounting guidelines on a national
scale, countries are able to implement a common terminology in the economic world and
perform a precise, uniform, objective and correct calculation of data on the financial position
and results of business units.
The standardization of the accounting procedures helps businesses to record and monitor their
business activity and achieve comparability of accounting information between companies that
operate in the same industry. By applying the same accounting principles and methods,
businesses ensure homogeneous, reliable and accurate data and information about their assets,
liabilities, financial position, and overall activity. (Accounting Dictionay, 2020)

Accordingly, several countries are working together to come with one global accounting
standard by mainly combining the US GAAP with IFRS. Resulting in high quality,
comparability financial results and information. Many finance people believe that this is a
vital for growing global economy and make provide easy and direct data to make economic
decisions

Further, the change and combining the accounting standards will potentially affect
management, employee and executive compensation, investor relations and legal issues.

As per the article in Journal Accounting Research dated 28 March 2008, in regards to the
effect of applying IAS, it was noted that “The application of IAS reflects combined effects of
features of the financial reporting system, including standards, their interpretation,
enforcement, and litigation. Firms applying IAS generally evidence an improvement in
accounting quality between the pre‐ and postadoption periods. (LANG, 2008)

However, the author cannot be sure whether their findings are attributable to the change in
the financial reporting system rather than to changes in firms' incentives and the economic
environment. (LANG, 2008)

As an example of the significance of different accounting policies used in Al Dar to its

financial results, the Company’s investment property portfolio amounted AED 16.7 billion
(2018: AED 16.4 billion) is evaluated at fair value and that resulted in recording a net fair
value loss of AED 375 million (2018: AED 671 million) in the income statement and
decrease in total assets by the same value. While if the company decided to record those
investment at cost which is also acceptable accounting principle, those losses would not have
been directly recorded in the income statement at this point of time, but they will be recorded
upon the sale of those assets. When the company has its assets recorded at fair value, it would
give the reader of the financial statement a better view in regard to the accuracy of the
company position and limit the ability to manipulate the financial position. However
sometimes it is not easy to get the related data to support the valuation and in cases of un-
stabilized market, the result of the valuation would vary significantly and creating large
swings year to year.

▪ PC 1.3: Critically discuss financial accounting and management accounting

practices that highlight the use/ misuse of financial data.

Financial accounting is the collection of financial data to create the company’s current position
(balance sheet, income statement, equity and cash flow) prepared in accordance to specific
accounting principle (GAAP, IFRS or other) and as per a set of disclosed accounting policies to
show the company’s assets, liabilities, equity, profit, and cash position. The users for the
financial accounting are company’s shareholders, investors, bankers, customers, suppliers
etc.…
To provide an assurance on the financials, those financials are audited by independent auditor
who provide his opinion in regards to the financial statements being free of material
misstatement that might have an impact on the user of the financial statements either quarterly
or at year end (depending on the regulations and management requirements).
Managerial accounting goal is to provide useful operating information to managers. Managerial
reporting might be prepared on monthly basis and depends on management requirement the
management report is more of operational report for a purpose to think of ways to generate
more profits, and there is no standard covering the issuance of reports, accordingly, the report
will cover more detailed such as profit by project, or by key customers, ratio analysis, budget
and forecast vs actual.
 Key difference Financial accounting Management accounting
Users Internal and external Internal
Business Looks at entire business Detailed and could covers
profit by project/customer

Reporting/timing Quarterly/yearly audited by Based on management

external independent auditor requirement and no third-
party review required

Standards Most follow a specific No requirement to follow

accounting standard standards

Time period Past Current and future

Financial statements might be manipulated to impact the decision of the users through one or
more tactics such as recording premature revenues, recording revenues that does not exist,
unrecording liabilities and expense, overstatement of assets or vice versa by reducing the
revenues, assets or increasing cost and liabilities.

As an example of the financial manipulation is the financial crisis in 2008, which was due to
financial manipulation and had an impact on the global economy and resulted in world-wide
crisis.

