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is not full. Or the company doesnt want to associate the name of the auditor
with the company.
4. Adverse it is not approved by an auditor.
5. Going concern disclosure company must be going concern
6. International Standards on Auditing (ISA) must be applied. There is a
file on toledo.
Annual accounts provided by the BOD.
Annual report
Auditors report
These 3 parts must be submitted to the national bank.
Basic assumptions:
Business entity principle- business is an entity and can be either
very small company or large
Going concern convention- must have an intention to make a profit.
Consistency- means that annual account should be comparable over
time in terms of accounting principles and rules. Example LIFO and
FIFO. Means that if you use FIFO year after year you cannot change it
every year. You must be consistent on the method that you use.
Monetary value- report in euros.
Reporting principles:
Time-period principle- you must report at least once a year and
most of the companies report on 31st of December, or June. But you
can choose any. You just have to report once a year at the same time.
It is also possible to lengthen or shorten your annual account once a
year, but to do that you must justify it. For example company buys new
subsidiary with different date- it can be changed in order to provide
consolidated annual account at the same date for all subsidiaries.
Comparability- must be comparable to other companies.
Faithful representation of the wealth, performance and financial
health of the company
Accrual accounting (matching)- means that if you have a rent due
to be paid on 6th December that will cover November you have to write
this expense in account for November, not for December when it
actually paid.
No compensation- suppose you have a customer that is also a
supplier. For example, he delivers wood to your company and you do
sth with it and then deliver it back to him. If you have outstanding
amounts receivable and amounts payable, you cannot compensate
them by each other.
Corporate Governance
Managers must behave in the best interest of the company. Why would the problem
occur? Dividend policy in the company, bonuses for managers. It could be that
manager makes a decision to make sure that the profit is higher by decreasing the
quality. In the long run you may lose the customers. Sometimes you have
competing interests in the company and by applying corporate governance you
make sure that these interests are merged. In Europe CG has a recommendation
form- the list of objectives that you must apply in your company, and if you didnt
apply them you must explain why you didnt. It is more flexible than in US.
Belgium:
Code Lippens for listed companies : you should find the info about how
the companies apply code Lippens on the website. It should also be included
in the annual report.
Since 1 Jan 2005
Transparency en accountability
Corporate Governance Charter on firms website
Corporate Governance chapter in annual report
Code Buysse for non-listed companies: - check on tha national bank of
Belgium for all the non-listed companies.
Based on principles of ethical and socially responsible undertaking
Exercises of this chapter will be important on the exam. You may expect a question
on it.
Basically we need to know under which category to put the company which shares
we own: 280, 282 or 284.
DIRECT CONNECTION: 50% + 1 SHARE.
INDIRECT: 1. There should be direct link between A & C. 2. The first connection must
be more than 50%.
A
60%
20%
35%
B
C
Only when these two conditions are satisfied A has an indirect connection
with C and control over it. 280 (20%+35%)
Exercises in the notebook and exercise 1.
Chapter 2 03.03
Assets become more liquid as we go down in BS.
Liability Equity, LT, ST. The more down we go the more claimable the debts are.
Meaning the faster you have to pay them.
Every company must have an intention to find a FINANCIAL BALANCE in the
Financial Report.
F structure is represented in the balance sheet. We can see the financial structure of
the company in BS. Think about of proportion of Equity in proportion to Debts. Does
it find its assets with equity or from debts? Are the debts on ST or LT?
Profitability is represented in the income statement. Check if there is a profit or loss.
Do we have operating result or fin result or extraordinary result?
Liquidity is represented in a cash flow. This shows us the incoming and outgoing
cash flows in the comp. If it has a lot of inflows or outflows. The goal is to optimize
the profit and the liquidity of the appropriate financial structure.
First of all, the financial structure will influence profitability. So, the distribution of
dividends will influence the income statement. The way you finance your assets will
influence your profitability. The more debts you have the more interest charges you
will probably have. The more you finance with equity the less interest paid you will
have.
There are 3 types of charges: provisions, depreciations, amounts written
down- that will never influence cashflows.
Link liquidity with BS. Think about loans. It may cause an impact of Fin Structure by
outflows. You can have a lot of sales but if your customers doesnt pay, it wont
affect liquidity. What are the non-cash expenses or revenues and if they are really
paid or received?
Screening: Last FS of the company. Look at last years report and check for
remarkable things.
BS- did it grow or went down?
What is the proportion of my assets vs liabilities i.e. proportion of fixed assets vs
current assets, proportion of equity of LT debt and ST debt.
Do I have an increase or decrease in Fixed Assets and what causes it?
4
5.3.2 Some purchases and small sale on disposal. Go to 169 note 5.7 you find info
about capital, shares they have, was there capital increase? No.
5.9 find division of LT ST debts. Important part about taxes. Non-expired taxes
payable shows if company is able to pay taxes to the govt. if there is an amount of
expired taxes payable it shows that company faces difficulties. The comp is not able
to pay it. Shows some liquidity or profitability problems. But our case shows only
non-expired => its good.
5.12 This company has a profit at the end of the year but there are no taxes which
is quite strange. Cos normally when company has a profit it should pay taxes on
profit. The fact is that they dont have to pay any taxes is because the accounting
profit is different from taxable profit. We dnt have to know it.
5.17.1 important as it has information about consolidated account. Means that
case is from year 5 included in group structure and what is mentiomned here is that
it doesnt have to make a consolidated account because it is a subsidiary of other
company. If you have your company which is included in some structure you will
find more info here.
6 social report. Did the number of employees increase or decrease? 1417.9 vs
1173.4 = increase.
Valuation rules where you find info on depreciation rates and also valuation of
inventories FA, amounts receivable and so on.
Then 193. Find cash flow. Extraordinary result is explained by the net profit of 155.2
mio on the sale of foreign subsidiaries at the beginning og 20x6. So if we have this
profit and we also know that the book value of FA that we sold was 96.6 then the
selling price for FFA is 251.8
have more LTD. We call that that company doesnt have enough capital on the
equity side. They have a lot of losses that they could recover by new capital, but in
first years its not really a case. In Y1 its still negative but proportion of LTD STD is
restructured and they moved towards LTD probably by other times of financing and
its a better structure. If you take additional folder and go to page 7 =>
Appropriation account. Look at profit/loss to be appropriated=> it is highly negative
in Y2. But what do they do during the year to end up with loss of only 25 000?
Transfer from capital and reserves => they do a capital injection. They increased
the capital enormously by 257 196 and used it to decrease the losses. You can only
see that by using absolute values (YOU WONT SEE IT IN THE VERTICAL ANALYSIS).
Look at LTD. At code 173 you see that they have attracted loans from credit
institutions which was 114 in Y1 and in Y2 it decreases a lot so they paid back a lot
of LT Loan and you see that there is nothing left in Y6 from LTL => they have
completely repaid it which is good. In Y3 there is not much to say, but Y4 you see
what happens with Equity => it increases. What causes it? Capital. They again did a
capital increase. Now you can see it in vertical analysis and you of course will see it
in horizontal analysis. In Y5 they were taken into the parent company and in Y6 we
know that they sold a lot of FFA. Go to IS. What are the largest categories of
Operating Charges? 60, 61, 62=> the largest accounts in OC. You use VA to see
what the main proportions are. There is not much to say about IS. But in Y6 there is
enormous increase in Ex I and youll see it. It is a lot higher than in years before.
