Financial & Reporting

Management of
Nestl Group

MAASTRICHT SCHOOL OF MANAGEMENT

Final Individual Assignment
Lecturer: Dr George Iatridis

Amalia Dharmawati (304349)

MM3
 Financial Reporting & Management of Nestl Group 2015

Table of Contents
Background Information of Nestl Group .......................................................................... 3
Business Overview of Nestl Group ............................................................................... 3
Vision of Nestl Group ................................................................................................... 3
Financial & Reporting Management of Nestl Group ........................................................ 3
Foreign Currency Exposures........................................................................................... 3
Foreign currency risk .................................................................................................. 4
Pension Benefit Policy, Scheme and Plan Asset Disclosure .......................................... 4
Post-employment Benefit............................................................................................ 4
Pension and Retirement Benefit.................................................................................. 5
Pension Scheme and Plan Asset ................................................................................. 6
Segment Reporting Section............................................................................................. 7
Information by Geographic Zones .............................................................................. 7
Information by Products ............................................................................................. 9
Managers Judgements and Disclosures Influence Financial Reporting .......................... 10
Earning management ............................................................................................. 10
Accounting Principle ............................................................................................. 11

2|Page
 Financial Reporting & Management of Nestl Group 2015

Background Information of Nestl Group

Business Overview of Nestl Group
Nestl SA is a Swiss multinational company which manufactures various kinds of snack
food products and other consumer goods production. The company was founded in 1866
in Vevey, Switzerland, when a dairy farm stands in Cham, Switzerland by the company
Anglo-Swiss Condensed Milk. Nestl is the largest food company in the world measured
by revenue. Nestl products consist of baby food, bottled water, breakfast cereals, coffee,
sugar, dairy products, ice cream, pet foods, and snacks. 29 Nestl brands such as Nespresso,
Nescaf, Kit Kat, Smarties, Nesquik, Stouffer, Vittel, and Maggi, generating more than 1
billion Swiss francs (about $ 1.1 billion) in sales per year. Nestl has about 450 factories,
operating in 86 countries and employs about 328,000 people.

This company is one of the main shareholders of L'Oral, the largest cosmetic companies
in the world. With the motto of Nestl "Good Food, Good Life", the company is committed
to combining science and technology in order to provide products that meet basic human
needs nutritious foods and beverages, as well as safe for consumption as well as delicious
taste.

Vision of Nestl Group

To create trustworthy products, systems, and services that contribute to improving the
quality of consumers lives in terms of convenience, health, and pleasure. They are
increasing the customers awareness that their food and beverages choices can impact their
quality of life and affect the lives of others.

In order to realize the vision, innovation has been the key to the company. They have the
largest R&D network (3 Science and Research Center and 31 Product Technology Center)
to ensure that every day they produce tasty and healthy products that help consumers care
for themselves and their families.

Financial & Reporting Management of Nestl Group

The objective of this assignment is to observe financial reporting management especially
in foreign currency translation, pension benefit and operating segment of Nestl Group.
Therefore, financial statement for the year 2015 of Nestl Group is chosen as an example
of this observation.

Foreign Currency Exposures

In accounting policy part of notes to the financial statement of Nestl group year 2015, the
company discloses their foreign currency exposures using monetary/non-monetary method
which is assets, liabilities or capital are fixed from a contract in terms of the number of
currency units regardless of the change in the value of money. They have a different
functional currency of individual companies and consolidation using primary economic
environment. In individual companies of Nestl group, they are using the rate of exchange

3|Page
 Financial Reporting & Management of Nestl Group 2015

at the date of transactions in foreign currencies transaction. Monetary assets and liabilities
in foreign currencies are also translated at year-end rates. The difference from exchange
rates is recorded in the income statement except for cash flow hedges that are qualified
recorded in other comprehensive income.

