ASOS

Comments on Accounting Policies

Note: No change has been made in the accounting policies for the following headings during the years (2013-2015)
Inventories
Inventories are valued at the lower of cost and net realizable value, on a weighted average cost basis. A provision is
made to write down any slow-moving or obsolete inventory to net realizable value. This indicates that the company takes
into account the market value of the inventory and
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairment in
value. Assets under construction are not depreciated.
Since the company assesses the residual values and useful at each reporting date, it protects itself from the risk of
having to take large write-offs in the future.

1.
2.

Depreciation, Impairment
Depreciation happens on straight-line basis as follows:
Fixtures and fittings - five years or over the remaining lease term where applicable
Computer equipment - three to five years according to the estimated life of the asset
ASOS reviews property, plant and equipment for impairment by taking into consideration the net present value of
expected future pre-tax cash flows of the relevant cash-generating unit or fair value, less costs to sell if higher.
Intangible Assets
ASOS recognizes goodwill as the excess of the cost of acquisition over the fair value of the identifiable net assets
acquired. Any impairment is recognized immediately in the Statement of Comprehensive Income and allocated to the
units on a pro-rata basis. On disposal of a subsidiary, the attributable extent of goodwill is involved in the calculation of
the profit and loss on disposal. ASOS also recognizes the costs of acquiring and developing a software that is not
integral to the related hardware is capitalized separately as an intangible asset. Amortization is premeditated on a
straight-line basis over the assets expected economic lives, normally between three to five years. Those deemed to
have an indefinite useful life are tested for impairment annually or as triggering events occur.
Investments
ASOS has investments in the form of Derivative financial instruments and hedging activities. The derivatives are
recognized at fair value on the date of entering into the contract; changes in foreign currency, hedging is reflected in cash
flows; and profit/loss on maturity of derivatives effects the income statement. ASOS also documents relationship
between hedging instruments and hedge items, risk management objectives and strategies.

Ratios
Capital Employed/TA
Long-Term Debt/TA
Capital/TA
Reserves/TA
Equity/TA
Debt/Equity Ratio
Interest Coverage Ratio
Working Capital ( in GBP millions )

2015
50%
0%
2%
48%
50%
0
0
99.80

2014
51%
0%
3%
48%
51%
0
0
75.20

2013
51%
0%
3%
48%
51%
0
0
81.10

Comments:
1.

2.

3.

The company does not have any long term debt which means that total assets of the firm are not financed by long term
debt. This also indicated that the LTD/TA and Debt-Equity ratio for the firm would be 0 and since the company does not
have any debt, therefore, no interest expense which leads to 0 interest coverage ratio. The benefit that the company has
is less risk, zero interest payment, less costs of production and more net income.
For the years (2012-2015), around 50% of the total assets are financed by Equity out of which about 48% of them are
financed by reserves and only 2% by share capital. Rest 50% is from Current liabilities. The company has high reserves
which indicates that the company is either making high profits or not distributing enough dividends.
The working capital for ASOS is positive and the company is in a condition to pay its short term liabilities with its current
assets.
We do not see any huge changes in the financing structures of the company and neither has the various ratios for the
company changed over the years signaling a stable and consistent accounting polities and financing strategies adopted
by the company.