Audited financial statement does not necessary identify or detect fraud, as auditors perform
their audit based on evidence gathered, identifying and detecting fraud is the management
responsibility. Examples of the other financial manipulation are Enron, Worldcom, Tyco
International, Adelphia, Cendant, Freddie Mac, and AIG should remind investors of the
potential landmines that they may encounter. The known prevalence and magnitude of the
material issues associated with the compilation of corporate financial statements should
remind investors to use extreme caution in their use and interpretation. Audited financial
statements does not necessary identify or detect. (Investopedia, 2020)

▪ PC 1.4: Discuss how a plan and execution strategy can ensure competitive financial
management.

A key successful real estate strategy to get a competitive edge in the market: lowest costs,
knowledge of client and market, and differentiation.
For the largest extent of the firms in the real estate industry, human resources can become a
key determinant of competitive advantage, but only by complementing a more conventional
approach. Consequently, in order to develop and maintain on the long run a human resource
based competitive advantage the firms should make a shift in their strategic thinking, by
emphasizing on education and training of their employees. (Dobre, 2011)
The globalization of tourism has created a significant number of opportunities for real estate
developers.

Al Dar was able to achieve lowest cost strategy and increase margin through merging with
Sorouh Real Estate. Prior to 2013, Abu Dhabi had two large real estate development companies
in the market “Al Dar PSJC and Sorouh PSJC” both of them significantly owned by the
government of Abu Dhabi and were competing with each other. The merger has resulted in
significantly reducing the cost and eliminating the competition resulted in higher margins.
Al Dar knowledge of client and market and differentiation was translated through benefiting
from the government vision of transforming Abu Dhabi to global cultural, business and trade
hub and Al Dar was and still able to transform this vision to additional profits to its shareholder
as an example of such projects is Yas island including Yas Circuits, Ferarri world, and many
other projects. This partnership with Abu Dhabi Government gives Al Dar an edge at all the
real estate developers in Abu Dhabi.
Al Dar mainly operates and focus its business in Abu Dhabi and that also reflected in its
strategy, vision and mission as it clearly mention its focus in Abu Dhabi and currently it is a
very successful model as Abu Dhabi real estate is
In case the company decided to develop other areas such as in the Middle East, North Africa
Far East and/or east Europe, Through looking at Al Dar financial statement, the company has
sufficient equity and strong financial position, however the company needs to ensure proper
understanding of the related area lows and regulation and political environment to ensure
successful planning and execution

▪ PC 2.1: Critically analyze the relevance of Traditional Budgets versus “new age”
Alternative Budgeting Types and Techniques.

Budgeting definition: A budget is an estimation of revenues and expenses over a specified

future period of time and is usually compiled and re-evaluated on a periodic basis.
The purposes of budgeting and budget objective are for resource allocation, planning,
coordination, control and motivation. It is also an important tool for decision making,
monitoring business performance and forecasting income and expenditure. With proper
budgeting, limited resources are managed efficiently. (Investopedia, 2020)

Budget Types: There are several budget types and techniques, such as:

- Traditional Budget
- Activity Based Budget
- Value proposition budgeting
- Zero Based Budget
- Others (Imposed Budget, negotiated Budget and Participative Budget)

Traditional budgeting is a method of preparation of the budget in which last year’s budget is
taken as the base. Current year’s budget is prepared by making changes to previous year’s
budget by adjusting the numbers based on insight from management and might consider the
change in the inflation rate, consumer demand, market situation, etc. Past year’s revenues and
costs form an integral part of current year’s budget. Only those items in traditional budgets
need to be justified which are over and above the last year’s budget.
ADVANTAGES OF TRADITIONAL BUDGETING
Traditional budgeting method has various advantages as well as disadvantages.

ADVANTAGES

- The traditional budget is can be easily prepared and implemented, as minor changes
required as compared to prior year budget It is easy to prepare and implement. Thus,
saves manpower, time and efforts of managers.
- The employees are aware of the budget details; hence it is a carried forward.
Accordingly, everyone knows what needs to be done.
- Decentralization: Traditional budgeting helps in promoting decentralization in the
organization like in the case of banks.
- It supports the underperforming projects/cost center by consolidating them in one
budget with overperforming projects.

DISTADVANTAGES OF TRADTIONAL BUDGETING

- Fixed and rigid: it does not consider the new factors which might have an impact on
the budget, thus it is fixed and inflexible.
- Employees are not involved or participating much in the preparation of the budget as
it is mainly a carried forward budget with minor changes, accordingly, the employees
do get motivated and further they don’t feel that they own their budget, accordingly
they will also feel less motivated to achieve it.
- Unidentified errors and inflations: this budget are a carried forward from prior year/s
accordingly any unidentified error or inaccuracy will be also carried forward put
excessive reliance on past year budgets. This would lead to the preparation of
incorrect budgets of the organization, which can harm the growth of the company in
the long run. Further, Managers may deliberately increase their budgeting cost
without justifying such expense.