Besides, in consolidation transaction, they use year-end exchange rates to translate the
currency into Swiss Francs, the Groups presentation currency to record the asset &
liabilities of Nestl Group. The incomes and expenses that were generated from the
transactions are also translated into Swiss Francs using the annual weighted average rates
of exchange or using the rate of the date of the transaction for several items. The
Differences that arise from the translation of opening net assets of Nestl Group, and also
with differences arising from the restatement of the net results for the year of the company
entities, are recorded and recognized in other comprehensive income.

Foreign currency risk

In their notes to the financial statement for the year 2015, Nestl Group exposed the foreign
currency risk that generates from their transaction and translation. Transactional disclosure
arises from transactions in foreign currency. The transactional disclosure is managed with
a systematic hedging policy using currency forwards, futures, swaps, and options. The
differences in the exchange rate are recorded in the income statement as a loss of CHF. The
company allocates the exchange differences to the appropriate headings of expenses by
function. Besides that, the disclosure of translation occurs from the consolidation of the
financial statements of foreign operations in Swiss francs currency. They set the Value at
Risk (VaR) based on historic data for a 250-day period and also a confidence level of 95%.

According to Investopedia, Value at Risk is a statistical technique used to measure the level
of financial risk within a firm or investment portfolio within a specific period of time. VaR
technique is generally used by investment and commercial banks to determine the extent
of potential losses in the portfolios. However, Nestl Group cannot forecast the movement
of the exchange rate. Therefore, they set the above VaR (Value at Risk) number to neither
represents actual losses nor considers the effects of favorable movements in underlying
variables. Accordingly, the VaR number can only be acknowledged the indicative of future
movements to the historic market patterns repeat in the future.

Pension Benefit Policy, Scheme and Plan Asset Disclosure

Based on income statement, Nestl group spend CHF 16,342 million for year 2015 and
CHF 15,978 million for year 2014 for salaries and welfare expense of the employees. The
expenses are allocated to the specific headings of expenses by function.

Post-employment Benefit
Nestl group is using projected unit credit method to determine the liabilities that arise
from benefit obligations and current service cost. They use actuarial advice from external
consultants and internal actuaries employed by the company. The actuarial result is used
to calculate the defined benefit obligations per the economic conditions in each country in
which the plan is located. The plans are either externally funded which come from

4|Page
 Financial Reporting & Management of Nestl Group 2015

independent administered funds or unfunded. The deficit or excess of the fair value of plan
assets over the present value of the benefit payable is recognized as a liability or an asset
and recorded on the balance sheet. Pension cost recorded to the income statement which is
consists of service cost (comes from current and past service cost, gains and losses arising
from settlement) and administration costs (other than costs of managing plan assets), and
net interest expense or income, which is realized as part of net financial income/(expense).
The differences between actuarial assumptions and what has actually occurred in pension
cost are reported in other comprehensive income.

Pension and Retirement Benefit

Nestl group has legally arranged social security for their employees and the employees
are eligible for benefits through pension plans in case of retirement, death, disability and
in case of resignation. The company made the plans to defined contribution plans or defined
benefit plans based on pensionable remuneration and length of service. In addiction to tax
law, All pension plans have to comply with local tax and legal limitation in their country,
including funding obligations.

The Group regulate their pension plans by geographic area and also comply under IAS 19
which are in EMENA consist of Switzerland, UK and Germany and in AMS which is USA.
In accordance with applicable legal frameworks, these plans have Boards of Trustees or
General Assemblies which are generally independent from the Group and are responsible
for the management and governance of the plans. The plans are explain based on the
country, as follows:

Switzerland & Germany

In Switzerland, Nestls pension plan is a cash balance plan where beneficence is
expressed as a percentage of the pensionable salary. The pension plan contains as at
retirement date, employees get pension benefits which are the conversion of saving
accounts they accumulate and collect though a period of times and a guarantee that the
employees get a minimum interest on the savings accounts. However, the employees might
choose to not receive a part of the pension as a lump sum. Increases of pensions in payment
are granted on a discretionary basis by the Board of Trustees, subject to the financial
situation of the plan. The group also generate a defined benefit plan that has been closed to
new entrants in 2013 and whose employees below age 55 should transfer into the cash
balance plan. This heritage plan is a combination between cash balance plan and a plan
based on a final pensionable salary.