Lots of things will come back in Horizontal Analysis. You see 9905 is negative in Y2
because there is a loss in this year. Also look at evolution of main categories and
also see TA and TL- how company performed over years? It increased a lot. Almost
doubled over the period. Page 43 account 10..15 shows negative values because
we had a loss in Y0. In formula the ref year is negative, so we get negative signs,
although it increases. Turnover? Increasing. Code 60,61,62 related also increasing,
because operating charges are related to it. Turnover increased in Y6 on 20%
comparing to Y0. The most important code 9905 => huge profit especially in Y6 the
cause is gain on sale of FFA.
BOOK EXAMPLE PAGE 45.
Grant a financial gift from the government. There are 3 types of grants:
1. Operational grant- that you receive for subsidizing your daily activity.
2. Investment/capital grant- related to the purchase of new FA, which you
finance with own capital.
3. Interest grant- purchase new FA but you finance it with loan and under
certain conditions you receive compensation.
All grants are income.
1. Is a type of Operating Income under 740
2.
Two types of Financial Income. Will be recorded under 752/9. BUT in the
book authors
3.
Made an adjustment. They see it as reduction of cost/charges. Do not
do it in Excel file.
More info in notes.
2nd Adjustment. They isolate financial charges on debts. 650 (debt
charges) instead of leaving it in Financial Charges authors want this
account to be mentioned separately. After extraordinary charges. You
need to look at them separately.
Class 4.03
Liquidity
Short term liquidity
Liquidity is the ability to mobilize cash in order to pay ST Liabilities. One option:
convert assets to the cash. That cash needs to be used to meet ST obligations. If
company has liquidity problems its a bad sign for creditors of the company.
Problems with liquidity can lead to bankruptcy. Thats a starting point to this
destination. We focus only on bank account in this chapter.
You cannot have assets without financing. If you have additional cash its always
recorded on BA.
Measures of Liquidity
1. Net working capital (NWC)
2. Need for net working capital (NNWC)
3. Cash position
4. Ratios derived from NWC and NNWC
1. Liquidity ratios NWC
A. Current ratio
B. Quick ratio
9
ST
10
Highly negative NWC Y0 and then it improves. We need to show in paper why it is
increasing or decreasing. There is an enormous increase in Y1 and Y6. Start with Y0.
Why is it so negative? Start with first formula. Extremely high amounts of
accumulated losses and this gave us negative equity. Together with quite small
amount of LT L gives very low amount in permanent financing sources with high
amount of AFA gives negative NWC. Over the years AFA decreasing and in Y6 they
11
sold FFA => enormous decrease and why? They had a huge gain on disposal of FFA
that gives a high amount of accumulated profit.
In second formula we use ST liabilities and proportion of ST liabilities was extremely
high in comparison to the LT L. What do they do in Y1 => they move the proportion
to better level.
ST L very high in Y1 and then they restructured their debts. Overall its quite stable
except for the last 2 years as this is other amounts payable. ACA is high in last 2
years especially in Y6 => sale of FFA account 41 increased a lot. That is what
causes increase and result in highly positive NWC.
How can company finance itself without attracting ST debts? Make sure that
consumers pay first and only after you pay to suppliers. We call it spontaneous
financing. It uses a delay in paying to suppliers.
Class 11.03
Every company wants to have a fast business cycle and to be renewed as many
times as possible during the year. The goal is to receive the money before they
have to pay them.
NNWC focuses only on operational assets and op liabilities. Two types of assets and
liabilities on BS:
Operational CA or OP liab or Financial OPA or OPL (ST). Only takes into account
operational ST L.
Cash financial, and the rest is operational in business cycle.
NNWC do we have plenty of operational ST debts to finance the operational CA?
Look at the majority structure if the BS on ST basis, but focus on operational part.
Operational CA = trade cyclic needs -> refers to the business cycle and assets that
needs to be financed.
Cash and ST investments are not included (50/58) as it is financial.
Financial ST debts 43 is not included as well.
12
If this ratio is negative it means that you have plenty of financing sources to finance
all our operational assets. We want this ratio to be negative.
Example- this is similar to supermarket system. Look in the paper the proportion of
stocks to amounts receivable and payable. And analyze if its normal. Say you have
business that works with fresh products. Lots of stocks is not normal for this
company. If its a store with lots of stocks => a lot of unfashioned clothes. But the
building company will of course have lots of stocks.
Amounts receivable (AR) =20
Stocks = 100
Amounts Payable (AP)= 200
NNWC = (20+100)-200= -80. We have enough sources to finance OA.
If its positive it can point out to liquidity problems. What can company do with it? It
can use a part of its NWC but only if its positive or it can attract additional financing.
If they attract capital, you will see it in most of the cases in 43 account.
Case page 53.
The ratio measures if you have enough ST L to finance your CA. Thats for the basic
rule that we saw in the beginning and rule is we should finance STA with STL. We
check it in our company with second formula. Its important to have not many STL.
First question if there are enough CA to finance and 2 nd if we have a lot of financing
sources. It is the case that shows us that company spontaneously finances itself.
And spont financing means that it can wait to pay its suppliers after it receives
money from customers. You cannot measure if it is very negative or very positive.
You can only see if it has any liquidity problems.
DHZ case.
We see overall there is negative NNWC which is increasing and its a good sign
except for the 1st year and last 2 years. What is causing NNWC to be in 1 st year?
Needs are decreasing (amounts receivable within 1 year) and means increasing due
accrued income and deferred charges. The main idea behind because needs
decreasing and means are increasing. In Y6 increase => amounts receivable within
1 year, more specific 41 account. Whats recorded last year? We have sold FFA but
the money from sale wasnt received yet and its fixed in amounts receivable within
13
1 year. If we exclude FFA then we will get 11.216 in Y5 and 25.248 in Y6. You dont
have to go to the annual report for your paper, because in order to find the causes
you need inside information, or Annual Report. Look at trade cyclic needs for Y5 and
Y6. For Y5 its 233 988 for Y6 its 406 496. In textbook you can see under code 41 we
have other amounts receivable and if we assume thouse 41 are related to financial
transactions, not to operational then we minus 151 242 and 334 333 we have new
NNWC. 82 740 a d 71 563. These are the means, but we have to adjust the needs.
186 755 (47/48) 92 799 = 93 956 and 100 122 3311 = 96 811. If we take needs
and deduct means we will end up with new values (negative ones on the slide).
NWC is splitted to NNWC and CP (cash position) - if the company attracts additional
financing.
There are 2 ways to determine CP = NWC NNWC. Or 50/58 43. We want it to be
positive, because it represents liquidity buffer.
There are several possibilities to have positive CP. It is positive when NWC higher
than NNWC. But if NWC is negative and NNWC negative you can obtain positive CP.
Example
Assets
FA 180
Stocks 90
AR 20
Bank 10
300
Liabilities
Equity 100
LT assets 40
ST debts 160
300
NWC= (100+40) 180 = - 40 => no liquidity buffer, company has problems. Not
enough LT perm sources to finance and not enough CA to meet ST obligations.
NNWC = (20+90) 160 = -50 => there is no need for NNWC. It is even more
negative than NWC.
CP= NWC NNWC = 10 or (50/58) 43 = 10 0= 10.
From page 54 there are different scenarios to work with. It can be interesting.
Important is that these 3 ratios are based upon BS data.
Case.
How company solves its problems during first 2 years. Check 43 => high amounts
recorded under it. As from Y2 account 43 has 0 amount. There are no liquidity
problems starting from year 2 onwards.