Because of such disadvantages, and the continuous developments in industries and

technology, most of the big companies moved towards alternative budget methods, different
approaches and different styles in preparing the budgets to improve efficiency, increase
profitability and controls such as:

Activity-based budgeting
Activity-based budgeting is a top-down budgeting approach that determines the amount of
inputs required to support the targets or outputs set by the company. Based on that the
company sets the targeted revenues/profit and then decided the sales/profit from each of its
current activity to reach to the proposed target.
Value proposition budgeting
In value proposition budgeting, the management would raise the questions of why do we
have budgeted for this amount and what is the value coming out of it along with a proper
justification for using such amount. The purpose in using such budget is to avoid unnecessary
expenditures and the amount included in the budget would add value to the company

Zero-based budgeting
As one of the most commonly used budgeting methods, zero-based budgeting starts with the
assumption that all department budgets are zero and must be rebuilt from scratch. Managers
must be able to justify every single expense. No expenditures are automatically “okayed”.
Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not
considered absolutely essential to the company’s successful (profitable) operation.

The zero-based approach is good to use when there is an urgent need for cost containment,
for example, in a situation where a company is going through a financial restructuring or a
major economic or market downturn that requires it to reduce the budget dramatically.

Imposed budgeting
Imposed budgeting is a top-down process where executives adhere to a goal that they set for
the company. Managers follow the goals and impose budget targets for activities and costs.

Negotiated budgeting
Negotiated budgeting is a combination of both top-down and bottom-up budgeting
methods. Executives may outline some of the targets they would like to hit, but at the same
time, there is shared responsibility for budget preparation between managers and employees.
Participative budgeting
Participative budgeting is a roll-up approach where employees work from the bottom up to
recommend targets to the executives. The executives may provide some input, but they more
or less take the recommendations as given by department managers and other employees
(within reason, of course).

(Types of Budgets, 2020)

▪ PC 2.2: Conceptualize the budgeting approaches required to link performance

management to improved operational planning and management strategies.

The budget is supposed to be the tool by which an organization transforms its strategy into
action. According to data cited by Kaplan and Norton, 60 percent of organisations do not link
strategy to their budgets. For budgeting to become the relevant process this gap needs to be
fixed.

For an entity to achieve its strategic objectives, a proper link should be there between its
objectives, strategy, resources and capabilities.
Jack Weich (New York: Harper Business, 2005) suggests that budgeting can be a productive
if organisations concentrate on two questions: “How can we beat last year’s performance?”
and “What is our competition doing, and how can we beat them?” (Yvanovich, 2017)

The answers to these key questions typically appear in a strategic or operational plan, against
which budgets can be set and monitored for effectiveness.
Performance management is all about managing the activities that generate results. Those
activities should directly support the organisation’s strategic objectives.

Therefore, a good plan acts as a road map, showing the organisation how it should move from
its current level of performance to the desired level of performance, based on the perceived
economic environment.

There is evidence to support the contention that organisations that focus on performance
management outperform those who don’t. In a survey of 437 publicly traded organisations,
those that had structured performance management systems (205) produced better results
than those who didn’t. Moreover, despite constrained budgetary environments, the CPM
software market still recorded a 16.4% growth increase in 2011. (Yvanovich, 2017)

Based on the current micro and macro-economic situation of having the Corona virus impacting
negatively on most of the industries including the real estate business, companies need to
manage their expenses in order to survive the current situation. Accordingly, in Al Dar Property
which is profit oriented company and relies on the sale of its unit whereby the cycle in real
estate industry takes almost three years in order to build and sell, accordingly, in prior years Al
Dar might have used the Activity Based Budget to put target at each cash generating unit (Real
estate, maintenance, Education) to ensure reaching to the maximum and best revenues result.
Currently, and depending on its future strategic objectives, Al Dar might to use for 2020
budgets and moving forward for the next three years the Value Proposition Budget as it would
assist in monitoring and minimizing its expenses and costs, proper cash management and
ensure the continuation of its operations for future developments.