The group located in Germany also use a cash balance plan for their pension plan. In
addition, there is heritage plan that based on final pensionable salary, but the plan has been
closed to new employees starting year 2006.

United Kingdom
In the United Kingdom, the groups pension plan is a career average plan with salary
revaluation. The employees accumulate a pension based on the average of their salaries
during their career at Nestl since 2010. The salaries are automatically revalued according
to inflation. Pensions earned before 2010 are also revalued according to inflation subject
5|Page
 Financial Reporting & Management of Nestl Group 2015

to a cap and furthermore, pensions in payment are compulsory adjusted, as well. At

retirement date, there is a lump sum option. Employees have an option to switch between
the defined benefit sections and a defined contribution section. However, there is no further
detail information from financial statement regarding benefit and contribution section.

United States of America (USA)

In the USA, Nestls primary pension plan is non-contributory for the employees. The plan
is called a pension equity design, whereas which employees earn pension credits every year
based on a schedule related to the sum of their age and service they have done with the
company. An employees benefit is the sum of the annual pension credits earned multiplied
by an average earning payable as a lump sum. However, as a replacement of the lump sum,
employees have an option to convert the benefit to a monthly pension annuity. The plan
does not provide for automatic pension increases.

Pension Scheme and Plan Asset

In the consolidated financial statement 2015, Nestl group has declare their pension
scheme and plan which explain in form of tables as follows:

Source: Consolidated Financial Statement of the Nestl Group 2015

Source: Consolidated Financial Statement of the Nestl Group 2015

6|Page
 Financial Reporting & Management of Nestl Group 2015

Source: Consolidated Financial Statement of the Nestl Group 2015

The group has divided the plan assets into several major categories which are equities,
debts, real estate, alternative investment and cash/deposits.

Source: Consolidated Financial Statement of the Nestl Group 2015

Segment Reporting Section

Nestl group describe their operating segment as a structure of the Groups management
and the way financial information is reviewed by the Groups CODM (Chief Operating
Decision Maker) which is also called Executive Board.

Information by Geographic Zones

The executive board of Nestl Group review the business situation financially from both a
geographic and product perspective. They decided to look through three geographic Zones
and several Globally Managed Businesses (GMB). If the Zones and GMB meet the
quantitative threshold of 10% of total sales or trading operating profit for all operating
segments, the information considered as reportable segments. Nestl Waters is reported
separately although the company does not meet the condition of reporting threshold
because of the consistency with long-standing practice of the Group. In addition, the Group
declared that as from 1 January 2015, they modified the scope of the operating segments
following the changes in management responsibilities, as follows:
Zone Europe, Middle East and North Africa (EMENA)
Zone Americas (AMS);
Zone Asia, Oceania and sub-Saharan Africa (AOA)
Nestl Nutrition
7|Page
 Financial Reporting & Management of Nestl Group 2015

Nestl Waters;
Unallocated items
Unallocated items represent items whose allocation to a segment or product would
be inconsistent. Nestl Group has explained that the situations mainly due to several
issues, which are:
- corporate expenses and related assets/liabilities;
- research and development costs and related assets/liabilities; and
- some goodwill and intangible assets.
the Bbchen business (other business)

The business activities and operating segments that do not meet the threshold such as
Nestl Professional, Nespresso, Nestl Health and Nestl Skin Health are combined
together and presented in other business as in the table below.

Source: Consolidated Financial Statement of the Nestl Group 2015

Nestl group do not disclose asset and liabilities segment performances to executive board.
However, The Group has declared the invested capital as well as goodwill and intangible
asset by segment and by product on a voluntary basis. Invested capital account consist of
property, plant and equipment, trade and other receivables, assets held for sale, inventories,
prepayments and accrued income as well as specific financial assets that associated to the
segments, deducted with trade and other payables, liabilities directly associated with assets
held for sale, non-current other payables as well as accruals and deferred income. The other
is goodwill and intangible assets are not included in invested capital because the amounts
recognized are not comparable between segments since there are differences in intensity of
acquisition activity and changes in accounting standards which were also relevant at
various points in time when the Group undertake a significant acquisitions. The table below
explains the geographical zone of invested capital and goodwill and intangible asset.