Amazon
Comments on Accounting Policies
Note: No change has been made in the accounting policies for the following headings during the years (2013-2015)
Inventories
Inventories are accounted for FIFO and are valued at the lower of cost or market value. Third party vendors maintain
ownership of their own inventories regardless the fulfillment is provided by amazon of third party hence it is not included
in the amazon inventories. Amazon also purchases electronic equipments from various sellers and enter into
commitments and it is based on forecasted customer demand which can incur additional costs.
Property, Plant and Equipment
There are two entries in this section, internal use software and website development and property and equipment net.
Cost incurred to develop software and amazon website are amortized over useful life. Cost related to design and
management are expensed as incurred. Property and equipment are stated as cost less depreciation. Depreciation is
stated by straight line method over the estimated useful life of the assets (generally the lesser of 40 years or remaining
life, 2 years for software, 3 years for amazon servers, 5 years for networking equipment, 5 years for furniture and 10
years for heavy equipment.
Goodwill and Intangible Assets:
Amazon evaluates goodwill for impairment annually or frequently when something occurs that can provide risk to
carrying value and it may not be recoverable. It performs a 2 step impairment test, first comparing the book value of net
assets to fair value of reporting units. If fair value is less than book value, then the second step is performed which is to
compute the amount of impairment as the difference between estimated fair value of goodwill and the carrying value. Fair
value is calculated using discounted cash flows.
Investments:
Amazon invests excess cash in short to intermediate term fixed income securities and AAA rated money market funds.
Equity investments are accounted for using the equity method of accounting if the investment gives amazon the ability to
exercise significant influence. If it doesnt add any influence, then it is included in marketable securities and other assets.
It periodically evaluates whether the declines in fair value below book value are other than temporaray. This is done
using qualitative and quantitative factors evaluation and intend to hold the investment until a there is a forecast of
recovery. Factors which are periodically evaluated are investment securities, credit quality of debt instrument issuers,
quoted market prices and other information which can effect the evaluation.
Ratios
Capital Employed/TA
Long-Term Debt/TA
Capital/TA
Reserves/TA
Equity/TA
Debt/Equity Ratio
Interest Coverage Ratio (in times)
Working Capital (in billion $)

2015

41%
21%
16%
4%
20%
4.05
11.00
2.57

2014

41%
22%
16%
3%
19%
4.24
19.00
3.24

2013

36%
13%
18%
5%
24%
3.24
27.00
1.65

Change

13.80%
61.53%
-11.11%
-20
-16.67%
25%
-59.25%
55.70%

Analysis
As mentioned in the Accounting policies Amazon declares revenues in three segments Media, electronic and general
merchandise(EWS) and Others which is mostly AWS. This explains for the contradiction between massive revenue
figures and small profit margin. It seems these 3 businesses selling different products bought with different bargaining
positions to different people with different shipping costs and different profit margins. Meanwhile all these businesses are
at different stage of maturity.
The trickiest part is the third party sales. Amazon only reports the revenue on the services it provides to the companies
not the cost of the good. There revenue line is not telling the actual picture and profit margin is misleading too. Dozens of
separate businesses and over 2 million third party sellers all accounts for the commerce platform.
Amazon does a good job when it comes to ROCE as it is quite stable over the three years with a 14% increase in 2015
which gives investors a belief that it is doing a decent job in deploying its capital. We can also predict that amazon has
taken the path of expansion as there is a 61% increase in long term debt for every asset utilization. We can see from the
table above that there is a considerable decrease in the reserves as well as capital over the three years, which could be
because of rapid expansion worldwide and also the revenue recognition method as mentioned above which results in
distorted profit margin. This doesnt give investors a good feel about the company but the cash flow statement which is
the real deal supports its expansion strategy to its investors. The shareholder equity ratio is consistent over the years
with a 17% dip in the last three years. Amazon has to improve this figure in the near future to strengthen the faith of its
investors. There is also a considerable increase in its DER by 25% which can suggest its increases number of fulfillment
centers expansion based on relatively more debt financing than equity financing. There is 55% increase in its working
capital which suggests its improving operations and marketing capitalization.

EBay
Comments on Accounting Policies
Note: No change has been made in the accounting policies for the following headings during the years (2013-2015)
Property and equipment & depreciation.
Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally, one to three years for computer equipment
and software, up to thirty years for buildings and building improvements, the shorter of five years or the term of the lease
for leasehold improvements and three years for furniture, fixtures and vehicles.
Goodwill and intangible assets
Intangible assets are amortized over the period of estimated benefit using the straight-line method and estimated useful
lives ranging from one to eight years. No significant residual value is estimated for intangible assets.
Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value.
Investments
The short term investments with maturities between 3-12 months, are classified as available for sale & are reported at
fair value. Unrealized gains and losses are excluded from earnings and reported as a component of other
comprehensive income (loss), net of related estimated tax provisions or benefits.
Long-term investments are classified as available-for-sale and are reported at fair value using the specific identification
method. Unrealized gains and losses on our available-for-sale investments are excluded from earnings and reported as a
component of other comprehensive income (loss), net of related estimated tax provisions or benefits
Inventory
No accounting policy is mentioned for eBay in their annual reports as eBay does not posses any inventory.
Ratios
Long-Term Debt/TA
Capital/TA
Reserves/TA
Equity/TA
Debt/Equity Ratio
Interest Coverage Ratio
Working Capital (in million $)