▪ PC 2.3: Apply Smart Technologies in Budgeting, Forecasting and Management

Control Processes to investigate performance management issues.

Traditional budgeting and forecasting tools, such as spreadsheets, are still used by many
organizations. This leaves these businesses struggling to overcome outdated systems,
complex algorithms and productivity issues.

Availability of timely data is very essential for decision making, which would give the
decision maker a fast reaction for challenges and opportunities and that could be the
difference between a very successful company and bankrupt company. Accordingly, many
businesses have noticed the importance of technology and investing to adopting to the
changes. Technology has brought ways to apply superior strategic approaches to budgeting,
forecasting and the performance of the management on monthly basis. In general, at most of
the companies the compliance with the budget is one of the most followed KPI’s to ensure
management performance.

In 2014 Deloitte performed a survey in regards to performance management, the results

highlighted that many organisations still struggle to drive real value from their performance
management processes. Processes are unclear, lack ownership and more often they entirely
miss the point.
Addressing process and technology issues along with proper culture change will certainly
deliver incremental improvements in efficiency and effectiveness. (Deloitte, 2014)

Some of the advantages of adopting technology in budgeting and planning to improve and
monitor performance:

▪ Increased Accuracy and Productivity

Relying on data that is wrong costs businesses millions each year in poor decision making.

▪ Better Budgets and Forecasts

Having an outdated budget (and budgeting system) is a massive problem for the overall
financial health of a business.

Good financial forecasts can help organization project production and staffing, reduce
spending and plan for the future. They can also identify potential needs down the road and
help guide organizational strategy.

▪ More Collaboration
All the information can be easily accessed. This helps to broaden the number of key
stakeholders involved in the budgeting and forecasting process.

▪ Knowing Actuals and Cash Flow

Real-time cash flow is a vital piece of information to plan for short term and long-term
liquidity to meet the obligation as they fall due.

The reason for adopting technology is strengthening the ability of the organisation to plan and
execute, to anticipate and respond and to maximise value for the organisation.

As a conclusion: Appling Smart Technologies in Budgeting, Forecasting and Management

Control Processes is essential to evaluate management performance.
The smart technology will provide the tools for management to monitor and control budget and
expense which would reflect positively in the company and management performance. It would
provide a very clear understanding of the organization’s overall health is incredibly important
for strategic decision making. Taking control of budget is so crucial, and with a smart budget
approach, it’s easier now than ever before. As such any investment in technology programme
needs to be taken seriously. Management and leadership needs to develop a clear understanding
of the true extent to which performance is impacted by existing issues with the PBF process
and the potential improvements that investment in technology can drive as part of a broader
programme of change.
 ▪ PC 3.1: Apply Ratio Analysis to interpret the historic business performance of
your chosen organization
▪ PC 3.2: Critically discuss how forefront developments or disruptions in the
external operating environment have impacted the financial performance of your
chosen organization.
▪ PC 3.3: Evaluate future strategies for financial changes that will improve
organizational sustainability

For the purpose of the above question, we have decided to compare Al Dar to Emmar. Emmar
is considered the biggest real estate company in Dubai and also in the middle east. Below is
the summary of both companies’ financial results used for ratio calculation.

Emmar (Emmar consolidated

Al Dar (Al Dar Property, 2019) FS 2019, 2020)
AED M AED M AED M AED M
2019 2018 2019 2018

Current Assets 20,294 16,833 37,229 37,299

Account receivables 6,211 5,070 25,924 21,439
Non-current assets 20,972 21,710 79,641 74,120

Total assets 41,266 38,543 116,870 111,419

Current liability 7,410 6,740 27,225 30,405

account payables 6,125 5,489 16,919 16,096

Non-current liability 8,905 7,568 26,196 24,225

Long term debts 8,035 6,675 23,101 20,909

Total liability 16,315 14,308 53,421 54,630

Capital 7,862 7,862 7,160 7,160
Others 17,089 16,373 56,289 49,629

Equity 24,951 24,235 63,449 56,789

Total liability and equity 41,266 38,543 116,870 111,419

Revenues 7,147 6,286 24,585 25,694

Cost of sales (4,378) (3,655) (13,023) (12,811)

GP 2,769 2,631 11,562 12,883

Others (844) (777) (3,353) (3,831)
Interest charges 349 309 1,162 1,057
 Net profit 1,925 1,854 8,209 9,052
Liquidity Ratios

Liquidity ratio focuses on a company’s current assets and liabilities to assess if it can pay the
short-term debts. The three common liquidity ratios used are current ratio, quick ratio, and
net-working capital.