8|Page
 Financial Reporting & Management of Nestl Group 2015

Source: Consolidated Financial Statement of the Nestl Group 2015

Information by Products
Nestl Group provide operating segment based on information by product. As you can see
from the table below, the highest sales earned by milk products and ice cream products
followed by nutrition and health science product.

Source: Consolidated Financial Statement of the Nestl Group 2015

Based on the table below, Nestl Group invest the highest capital in Nutrition and health
science products with 7,183 million CHF and also powdered and liquid beverages for the
amount of 5,830 million CHF.

Source: Consolidated Financial Statement of the Nestl Group 2015

9|Page
 Financial Reporting & Management of Nestl Group 2015

Managers Judgements and Disclosures Influence Financial

Reporting
The essential purpose of external financial reporting is to provide information to external
users for decision making. According to accounting policies, there are 4 qualitative
characteristics of a good financial reporting which are relevance, reliability, comparability
and consistency. As results, annual reports or financial statement were made to help users
to make decisions in term of operating, financing and investing activities. Therefore, the
role of managers in the company are important because they act as agents on behalf of the
owners or shareholders of the firm. In addition, in making investment decision, financing
decision and combination of investment and financing decision, managers must have an
understanding how capital markets work, how financial assets are valued and the effects of
time and uncertainty. Therefore, subjectivity in managers judgement and disclosures may
influence reported accounting number and financial reporting management. This matters
occur because of several reasons, which are:
Earning management
Earning management occurs as an effect from a relationship between manager and
shareholder. In this situation, managers aware of shareholders dependency for
information that provides by managers. Managers may not disclose some information
needed by users which are called Information Asymmetry. Besides, Agency Theory
holds the main reason earning management happens in the company. Agency Theory
is a contract between shareholder and manager to perform some service on their behalf
which is involve delegating some decision-making authority to the manager. This
theory also contains assumptions of self-interest and wealth maximization of a
manager. In this case, manager tend to increase the profit so that he/she would get
bonus or commission for maximizing profit of the company. So, this principle will
affect managers judgment to change or undisclosed important information in the
financial statement that also affect to decision-making by users.

There are several solutions in or der to minimize earning management in the company,
which are monitoring managerial behaviour, create incentive schemes, create
corporate governance regulations, and information flow. The company should
generate regulation regarding corporate governance so there will be exact information
about the rights and obligation the shareholder and manager should have and give to
the manager and company. This matter includes in what extent the information about
companys financial position must be disclosed. Besides, manager should be
transparent in reporting financial position of the company. Another solution
mentioned above is create incentive scheme which is in order to prevent information
asymmetry caused by wealth maximization of the manager. The company should
create incentive scheme to the employee that provide good performance or service to
the company. So that, the employees and managers would motivated to do their best
to the company without hiding or change financial information of the company for
their own benefit.

10 | P a g e
 Financial Reporting & Management of Nestl Group 2015

Accounting Principle
According to accounting regulation, financial reports are prepared using accrual
accounting instead of cash accounting. This means that company recognized economic
events regardless when cash transaction happens. Manager of the company realizes
and recognize revenues and expenses based on when the transaction occurs rather than
when the payment is received or made.

Conservative accounting also may cause misleading of accounting number reported

in the financial statement. Accounting conservatism is an accounting principle where
company tends to recognize expenses and losses rather than revenues and receivables.
The company only recognize the revenue only when its been realized and tend to
delay the recognition of revenue and receivable until the payment is received. Manager
of the company gets to decide when to conservative or optimistic. Therefore, the result
of managers judgment on being conservative or optimistic effects on accounting
number reported in a financial statement. Because, if the manager chooses to do
accounting conservatism, the profit of the company will decrease from at it should be
and vice versa. This decision depends on managers subjectivity judgment and
managers knowledge of financial position of the company.

11 | P a g e