2015

38%
-9%
46%
37%
1.03
17.71
5641

2014

15%
0%
44%
44%
0.34
24.07
9000

2013

10%
9%
48%
57%
0.17
28.06
10644

Analysis:

LTD/TA, EQUITY/TA, Capital Employed/TA
By observing the Capital structure, it can be said that the assets are mainly financed by the long term sources.eBay is
shifting its sources of funds from the equity to debt. The firm is continuously reducing its dependence on equity & moving
towards being a leveraged company. In 2015, the financing is almost equal from debt & equity & in the future it will still
move towards greater debt financing.
CAPITAL/TA, RESERVES/TA
The reserves are more or less maintained each year, and the capital to total assets ratio has gone negative due to the
purchase of treasury stock in excess of the issued common stock.
DER
The debt equity ratio is improving as the company is moving from being equity driven towards being equity & debt driven.
We can say that the cost of capital will fall, as we are moving towards higher DER, since Kd<Ke.
ICR
As far as the ICR is concerned, it is reducing continuously. This signifies that the margin of safety, for paying the interest
by the company is reducing, since the company has moved towards financing from greater debt. Even though it is
reducing, but the companys interest paying ability is not questionable since the ratio is still decent.

WORKING CAPITAL
As can be seen from the working capital, the dependence on the short term sources is continuously decreasing since
they are relying more on the long term debt, which is cheaper than the short term sources.

Inter-Company Analysis

(Assumptions: We have calculated the industry average for ASOS, Ebay and Amazon assuming that only these
three companies form the part of the industry)
1.

2.

3.

4.

5.

6.

7.

Capital Employed/Total Assets

According to the industry average, more than 50% of the total assets are financed by the long
term sources as indicated by the Capital Employed/ Total Assets ratio. This is due to the fact
that Long term sources are cheaper than the short term sources.
Long-Term Debt/Total Assets.
We see the industry average for Long-term Debt/Total assets is around 20% for all the three
companies in 2015. ASOS is a debt-free company majorly because of less competition in UK
whereas eBay and Amazon has indulged into debt-financing because of intense competition
and expansion approach.
Capital/ Total Assets
The industry average is continuously reducing as the companies are moving towards greater
financing through reserves since they are ploughing back most of the profits.
Reserves/Total Assets:
We see the industry average for Reserves/Total assets is around 33% for all the three years
across the three companies. However, ASOS and eBay have higher ratio of about 44%
whereas Amazon has only 4%. This is majorly because Amazon is adopting aggressive
expansion strategies thus leading to higher operating expenses. Also, for Amazon, in previous
years due to negative profit margin, it has utilized its reserves to support its operations.
Equity/Total Assets
By observing the industry trend, we see that the Equity/TA ratio is consistent for all the three
companies over the years where ASOS has the highest amongst the companies and Amazon
has the lowest. Also, we can see a decrease in the YoY trend as the e-commerce industry is
shifting towards debt-financing and leveraging themselves.
Debt-Equity Ratio
The industry average for DER is increasing indicating that the cost of capital will reduce since
Kd < Ke. Long-term debts have higher contribution than current liabilities. However, ASOS is
an exception with no long-term debt because of limited competition in UK.
Interest Coverage Ratio
The industry average for ICR is reducing continuously. This signifies that the margin of safety,
for paying the interest by the company is reducing, since the companies have moved towards
financing from greater debt. Even though it is reducing, but the companies interest paying
ability is not questionable since the ratio is still decent.