Link different chapters in the paper!! And give interpretations! For
example if you see high increase in FA in Horizontal analysis that you take
this into account when you are doing liquidity. That you refer to horizontal
analysis when start analyzing.
Basic rules referred to liquidity is that your Equity and LT L should be at least equal
or higher than FA. Also you have to have sufficient CA to cover ST L, but the most
important one is next reference point. Its good if equity is at least 1/3 of total
Balance of equity and liabilities side. In most cases its good when equity is more
than liabilities, but in some cases its opposite. This shows how independent is the
company from creditors.
14
If you calc NWC and NNWC and CP we use absolute values! Its different to compare
them with other companies results. We compare it with sector data in absolute
values.
The NNWC doesnt take into account that business cycle is renewing.
Current ratio = Adjusted CA/ST L
For example 40 000/30 000 = 1.33 => it shows that we have more ACA than we
have STL. If current ratio is higher than 1. Shows if company is able to meet all its
STL by Assets.
Extended formula:
first year? We have a lot of ST L and financing structure in first year. It had a lot of
ST liabilities and not much LT L. They changed it in 2 nd year. It changed things but
not that much. Here you can see the impact of stocks. Company has a high amount
of stocks. You see difference between two ratios.
Additional Ratios:
A. Stock turnover period we calculate how long it takes before stocks are
sold
Purchased stocks (supermarket, resellers)
Finished or produced goods (BMW and other manufacturers)
If stock turnover period is 60 days => means that usually the good is sold after it
has been in stock for 60 days. Inventory is renewed every 60 days. We want it low.
The faster we sell the better. Its about the quality of goods.
Example
Stocks 47 233
Charges 186 514
47 233/186 514 * 365 = 92 days => stock is renewed every 3 moth. (13)/(16)
186 514/47 233 = 3.96 => Rotation. Shows how many times stocks disappear from
the company per year. Stocks renewed 4 times per year. (6)/(3). CHECK: 365/3.96=
92 days.
We want stock turnover as low as possible and rotation as high as possible.
At the end of the year company should have a sufficient stock to cover demand of
the customers but it cannot have an excess of stocks. There should be some
optimal level.
To calculate the optimal stock level we take (Opening balance + End balance)/2.
Suppose:
(34) 25
(70) 125
(60) 100
100/25 = 4 => rotation.
Assume delta (34) = 10 => 100/10 = 10
16
Class 17.03
B. Settlement period debtors- how long do we have to wait until we receive
the money from our customers.
Case:
Overall customers pay quite fast. Why is this the case? They usually pay directly in
the store. There will be some customers paying with invoice but not very often.
Increase is by fact that amounts receivable increased a lot in year 5 and its probably
normal.
C. Settlement period creditors
17
We want it to be high, because you want to wait longer before you pay to your
suppliers. If you dont have to pay immediately you can have more interest on these
money while they are on the bank account. They also longer available to finance
your business cycle. But usually creditors want to receive the money as fast as
possible. If you have a high level of amounts payable => you have an extended
delay to pay your creditors, also can show that you have a liquidity problems. Be
careful when giving an interpretation of this ratio.
Case:
Increasing over time. Does it show that company has liquidity problems? We saw
earlier that it doesnt have any problems. Then it means they have better
relationships with suppliers.
These 3 refer to Operational cycle within the company. And it will show if
the company is able to finance itself.
Cash cycle ratio can the company spontaneously finance its business
cycle?
The opposite situation is favorable cash cycle- if its a negative result its a
good sign. Means spontaneous cash cycle.
Sector comparison
NWC NNWC and CP are very hard to compare. The only thing is look at the signs
and at most of the cases we have positive NWC. Current ratio is higher than sector
which is a good sign. Acid test is below 1 => good sign. We sell stock faster than
the industry. We receive money faster then other comp. We have a delay in
payments that is longer than the rest. Overall company performs quite good.
Example of how detailed the calculation should be => look in the book. Give sector
data with company data and compare them.
Exercises: less difficult than the exam and less extended. In exam no need to
calculate ratios. What you need to do is give interpretation of changes in ratios.
1. Assume company has liquidity problems and number of days settlement
period for debtors goes from 60 days to 30 days? Impact on NWC, NNWC, CP?
In exam you will need to search for the transaction that company used to
increase its liquidity.
What will happen overall? What if customers pay faster? Which accounts will
be changed? Amounts receivable will decrease. 40 account decrease. Bank
account increases. Will this action have impact on sales? Most probably no,
but its possible that customers will search for new supplier that gives them
more time to pay. You will receive full points if you say that 40 goes down, 55
goes up and 70 might decrease. But if company makes this action it may take
some effort to attract more customers and to make sure that their sales wont
be affected. But this is type of info that you dont have. There could be
straightforward solution, however you could find some underground holes as
well.
NWC = (EQ + LTD) AFA
NWC = ACA STD
NNWC = TCN TCM
CP= NWC NNWC
CP = (5) (43)
So we have decrease in 40 and increase in 55. How it will impact formula of
NWC. Any change? (1) no. (2)- amounts receivable will decrease, but bank
19
Class 18.03
20
Chapter 4 CF analysis
Cash Flow can either be a cash receipt (increase) or cash payment (decrease). We
focus on 5 account the most liquid part of BS. Two concepts: CR and CP. Think
about them as your own wallet when you receive money or when you have to pay
to somebody.
Difference between cash revenues and cash expenses and non-cash revenues and
non-cash expenses - depreciations, amounts written down, provisions the
expenses that you record in your IS but they dont impact movement on your bank
account. When I talk about bank acc I mean total 5 accounts. Not only BA. There is a
big difference between cash-expense and non-cash expense is that cash exp can
impact your bank account. It is recorded in IS like purchase of goods or services and
CE is expected to be converted into Cash Payment.
Example Invoice: of 10 000. Record: 6 (d = 10 000), 44 (c = 10 000), 55 (c =
10 000). When you record sales because you have an invoice you record it as cash
revenue but not revenue and expect it to be converted into cash receipt. It will be
transferred only when you will receive cash, then it becomes cash receipt.
Only CReceipt and CPayment are included in Cash Flow those that you
actually received or paid.
We also have non-cash revenues and non-cash expenses and we eliminate them
from CF.
Three types of transactions or activities that determine the cash flow:
Operating activities payment of the interest on the loan
Business activities
Financial activities
Extraordinary activities
Investing activities
Financing activities payment of capital on the loan
And total CF.
Therefore we have two types of Cash Flows:
Cash flow from investing activities: if the company is investing or not.
Purchase and sale of fixed assets
Cash flow from financing activities: - how the company is financing herself. If its
attracting or paying back the capital.
Attracting and paying back equity and financial debt
Operating CF the rest of the activities.
!!! PAY ATTENTION:
Repayment of loans => financing activity
Interest payments => operational activity (indirect method)
Total cash flows shows the total movement in 5 accounts the different type of
analyzing the liquidity of the company. Here we see what exactly causes liquidity
issues within the company!
Direct Method and we are unable to do it as we dont have an access to
companys bank account.
Indirect required information of minimum two accounting years. We assume that
all income and expenses generate cash flow. Its not a good assumption because
21
NCR and NCE are included in this result and we need to eliminate them; 2 nd some
CashR and CashE but not received yet.
Step 1.
If we have amount in <> this means that it can be either positive or negative
amount.
Exercise 1.
Record the depreciation of a building, straight line depreciation over 20 years. The
purchase price of the building was 100.000 in Y1.
The opening balance of the bank account is 1.000.