Al Dar Emmar Real Estate:

Average
Industry
Ratios* (Real
Estate:
average
industry
financial
AED M AED M AED M AED M ratios, 2020)
2019 2018 2019 2018 2019
Liquidity ratio

Current ratio 2.74 2.50 1.37 1.23 1.18

Quick ratio 1.61 1.50 0.98 0.98 0.92

Net working capital 12,884 10,093 10,004 6,894 Not available

*average real estate industry ratio for the listed companies in the US for the year 2019

Current ratio, quick ratio and net-working capital:

- Current ratio is the result of dividing current assets over current liabilities. And it
shows the ability of the company to pay its current liability “liability that are due
within a year” while quick ratio it is current assets minus inventory “most liquid
assets” divided by current liability and it measures that a company has instant liquid
assets to cover its current liabilities. In general, 1 is considered a very healthy quick
ratio.
- Net working capital: it is the difference between the company current assets and
current liabilities, and it measures liquidity, efficiency and short-term health.

Negative working capital and less than one current ratio might give an indication that the
company might not be growing or able to meet its current liability and, in some cases, going
bankrupt.

Evaluation and Interpretation of the ratio

In the case above Al Dar and Emmar Properties are showing improvement in the current ratio
as compared to prior year, moreover both companies show current ratio greater than 1 and
quick ratio of almost one in Emmar and exceeding 1.5 in Al Dar which indicate that both
 companies are in good financial health and it is less likely, that they would fall into financial
difficulties within the next financial period.

By comparing both companies “Emmar and Al Dar” to the industry, Emmar is in line with
industry average for both current and quick ratio while, Al Dar current ratio is almost double
Emmar Properties’ and the average industry

The above is reflected in the net working capital for Al Dar which amounted AED 12.8
billion as compared to AED 10 billion in Emmar Properties which indicate that Al Dar has a
very strong financial position not only to pay its current short term debt as they fall due but
also to finance future needs.

Future Strategic Recommendation

It is recommended that Al Dar could utilize part of its working capital to finance its future
growth and investment which would result in lower financing costs and gave it better
compatibility position against its competitors in the market with a better margins and
profitability.

Profitability Ratios

These ratios analyze how the company uses its assets and how effectively it generates the
profit from the assets and equities. This also then gives the analyst information on the
effectiveness of the use of the company’s operations.

Al Dar Emmar Real Estate:

Average
Industry
Ratios (Real
Estate:
average
industry
financial
AED M AED M AED M AED M ratios, 2020)
2019 2018 2019 2018 2019
Profit ratio
GP Ratio 39% 42% 47% 50% 52%
Net profit ratio 27% 29% 33% 35% 18%
G&A and other
expenses to revenues 12% 13% 14% 15% 34%
Return on equity 8% 8% 13% 6% 2%
 Gross profit ratio analysis: Gross profit ratio equal Gross profit/net sales *100 and it shows
the amount of profit gained before operating and other expenses.

Evaluation and Interpretation of the ratio

The decrease year to year in both companies GP margin might be related to the drop in both
property prices and rental prices as mentioned in question 1, also it might be due to the
increase in available units, however both companies’ margins seem stable and considered
high which indicate a strong management and also it reflects the strong financial position for
both companies. But both of them are still below the average industry ratio. Moreover, Al
Dar margin is lower than Emmar,

Future Strategic Recommendation

- Both companies need to work better to enhance the cost management.

- Looking at the industry ratios It is recommended for both companies to improve the
control over their operating costs to enhance their gross margin. Based on
understanding the industry, the key costs are mainly contractors cost, accordingly,
better controls on quotations, proposals and drafting scope of work along with strong
negotiations techniques with the contractors would save significant amount of money.

Net profit ratio: it equals net profit / net sales*100

The net profit margin is intended to be a measure of the overall success of a business. A high
net profit margin indicates that a business is pricing its products correctly and is exercising
good cost control

Evaluation and Interpretation of the ratio

Real Estate Businesses

Businesses related to real estate have good profit margins. Lessors of real estate earn a
margin of 17.4%. These include rentals for apartments, houses, self-storage facilities and
mini-warehouses. Real estate agents and brokers also do very well, with profit margins
averaging 14.8 percent (Woodruff, 2019)

As shown above, both companies are significantly performing higher than the industry
average, while Emmar is still doing better as compared to Al Dar, this is mainly due to the
difference coming from GP margin, as Al Dar is doing better in controlling its admin cost.

looking at the real estate average in the US which has significantly higher G&A expenses
resulting in lower net margin it might be due to using different accounting standards which
might have in impact on revenue recognitions and/or recording expenditures.

Future Strategic Recommendation

 In order to increase profitability, both companies need to enhance their controls on their
expenses and reduce the administrative and other expenses As per Mckinsey study the best
practice range of the G&A expenses is between 8%-10%. (Mckinsey, 2016)

Return on equity: it equals net profit after interest and taxes/equity and it shows the benefit
gained from an investment and the efficiency of the company using its capital to generate
profit to compensate the shareholders of their investment.

Evaluation and Interpretation of the ratio

According to S&P 500 index, the average return on investment in the US real estate market is
8.6%. It differs based on property investment strategies. Residential real estate has an average
ROI of 10.6%, commercial real estate has an average of 9.5%.

Future Strategic Recommendation

As mentioned above to enhance the ROE, Al Dar needs to further control both its cost and
G&A ratios

Working capital “Activity” ratio

Activity ratios measures the efficiency of a company using its resources through trend
analysis. It would also compare the efficiency of different entities by comparing them to each
other.

Al Dar Emmar Real Estate:

Average
Industry
Ratios (Real
Estate:
average
industry
financial
AED M AED M AED M AED M ratios, 2020)
2019 2018 2019 2018 2019
Working capital ratio
debt turnover ratio 111% 115% 95% 120% 55%
debt days 329 318 385 305 664
credit turnover ratio 71% 67% 77% 80% Not available
Creditors days 511 548 474 459 Not available
Accounts Receivable Turnover: it is calculated by dividing revenues over trade receivables
and it determines the entity's ability to collect money from its customers. High ratio shows
how quickly the credit sales are converted into the cash while a low ratio suggests a
deficiency in the collection process.
Accounts Payable Turnover: it is calculated by dividing cost over accounts payable and it
determines the entity’s ability to pay its creditors. High ratio shows how quickly the company
is paying while low ratio might suggest delays in payment process.

Evaluation and Interpretation of the ratio

As compared to Emmar properties, Al Dar has slightly higher ratio and lower debts days
which indicate that it is more efficient in collecting its receivables, while as compared to
industry, Al Dar and Emmar are collecting their receivables faster than the industry.

On comparing Al Dar year on year, the number of debt days is consistent with a slight
increase which might be linked to higher competition in the market and the slight drop in
economy which might result in flexibility to the credit terms given to customers.

On the other hand, Al Dar shows more creditors days and both companies show more creditor
days than debtors days which means that they are keeping the cash in their hands for the
longest period possible this also is reflected in the liquidity and current ratios analysis.

Future Strategic Recommendation

In order to determine the efficiency in collecting receivables and paying payables both
companies needs to compare the debt days to their credit terms and credit days to the
agreement with the suppliers as delays in paying to suppliers might impact reputation and/or
delays in delivery.

Capital Structure Ratios

A company’s capital structure points out how its assets are financed. The company’s assets
could be either financed via debts or equity depending on the company’s strategy.

The purpose of capital structure is to provide an overview of the level of the company’s risk.

Al Dar Emmar Real Estate:

Average
Industry
Ratios (Real
Estate:
average
industry
financial
AED M AED M AED M AED M ratios, 2020)
2019 2018 2019 2018 2019
Capital structure
ratio
Debt to equity 65% 59% 84% 96% 69%
Interest coverage ratio 6.5 7.0 8.1 9.6 1.2

Debt to equity ratio: it equal total debts / total equity and it actually measures the relationship
between the external (debts/equity/outsiders fund) and Internal (equities/shareholders fund).

Assets are acquired by the utilization of both outsiders’ fund and shareholders’ fund.
Accordingly, the ratio would tell the reader how the assets/projects were financed.