22
CASE page 90
We start in Y1 with high loss, which is not really good because if you already start
with loss it may take some revenues to improve situation. Y2 we start with profit
which is very high in Y6 and we know what is causing that. Overall the values are
similar over the years. The only 1 different is loss on disposal of FA in Y3 as they
23
sold FA and realized great loss on this disposal. We see if we look at non CR we have
Y3 high FFA and in the end we see in Y6 -> great gain of disposal of FFA. Overall the
potential operational CF is good if its positive, but in Y1 its negative mainly caused
by great loss. If we have a lot of expenses and dont have enough sales to
compensate them, then you can start with great loss and recovering it might be
difficult.
Now the question is if all CR are received and paid? Can I assume that all my cash
revenues are received? How can you see that not everything is paid => amounts
receivable.
Step 2. Look at the movements in the BS
Assume we have amounts receivable (40) and at start of the year it 10 000 and in
the end its 6000 => means that we received money from customers. Meaning that
If my assets decrease we received money from customers.
Now we look at amounts payable.
Basic Rules:
Increase Assets => decrease BA and CF
Increase Liabilities => increase in BA and CF
decrease in CF and decrease
Decrease in assets => increase in BA and CF
CF. => Revert the signs!!!!
Decrease in liabilities => decrease in BA and CF.
an increase in op A =
in op A = increase in
Why we include amounts receivable >1 y? if I give a loan to someone this is the
amounts receivable for myself. Money disappear now or within some period? Now.
Thats why we include it here. There is a minus before the code that is going to be
changed in order not to forget to revert the signs. Because the impact on CF is
exactly opposite!
EXERCISE 3
24
A company realizes the following sales: 10.000 and 20.000. Do not take the VAT
into account. The first sale is fully paid on the bank account. The second sale is not
paid yet.
The opening balance of the bank account is 100 and of the 40-account amounts
receivables-trade debtors is 500. Make T-accounts!
Bank OB = 100
Amounts receivable (40) = 500
During the year we have two sales on 70 account (10+20thsds). We also record
them on 40 account as we have to receive money on these sales. 10 000 you
received on bank account therefore we delete it from 40.
We have sales of 30 000. Increase in bank of 10 000 and some outstanding amounts
payable of 20 000.
= 30000
+ Non-cash exp 0
- Non-cash revenues 0
-750
0
-763
0
- op. Assets (40) - 20 000 (it actually increased, but because of the rule we
deduct it)
CF
=
10 000 its correct! Check with change in 5 account => 10 100 100
= 10 000
We start with result of 30 000 and assume that all cash is received. Therefore we
correct this part. Look at the BS and check which amount is not paid yet. If you just
look at the IS you will never understand which income you received and which not.
=> check 40 account. And we see there that 20 000 isnt received yet.
EXERCISE 4
During accounting year 1, the company paid an insurance premium of 5.400. The
premium covers the following period: 1/7/Y1 until 30/6/Y2. At the end of the
accounting year, the necessary year-end entries are recorded.
The opening balance of the bank account is 6.000.
25
We start with BA 6000. Then we pay 5400. We have also an additional expense (61)
of 5400. Then differed charges is 2700 half of the premium refers to the next
accounting year, so we can only include half in this period. Therefore we decrease
26
We cant see the difference here. But we dont know in which account exactly we
put 2000. The only thing we can look in the notes and check this amount.
= - 8000
+ Non-cash exp +8000
- Non-cash revenues 0
-750
0
-763
0
- op. Assets (40) +8000 (op. A decreased by 8000)
- Non cash expences (relative to op Assets)
- non cash revenues (relative to op Assets)
-8000
CF
=
0
We can determine whether we have to make this correction only if we look at the
opening and end value. Example: suppose that there would be an increase instead.
It could be that part of increase related to the amount taken back on doubtful debts
or additional amount written down. So you dont know for sure what the increase or
decrease includes. Thats why you have to look at the notes (non cash expenses
and revenues) and add some values. 2nd step is about BS data.
TO DO
EXERCISE 6
A company pays a rent of 600. 1/3 of the rent relates to the next accounting period
and is being deferred to the next accounting period.
The opening balance of the bank account is 5.000 (slides 6)
In textbook the signs are reversed in the end only!!! So choose what to follow: slides
or book
Case
Increase in CF in last two years due to amounts receivable less 1 year. These comp
dont have much luck because this amount doesnt mean that it is paid or will be
paid for sure so they are stacked. This is the case in y5 and y6. We have total CF
mainly from op assets and we see that in many years there is an increase in op. A
except for the last 2 years, where you have decrease in CF.
Class 25.03
st
(+ 21% VAT). During the year, the outstanding debt of 4.840 is paid with the bank
account.
The opening balance of the bank account is 5.000, of the 41-account VAT to
recover 1.000.
What is the begin balance of the 44-account amounts payable-trade debts?
44: 4 840 + 12100 4870 = 12 100 => end balance
Purchase: 60: 10 000
VAT 41: 2100
44: 12 100
Bank: 5000 4840 = 160
41: 1000+2100=3100
= - 10 000
+ Non-cash exp
0
- Non-cash revenues 0
-750
0
-763
0
- op. Assets (40) -2100 (op. A increased by 2100)
- Non cash expences (relative to op Assets)
- non cash revenues (relative to op Assets)
0
op liabilities +7260 (12100-4840)
CF
=
-4 840 = 5 account
CASE DHZ
28
In most cases we have increase in operational liabilities except for Y4. The increase
in Y3 and Y5 => due to increase in debts <1 year(44). Also in Y5 we see increase,
caused by increase in trade debts and deferred charges and income. You can link it
with VA and HA and Screening.
Ex 8 => same as 7.
Step 3 of operational CF- corrections of changes in provisions and deferred charges
(16). We expect it to impact CF because we move it to the IS. But will it produce a
movements in cash? Definitely No. as these are typical example of NCE and is the
example of calculation of change of future expenses. Its included in op A because
we expect 0 impact on BA after correction => every account of the BS is included in
CF statement.
EXERCISE 9 (cf. exercise 2)
A company books a provision for the repair of the rooftop for 25.000.
The opening balance of the bank account is 400.000.
= - 25 000
+ Non-cash exp
+25 000 (635/7 from IS)
- Non-cash revenues 0
-750
0
-763
0
- op. Assets (40)
0
- Non cash expences (relative to op Assets)
correction for operating assets
- non cash revenues (relative to op Assets)
0
op liabilities
0
Provisions & Deferred Taxes (16) +25 000- example of liability that doesnt
impact CF
-NCE (relative to P & DT)
-25 000
+NCR (relative to P & DT)
CF
=
0 = 5 account
29
CASE
Perfect example that there is no impact -1 and +1 are just rounding differences and
its not important. Y1 increase of 19 605 was the transaction that didnt impact CF.
If we put 3 corrections together => Total operational CF in first and last two years
its negative which is not a good sign and we have to find out what caused it. CF
from business activity more outflow than inflow. Why? If we look at some slides
before we started with potential CF with loss. So the fact that op CF is due to a
high loss => not good but year after there is already a positive amount and its only
1 year and it didnt affected that much. Afterwards its positive except for the last 2
years. Caused by increase in op Assets. Increase in op A decreases CF. what is the
problem? Other amounts receivable 41 account high amounts related to the
selling of the assets that arent received yet, there are also other amounts received
and as long as we didnt receive them its bad for our CF.
Exam provide the CF statement with calculations and ask for interpretation.