- The shareholders desire to utilize more funds taken from the investors so that they
will share lesser risk and at the same time to increase the rate of dividend after paying
a smaller fixed rate of interest to outsiders. Similarly, outsiders desire that
shareholders should take the greater risk.

In short, the higher the ratio, the greater will be the risk to the creditors, and this indicates too
much dependence on long-term debts. On the contrary, a lower ratio reveals a high margin of
safety to the creditors.
Various all-Indian Financial Institutions suggested that the normal Debt-Equity ratio is 2: 1

Evaluation and Interpretation of the ratio

The debt to equity ratio is lower than two in both companies which indicate that both
companies relies on financing themselves through the shareholders contribution rather than
from outside debtors and that indicate a lower risk to the debtors.

Interest coverage ratio: it equal EBIT/interest expense. The interest coverage ratio measures
how many times a company can cover its current interest payment with its available earnings
it measures the margin of safety a company has for paying interest on its debt during a given
period. When a company's interest coverage ratio is only 1.5 or lower, its ability to meet
interest expenses may be questionable.

Evaluation and Interpretation of the ratio

Both companies have a very high interest coverage ratio which is a reflection of the low debt
to equity ratio.

stability in interest coverage ratios is one of the most important things to look for when
analyzing the interest coverage ratio in this way. A declining interest coverage ratio is often
something for investors to be wary of.

Future Strategic Recommendation (for both ratios above)

Since the rate of return is higher than the rate of interest that would result in lower dividends
for the investors, but it is less risky for both the shareholders and debtors. Both companies
might need to consider to either drop their capital and utilize the debts more or invest more in
international markets.

Learning Outcome 4: Evaluate investment appraisal techniques to support decision-

making.

▪ PC 4.1: Critically discuss the importance of investment appraisal techniques when

approving capital expenditure investment proposals.
▪ PC 4.2: Conduct discounted and non – discounted flow analysis.
▪ PC 4.3: Evaluate at least two investment appraisal techniques and apply them to
your chosen organization.

Investment appraisal techniques are primarily meant to appraise the performance of a new
project. The first question that comes to the mind of the decision maker before beginning or
approving to invest any new project is “Whether it is viable or profitable. Proper evaluation
of a capital expenditure is essential for taking a decision, using a specific technique might
result in different result in using other technique. Accordingly, a decision maker should be
aware of the types of techniques and the advantages and disadvantages of each type. Each
technique evaluates the project from a different angle and provides a different insight. There
are two types of criteria in evaluating the techniques which are non-discounted cash flow
criteria and discounted cash flow
Investment appraisal techniques can be divided into two catogeries
- Traditional (non discounting) such as payback period and accounting rate of return
- Non tradional (discounting) such as Net present value, Internal rate of return,
discounted payback period and profitability index method.
Below is the details for each method and its impact on the decision maker:
Following are the techniques used for traditional non-discounted cash flow criteria in
evaluation a project:
1- Payback period: One of the simplest investment appraisal techniques is the payback
period. It would tell the investor how long it would take to get his capital investment
back. The advantage of payback, it is very easy to calculate and understand. But the
disadvantage is that it ignores the time value of money and anything that happens after a
payback point. (efinance, 2019)
It is recommended to use the payback period for projects with expected low risks and
also in case of small and short-term investments which require a little input.

For Example, “this example is applicable to all stages of the question” and it shows
different results/decision made based on the investment appraisal technique used.

Al Dar is planning to invest AED 100,000. It has two options, projects A and project B.
Project A will generate revenue/cash of AED 60,000, AED 40,000 & AED 10,000 in year 1,
year 2 & year 3 respectively. Project B will generate revenue/cash of AED 30,000, AED
40,000 & AED 60,000 in year 1, year 2 & year 3 respectively.
Payback period for project A and Project B is 2 years & 2.5 years respectively. Based on this
result and the payback period method, Project A will be given preference. However, while
looking at the future the curve for project B revenues is increasing while the curve for project
A is dropping down, but this fact is ignored while using the payback period technique.

2- Accounting rate of return: it measures profit expected from an investment as a

percentage by dividing the average net profit over the investment/capital. Same as the
payback period, the advantage of the ARR is it is easily calculated and understood, but
the disadvantage it ignores the time value of money. (efinance, 2019)

It is recommended to use the rate of return on a simple projects and/or small investments, as
compared to the payback period method, it has the advantage of accounting for the future
profits

As per the above example the ARR for project A and Project B is 3.67% and 4.3%
respectively. Accordingly, project B will be a better investment based on ARR.

Accordingly, in order to evaluate the above two techniques and as a recommendation for
decision maker,

- in case the decision maker is looking for short term and to get back his
capital/investment at the earliest possible, Investment A will be a better option.

- while in case the decision maker is looking for long term and to generate better and
more revenues, Investment B will be a better option.

The techniques using the non-traditional / discounted cash flow criteria in evaluation a
project:

1- Net Present Values: It is the most common method of investment appraisal. Net present
value is calculated by discounting the free cash flow related to the project using the rate
of the weighted average of cost of capital “WACC”.
The project is considered profitable if the results were positive and loss making if the
results were negative. The advantage of NPV method that it takes into account the future
value of money “i.e. one Dh today equal less next year” and it takes into consideration the
cost of capital “WACC” however the key disadvantages of NPV that there are assumption
built in calculating the cost of capital accordingly, if the cost of capital was not calculated
accurately, it might result in approving a loss making investment or rejecting a profit
making investment. (efinance, 2019)

It is considered the best procedures when looking at long term investment, it helps in
analyzing the cost and benefits of long-term plan. The rationale behind the NPV method is
its focus on the maximization of wealth for business owners or shareholders. It gives a
straightforward criterion for the decision maker. Also, it would show the cash in and out
during a period which would also help in preparing the budget. Currently it is one of the
most used techniques for long term investments
As per the above example and considering the WACC is 10% for the company, project A will
generate cash-flow of AED 60,000, AED 40,000 & AED 10,000 in year 1, year 2 & year 3
respectively. The NPV = [AED 60,000/(1+0.1)1] + [ AED 40,000 / (1+0.1)2 ] +[ AED
10,000/ (1+0.1)3 ] – 100,000
Net present value = AED 95,116 – AED 100,000. The net present value of the project is
AED (4,884) loss.

For Project A the result of the NPV is negative accordingly, it would be recommended to
reject the project.

Looking at the same for project B, project B will generate cash-flow of AED 30,000, AED
40,000 & AED 60,000 in year 1, year 2 & year 3 respectively. The NPV = [AED
30,000/(1+0.1)1] + [ AED 40,000 / (1+0.1)2 ] +[ AED 60,000/ (1+0.1)3 ] – 100,000
Net present value = AED 105,410 – AED 100,000. The net present value of the project is
AED 5,410 gain.

For Project B the result of the NPV is positive accordingly, it would be recommended to
proceed with the project.

2- Internal Rate of Return: is a discounted cash flow technique which gives a rate of return
earned by project. In other words, it is the discounting rate at which the company will
neither make loss nor make a profit. (efinance, 2019)

3- Profitability index: It defines how much you will earn per dollar of investment.
Proceeding with the project would be recommended If the Profitability index greater
than 1 and in case the result was less than 1 it would be recommended to reject the
project. (efinance, 2019)

4- Discounted payback period: From its name, it is the discounting the payback period by
discounting the future cash flow.

While looking at Al Dar properties financial statements, Al Dar has a strong current position,
high liquidity and high liquid current assets as compared to current liabilities (as discussed
and shown in the ratio analysis) accordingly based on the above

Using the non-discounted two techniques it would be better for Al Dar to look for long term
investment and go with option B.

while in using the discounted techniques the results for project B shows AED 5.4k gain
approx. 1.7% per year which would be considered a low return considering other options
such as bank deposit and the other risks associated with any investment such as market
stability, geopolitical factors, accuracy of the assumptions used and other qualitative factors
such as if the project might drive culture change which the company might face resistance
from the employees and it might impact employees morale and productivity in regards to this
project and other existing projects.
Summary: management strategy is a key factor in evaluating an investment, the decision
maker needs to understand the different types of techniques and their advantages and
disadvantages before taking a decision. The amount of profit is not always driving the
decision. It is recommended for decision maker to always look at other quantitative matters
and risk associated. Management might also accept a loss-making project that is benefiting
the society as part of marketing strategy and pay back to the community.

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