EXERCISE 1
A company buys in 20Y1 a construction hall of 120.000 with money on her bank
account. The hall is depreciated over 30 years.
The opening balance of the bank account is 200.000.
Calculate the operating and investing cash flow.
31
INVESTMENT IS NEVER AN
EXERCISE 2
The company sells the production hall from example 1 during 20Y6 for 150.000
euro. The company receives the selling price immediately on her bank account.
Assume: BA didnt change over 5 years.
Selling price: 150 000
Book Value: 120 000 (5 * 4000) = 100 000
Gain on disposal of 50 000
80 000 + 150 000 = 230 000
OCF
: 50 000
-763 - 50 000
OCF = 0
ICF
-22/27 = + 100 000 ( 0 at the end of the year decrease of 100 000)
+ gain on disposal + 50 000
32
ICF
=
150 000
TOTAL CF = 150 000
CASE
Some intangible FA that impact our CF. Overall the amount of intangible FA is
negative did they invest or sell? Invest if there is a decrese it means that cash
went out and they invested. Also for tangible FA they always invested during the
years. FFA there are fluctuations. What we can see- most of the time they have
sold their FFA during 2,3,6- large movements related to the sale of FFA. Since they
generated positive amount assets has decreased since CF are positive. We also
see in y3 there are non-cash expenses amounts written back and loss on disposal
and together the impact is not that big of course. If we add everything together
we have CF from investing activities and we see its quite fluctuating- not always the
same in some years they invest in some not. The extraordinary amount is y6
where they have high positive investing CF related to large gain on disposal that
we realized by selling FFA.
33
EXERCISE 1
On 1/2/20Y1 company A is getting a 20 year-loan of 120.000 euro with monthly
reimbursements. The interest rate is 5%. The first repayment is deducted from the
bank account on 1/3/20Y1.
Calculate the operating, investing and financing cash flow.
17: 120 000 repayable in 20 years: 120 000/20yrs * 12mths = 500 eur per month
500 * 5% = 25 eur of interest monthly- how many time we already made a
repayment? We start payments on 1st of March.
Repayment: 10 * 500 = 5000 capital
10 * 25 = 250 eur interest
We move 17 to 42: 12 * 500 = 6000 eur.
55: 120 000 5 000 250 = 114 750 End balance.
17: 120 000 5 000 6 000 = 109 000
34
OCF
:
-250
OCF = -250
ICF no investments
TOTAL CF = 0
FCF
17 + 109 000
42 + 6 000
Total FCF = 115 000
Total CF = 114 750 = 5
CASE
Changes in equity and capital during 2 yrs there have been increase in capital. In
y2 its a case they used this increase to incorporate it and to decrease the
accumulated losses that they already made. Y2 is extraordinary in our changes
there is a high increase in profit/losses carried forward due to capital increase in
order to reduce the losses. Now in case of fin debts in frirst years like 0 there are a
lot of ST debts and not many LTD. In Y1 they already changed it. So STD decreased
and LTD increased. Year after they have repaid a part of STD. This impacts financing
CF. In this year its not that high due to repayment of debts. Overall its fluctuating
in last two years its positive and negative. Negative result caused by decrease in fin
debts less than 1 yr. Sometimes they attract new loans and sometimes they repay
them.
In the end we have to calculate real CF and here we look at change in 5 account. For
the case what we see: in some of the years TCF is negative, sometimes positive. You
can see it in Bank account. In textbook on the page 32. We can calculate change in
5 account. We take 50/53 with 54/58 and this is the sum of all 5 accounts. Thats
what you have to calculate for your CF. For Y1 relative to Y0 on 50 and 51 its 2 times
zero and 54/58 in Y0 its 7 754 and Y1 its 2700. For CF we take the difference and its
2700 7754. And its equal to 5053. So what is causing negative change in CF in
35
Y1? In 2nd and 3rd year its positive and its a good sign. In 4 th year we see negative
CF its caused by investing activities. Means that company has invested and
purchased FFA. In case of CF in Y5 its caused by CF from operating activities which
is not a good sign. Investing activities are negative and not enough to make CF
positive.
36
its liabilities. If there is a positive CF the company will be able to pay dividends to
shareholders.
Example
Suppose that company buys FFA in Y0 and half is paid on BA and half paid with loan
on 2 years and its fully repayable in Y2. The interest on the loan first payment in
March Y1. What is the impact on the CF?
First of all we have to explain what is happening in the transaction! CF will decrease
we pay part with BA that will decrease, then we receive the loan and use it to pay
FFA- overall CF will decrease. FFA will increase. 17 account will increase, 42 account
is used for repayment for part of the loan that we have to repay within 1 year it
will not be affected there is no repayments during Y1. What happens with interest?
We will have accrued charges in liability account. Liab expense will increase 65
account.
We can use numbers to help ourselves => FFA = 200 000. BA 100 000, Loan
100 000. Interests are 500 and 500
OCF:
decrease by 500
op. Liab increase by 500
OCF = 0
ICF:
-28 decrease on 200 000
FCF:
17 increase by 100 000
TCF:
Decrease on 100 000
Suppose purchase of the building. Depreciation wont impact CF because its a noncash expense. Be always careful with accrued charges and deferred income it will
be on the exam.
Profitability of equity (ROE) the most important part for the shareholders
looks how much profit company has and if it can distribute it to them in terms
of dividents
efficient use of the financial means, brought in by shareholders
ROS
Measures the profit margin per euro of sales. What is the extra value added to the
sales. Measures how efficient the commercial policy is. For example do I purchase
the expensive raw materials? Production policy do I have a lot of old machines?
Personnel policy what is the expense of my personnel? First of all we have a gross
sales margin
We look how profitable the commercial activities of the company are. The financial
or extraordinary result is not part of that. But we exclude all NCE/NCR. We look at
the result in proportion with sales.
Example the result is 7%. Is it good or bad you have to compare with industry. The
good sign is that its positive but strongly depends on the type of activity and
competitors.
When sales margin decrease? When you have less turnover? If income stays same
but charges increase. But there are different scenarios.
CASE
Overall operating profit is increasing but look at gross sales margin slightly
increasing which is good.
39
Compate to net Sales margin you can see that the big impact that some years have
of non-cash exp and non-cash revenues. For example in Y6 if we include non-c exp
and revenues there is a high decrease in operating profit. Also in Y1 we can see that
the influence of non-c exp and rev is quite high because operating income is much
smaller than before.
ROA here we look how efficient the companys assets are used. Do they make
enough profit or not. Spilt between oper assets and fin assets. In 1 st we leave fin
assets out.
We want to see how efficient the assets are used. We also will have a look at the
rotation of the assets.
We will measure how fast the assets are translated into sales.
We split up the ratio in to two parts the first part is what we discussed in first part,
the second measures the rotation of operating assets. How fast do my assets
generate profit/sales?
To have a good profitability you need to have a good gross sales margin and
efficient rotation of operating assets. What is included in operating assets? For
example amounts receivable, stocks. If stocks are old and you dont have high
rotation this will Impact rotation in assets. If you have terrible rotation of operating
assets this will impact your profit. You need liquid stocks, amounts receivable all
included in rotation. This has relation with liquidity part! You can improve it by
increase in gross sales margin and also by fastening rotation of op A.
40
CASE
Op A are quite stable in first 5 years but then there is a huge increase in op assets
and we know that its due to increase in amounts receivable. So we can see if we
have high increase in Op a will impact your ratio negatively. Overall gross is
around 15-16% and net prof is around 10% but if profit doesnt increase during last
2 years why we have increase in op a? its not normal situation as we all know there
41
are many other amounts receivable stuck in the assets. Once they are paid the
stock will decrease and improve return on op A. Overall the rotation is between 3
and 4. Renewal of op A into sales. In last 2 yrs high decrease in rotation because in
last 2 yrs it shows that there are some problems with operating assets and we know
that its due to other amounts receivable stucked. In case of our paper we have to
find out the causes of high increases/decreases.
Total Assets
= profitability in the use of all assets and takes the whole of company activities in
consideration
Accent on asset side the method of financing debt or equity isnt important.
=> financial structure plays no part
Also with the profitability of total assets the breakdown into sales
margin and rotation is possible
BUT: rotation is less relevant
Compare with the interest payable on LT loan: are the companys
assets efficiently used?
Compare with sector and LTL interest you compare the costs of LTL with return
that you obtain from your assets. The return should be higher than interest.
Numerator: why earnings before interest and taxes?
EBIT(DA)= earnings
before interest and taxes (depreciations and amortizations)
ASSETS (denominator) are financed by
equity
vs.
debts
dividends
vs.
interest charges
taxes
vs.
no taxes
Because we want to eliminate the effect of financing decisions in
a ratio that wants to measure the effect of investment decisions
EBITDA- exclude non-c exp.
42
Very imp take total result. How much company generates with all means?
CASE
Gross P assets we see that some years that are remarkable but overall its between
7 and 8 %. Last year is extremely high because of large profit for the years which
includes gain on disposal of fffa. If result is high this impacts profitability in positive
way.
Net is very high difference before and after is not that high. In y1 we have
negative as we start with loss. The most remarkable ratio are the ones for Y0 and Y2
that net prof is higher than gross cos normally its other way around. What is causing
that difference? The non-cash revenues were higher! It causes the result to be
higher in Y0 and Y2.
Take closer look at non-c exp and revenues.
Important list of mistakes from text book.
43
Look at the rotation of total asets its lower than rotation of op assets as we include
the financial assets here.
We should compare the return with a risk free investment rate (say 3%). We should
add the risk premium. Lets say if I would invest in any bank and my personal risk
premium is 1% therefore I would obtain 4% return. We compare this 4% with
companys result.
CASE
In first year its negative caused by negative equity, although there is a profit.
Second year is highly positive but we have to watch out. What is causing this ratio?
Negative loss and negative equity! This is not good for comp, but if you calculate it
it will become positive and therefore even we see a positive result it is negative!
Then we eliminated it by capital increase and there is a positive result. This gives a
nice return on equity in year 4 and 5. There is no difference between two because
company doesnt pay taxes as they have a lot of accumulated losses. We saw that
in screening.
First of all the profitability of Op Assets. Overall its higher in y3 and y4. Our
company has better return than overall industry.
44
Class 01.04
How does company finance her assets? Is it able to bay LT, ST debts?
Two important decisions? If company finances assets it has to ask itself 2 q. Finance
with equity or with debt? Equity doesnt involve financial risk the repayment of
interest is not needed. The more debts company has the higher the financial risk. If
finance with Equity there is no risk. The method of financing will impact the
profitability of shareholders. Company can improve the return on equity by
increasing FA. Finance by ST or LT depends of Assets. If FA => LT if CA => ST.
The more equity the company has the better for creditor. (not always for the
company)
FINANCIAL INDEPENDENCE whether company finances with equity or debt?
Debt ratio = Total Debts / total liabilities
+
Financial independence ratio high or low (prop of equity). Low financial risk, low
protection of creditor and vice versa. = Equity / Total Liab
= 100%
Here we decide which company is preferable for the creditor. Only sometimes it is
better to be a shareholder in B cos then you invest less => we will see it in financial
gearing.
Take into account the complete capital check the uncalled capital and add it! The
shareholder is responsible for it!
Check ST vs LT if ST > LT the fin risk is higher. Also the type of institution where you
have a debt matters. If from affiliated companies- the interest is much lower. Find a
specific note 5.3 there is some information.
The ideal independence? There is no straight answer but there are rations: 30/70 or
40/60 (FI to Debt) is already good.
How to improve it? By increasing the equity => place the profit in financial reserves
or make a capital increase or by repaying loans.
45
Case
In first years FI is negative for 2 yrs caused by negative equity and debt ratio is
more than 100%. After we have 2 years where we have equity over 18 and later
even more because we have enormous increase in profit carried forward. If we
compare it with sector than we see that our company performs better. The fin
stability shows the choice of the company in finance of debts ST vs LT. The basic
idea is the more LT you have the more stable the company is. If you have more ST
debts you are uncertain about how much you will have to repay. Take the
Ideal: LT assets must be financed with LTD. If you have positive NWC than its ok.
CASE: In first year a lot of ST liab and this is translated in low Fin Stab. Then they
changed it and the financial stability increased. Min 39.
Debt redemption capacity Looks at the ability of the company to pay its
46
Looks at ability to pay financial debts with operational CF. We compare op. CF with
financial debts that company has to repay.
We study it in going concern principle.
suppose CF of 1000 and debts 10 000 => DRC = 10% with operational CF company
can repay 10% of the financial debts
We can consult note 5.9 and check how the financial debts are divided.
Check group assignment for comments! DRC is just an indicator, even if it shows
positive result it doesnt necessarily mean that company will have to repay its debts
in the year! Check if the debts are ST or LT -> important.
CAP GEARING
Sometimes its better for company to finance its assets with debts although it has
enough equity. Cap gearing is type of ratio that shows how much return on equity of
the shareholders increases if company finances in smart way with debts. We have a
return on equity which can increase if company finances with debts but only in
smart way when return of the asset is larger than the cost of financing. If the
return on the investment that you made and financed with debts is larger than
interest that you have to pay on the loan -> then it is considered a smart financing.
We call it positive capital gearing. Suppose company wants to purchase a new
machine and it has to decide to attract a loan or finance with equity. Now for
example lets say company has prepared investment in good way and already
calculated the possible return on the machine. Suppose machine has return of 15%
if the return on the machine is higher than interest paid on debts -> then net return
on debt is 11%. If this is the case and you still have a positive return on asset than it
might be more interesting for the comp to finance the asset with loan. But only if
return is higher than interest paid. Why? It can improve return on equity and since it
used new loan it can use money on the bank acc for sth else.
Two ways to calculate as sum or multiplier.
Gearing can be negative.
In the end we already know the end result because we already calculated ROE and
ROA. Why we do it? To show that the method of financing can influence profitability.
WE need to be able to calculate it. The outcome will be different but in the end ROE
and ROA are No need to know method after taxes.
AS SUM
Take return on equity and its equal to return on asset. We want to know is there
some kind of gearing that upgrades some kind of equity.
Return on assets interest rate. In this part we can already see if the company
makes smart financing decision. This Value should be positive, otherwise we dont
have gearing. If we dont have any debts the outcome will be 0. The higher the
interest on debts the smaller the gearing.
The return on equity was calculated in prev chapter and we take net ROE before
taxes. And ROA is about net ROA. To calculate average cost of debts we take all
accounts related to interest charges interest grants and divide it by total debts. If
ROA > I then you have smart financing decision and company has invested money
47
at higher return than expense of finance. If ROA =I there is no gearing. Then the
worst case if ROA < I then company hasnt made smart decision because company
has attracted too expensive borrowed money.
AS MULTIPLIER
The result is exact same but the gearing will have different outcome than in case of
the sum. Gearing is calculated with two factors.
If we calculate the multiplier then we need additional formulas that arent in the
textbook.
Go to second factor its the actual gearing = TA/TE. What does it tell? The more
debts we have the higher this factor will be. Small increase/decrease in debts
leads to much higher change in the second factor. The problem is that first factor
will limit the second factor. Why? We take interest charges into acc and the more
debts you have the more interest charges there are. And you look at the
result/result + interest charges.
Suppose result 100 and interest charge 25 => 100/125 = 0.8
Suppose IC > 50 => 100/150 => 0.66
Therefore we have here more debts and more interests. The more debts we have
the larger the effect of the first factor that will limit the effect of 2 nd factor.
Min 68 discuss the table
Consolidation
Chapter 1
Consolidation =
A true and fair view of the wealth, performance and financial position as if it was
one company.
=> the financial statements of a GROUP of companies.
Participating interests in other companies:
280 (affiliated companies)
282 (other enterprises linked by participating interests)
284 (other financial assets)
Art. 11 Company Code:
When is a company affiliated? 280!
a) When the company has a power of control in another company
=
b) When a company practice a power of control over your company
c) When several companies are a consortium
d) Other companies who are under control of the companies mentioned in a), b)
and c)
If you have more than 50% of shareholders of other company in your BoD meetings
it means that you have a control over third company.
Control - IFRS
A parent controls a subsidiary if and only if the parent has all of the following
elements:
1. The parent has power over the subsidiary;
2. The parent has rights to variable returns from her involvement with
the subsidiary;
3. The parent has the ability to use her power over the subsidiary to
affect the amount of the variable returns.
Class 28.04
Exercise 6 Equity method because A will stop its activity
Theory will can be asked on all methods of consolidation but exercises only about
integral method.
Example - difference between equity and proportional method? Or some multiple
choice on theory.
50
IFRS vs GAAP:
IFRS: all consolidated annual accounts of EU listed companies if you are
listed comp and draw individual AA then use GAAP.
BE GAAP: all consolidated annual accounts of non-listed Belgian companies,
although IFRS is permitted
The next slides are applied to the individual and consolidated annual account
!!!
51
Fair value =
Market value
OR
Impairment test =
record assets and liabilities according the real value (= fair value)
First: compare market value with value in use
=> highest of values is most relevant = fair value
Then: compare book value with the fair value
If BV > FV:
=> impairment loss (= write off) decrease the value of the asset/liability
If BV < FV:
=> reversal of impairment (=revaluation) increase the value
52
Process of working:
1. 100% summation of all balance sheet and income statement accounts of P &
S
2.
Elimination participation
Preacquisition result
Minority interest
Consolidation difference
Result distribution
S
FFA 300
Equity
100
Debts
100
Equity
100
Debts
200
P
FFA 300
Cash 300
Equity
300
Cash 900
Equity
300
Debts
600
Equity
100
Debts
Consolidation: (includes all
200
of S).
Net Assets = Assets provisions and debts
Net Assets = equity
Total:
FFA 300
Cash 900
Equity 400
Debts 800
Eliminate
10 Equity
capital
@ 280
FFA
buys a subsidiary
300 D
300 C
Question 2: When did the consolidation start? From the moment when the parent
has bought the shares of the subsidiary.
Question 3: What is the interest percentage of the parent in the subsidiary?
To record the minority interest separately in the consolidated balance sheet
and income statement
P has a majority interest in S but the interest percentage of P in S:
when = 100% => no minority interest
when < 100% => minority interest (MI)!!!
TO DO:
First: determine value of the participation at acquisition date of the shares in
S.
Exceptions:
First consolidated annual account suppose in 2002 P has
Purchased some participations and they are all 100%. But does not
satisfy Article 16. But in 2012 the conditions are met and P has to
consolidate. You have to determine the value of subsidiaries at the day
of acquisition, BUT you actually have to look at the value AT THE
MOMENT OF THE FIRST CONSOLIDATION (2012)
Subsidiary for the first time in consolidation example. We have
A (100%), B (70%), C (60%), D (25%). D not included. Suppose in 2012
P purchases additional shares in D. And now it has 55% in D. Now it will
become integral method and its first time D becomes a part of
consolidated account. We look at the value on the moment of first
consolidation.
Revaluations
Preacquisition result
Minority interests
Consolidation difference
54
Examples 1,2,3 ??
Example 4
Class 06.05
55
Turnover
20 000
60/6
Operating charges
10 000
4
9904 Result of the period
10 000
3) Elimination of participation
Eliminate equity of the subsidiary relative to FFA of the parent. The first thing
is to eliminate the equity of the subsidiary (consists out of capital 70 000,
reserves 20 000). There is also another part that needs to be eliminated
preacquisition result. Goodwill as well 10 000. Then FFA of the parent = 280
and minority interest = 20 000.
10
13
14
20x0
280
1y
Capital
Reserves
Preacquisition result
Goodwill
FFA
Minority interest
70
20
10
10
000
000
000
000
90 000
20 000
63
2x9
Depreciation on goodwill
Goodwill depreciation
1166,67
1166,6
7
5) Impact on result
14
9904
1166,67
1166,6
7
Example 5
Revaluations
Preacquisition result = 60 000 => increase of the equity of S
MI: 25% * (250 000 + 60 000) = 77 500 EUR
Consolidation difference 250 000 75% * 310 000 = 17 500 goodwill
( 17 500/5 * 6/12) = 1750
Entries:
1) --2) Elimination of preacquisition result
70
61
60/6
4
9904
Turnover
Services and other goods
Operating charges
70 000
5 000
5 000
60 000
Capital
Reserves
Preacquisition result
Goodwill
FFA
1y
Minority interest
100 000
150 000
60 000
17 500
250 00
0
77 500
1750
57
2x9
Goodwill depreciation
5) Impact on result
14
9904
1750
1750
1750
600 (100% * (200 + 100 + 80 + 80 25)) = 165 (slide that shows the
impact of different accounts on equity is important one!)
Depreciations 165/5 = 33
63
14
Buildings
12
Revaluation surpluses (RVSP)
2) Depreciation of the building
80
Depreciation on TFA
229
Buildings depreciation
3) Impact on the result
10
13
21
12
2x0
63
80
Capital
Reserves
Brand
RVSP
Goodwill
16
Provision
280
FFA
5) Depreciation goodwill
200
100
80
80
165
Depreciation goodwill
2x9
Goodwill depreciation
6) Impact on the result
33
14
9904
25
600
33
33
33
59
60
Entries:
1) Elimination of participation
10
13
14
34
280
22
1x
1y
Capital
Reserves
Result for the period (preacquisition results)
Goods purchased for resale
FFA
Land and buildings
Badwill
MI
400
300
75
80
500
20
1C
334
Operating revenues
300
60
Operating expenses
65
Financial expenses
9904 Result of the period
3) Depreciation of the building
229
Building depreciations
63
Depreciations of TFA
4) Result of the period
9904
14
150
75
75
2
2
2
2
Class 12.05
Adjustments : Elimination of intragroup transactions
Only transactions with external parties included!
1) 100% summations of P & S
2) Eliminate Participation of S (I%)
3) Eliminate intragroup transactions (100%)
Suppose P sells goods to S for 100$ and S sells it to the third party. P will have this
100 under 40 account (amounts receivable) and S in 44 account (accounts
payable). If we want to eliminate this transaction we eliminate 40 and 44 account.
The problem is that at the end of the year the purchase invoice can still not be
booked by S. But the P has it. In that case we have 100 under 40 acc and 0 under
44, but this will never occur in the exercises.
61
Method of working:
1. Elimination of the intragroup charges and incomes
2. Elimination of the intragroup amounts payable and receivable
3. Elimination of the intragroup result (profit or loss) trough change in
inventories in case of end balance of inventories if S sold 100% of
goods to external party this step will never occur
4. Correction of the result (in case of 3.)
We report the transaction as P has sold goods to external party!
Example 1
Sales of inventory P&S, no payment, no end balance inventories
P has a participation of 85% in S. In the balance sheet on 31/12/X1 there is an
outstanding amounts receivable in the bookkeeping of P on S as a result of
delivering goods for a value of 400.000 EUR. This amount is booked as a debt to P
on the balance sheet of S. All the goods are resold to a third party by S.
Give the elimination entries
P (40) 400 000
S (44) 100 %
X
Step 3 and 4 wont occur as we dont have any end stock.
There will be amounts at 70 account for P as it has realized the profit and at 60
account for S (goods for resale)
1) Eliminate intragroup charges and income if we want to eliminate the sale
we have to debit it!
70
Turnover
Purchase of goods
400 000
60
400 000
40
Amounts Payable
Amounts receivable
400
000
2) Elimination of intragroup amounts payable and receivable remove all the
amounts that occur between P & S in the BS. 44 if we want to remove we
debit!
44
400
000
Suppose in this case 50% has been paid by S. Will the first transaction be different?
NO. Second entry will be halved. Is there an income on the end result? No, because
debit and credit amounts are the same. The net effect on the end result is 0 as
debit=credit. We wont do the adjustment.
Example 2
Example 3
Turnover
Purchase of goods
1000
1000
Changes in inventory
320
63
34
Inventories
4) Correction of the result
14
9904
320
320
320
Example 4
Sales of inventory P&S, end balance inventories
P sells for 1.000.000 EUR goods to her 80% subsidiary S. The cost price of the goods
for P was 700.000 EUR. At 31/12/N1 has S still 50% of the purchases goods in stock.
Give the elimination entry on 31/12/N1
X 700 000
1) End balance
of P = 50%*700 000= 350 000 ( if P would have sold goods to Y directly)
of S= 50%*1 000 000=500 000
(S) (P) = 150 000 => too much
Alternative way
(1 000 000 700 000) * 50% = 150 000!
Entries:
1) Eliminate intragroup charges & income = always equals to the transaction
between P & S.
70
Turnover
60
1 000
000
Purchase of goods
1 000
000
Changes in inventories
Inventories
150 000
150
000
150 000
150
000
Example 5
Operating income
8 000
61
Rent
8 000
2) Elimination of the intragroup amounts payable and receivable ( as it is a
liability we debit it to decrease)
49
49
Deferred income
Deferred rent
4 000
4 000
Residual value = salvage value- the remaining value of an asset after it has
been fully depreciated.
Example 6
500
P (70)
100
S (60)
P
100
S
-
100
100
50
50
65
31st Dec 2010 what is book value when P sells to S? Purchase price
depreciation = 100 50 = 50
What would be real book value, if this transaction would never occur? Value
at the 31st Dec 2010 = 500- 400 = 100.
We have recorded too little depreciations and the book value is too low.
We have 50 too little depreciation and depreciation has to be 100 instead of
50.
1) Eliminate gain/loss. Loss is a charge and if we want to eliminate it we have to
credit it. Therefore something else increased machinery. We decrease it by
100, however in fact it is low by 50. We will have to add additional
depreciation
23
Machinery
100
663
Loss on disposal of TFA
100
2) Elimination of the intragroup amounts payable and receivable. The book
value of the machinery is 50! As P has sold it for 100 and 50 is the recorded
depreciation. Thats where we started.
630
Depreciation on TFA
239
Machinery depreciation
3) Impact on the result. Increase by 50
9904
14
50
50
50
50
Example 7
35 000
included in IS. In this example it is only the first month, the rest goes to BS
and becomes a liability
75
Financial income
65
Financial charges
4) Eliminate intragroup charges/income
493
490
Deferred income
Deferred charges
500
500
5 500
5 500
In 2nd step we have a charge and income, therefore it wont affect our end result
and we dont have to make a correction on it.
Look at the examples in the textbook!
Class 13.05
Result distribution
There
Start
written after the result distribution then we have to reverse that transaction.
Why? We want only 2 accounts in consolidation 14 and 9904. 14- is to
determine consolidated result and the end result of the BS, 9904 is to
determine the result at the level of the IS. We will reverse individual result
distribution of the P and S to make sure that the result is included under 14
and 9904 acc.
2. Distribution of individual result and allocate it to 3 possibilities. Its either
mentioned under the group reserves Eq or its mentioned under MI or
parent has given dividends to SH. There is never a dividend payments for S. S
never pays dividends to SH because P is the SH.
P
1000
div
600
471
600
2.
Only
has 60% of
14
400
S
1500
div
1000
= 2500
14
500
13
400
60%
13
40%
1y
60%
13
40%
1y
68
Example
P
1000
has 80% of
14
600
div
400
13
471
S
500
14
400
13
320
600
= 1500
div
100
1y
13
80
80
1y
20
400
P&S have distributed their result and the first step is to reverse the result
distribution in the individual annual account. How we do that? In normal result
distribution. In normal way you would debit the result of the period and increase the
accumulated profit and dividends payable. Here we eliminate result distribution in
order to make sure that the RD never occurred. What will happen after this
transaction?
14
1000
1000
9904
500
500
This eliminates individual result distribution for P.
We have a second entry that eliminates individual result distribution of S. It has
allocated result to the profit and to the dividends. We reverse that entry to make
sure that everything is allocated to 14 and 9904.
Second step is to distribute the result for S and P in the correct way to 3
possibilities. We have P: what will happen with 600 under 14 acc? Group reserves,
MI or dividends?
GRAPH.
Corrections:
1) Preacquisition result is always allocated to S since it concerns the result of S.
69
Book value
50
Loss on disposal of FA
50
9904
Result of the period (increase)
50
14
Result of the period
50
Consolidation result is positively affected by this entry.
Now we need to include the corrections in the result distribution table. First of
all we have a preacquisition profit. It is always allocated to the S and we just
said that preacquisition result will decrease 14 account. This 100 has to be
allocated to a part of the group and a part of the MI. 80% allocated to group
reserves, 20% to MI. Then we have a loss on disposal, it is allocated to S, as it
is an upstream sale. It has positive impact on the result. Correction 3. 14
account increases, so we include positive value. This again needs to be split
up a part to the 13 and to 1y. The last correction is depreciation of the
goodwill that is allocated to P. A depreciation has a negative impact on the
consolidation result => -20. It is only allocated to the group reserves and we
dont have any minority interest in case of correction of the P. If we add all
the things together: 1500 100 + 50 20 = 1430 this is a consolidation
result
663
70
.
Exercise 9
Part 3 - assignments
Exercises on integral consolidation method and result distribution
Exercise 9
On the 1st of February 2003 P acquires 60% of the shares in S for 11.000 EUR. At
the date of acquisition P identifies an undervaluation of Ss buildings of 3.000 EUR.
Buildings are depreciated over a 10-year period, applying the straight-line method.
Moreover, P estimates the fair value of Ss land 200 EUR lower than represented in
Ss balance sheet.
During the first month of 2003, S made a loss of 400 EUR, due to operating
revenues of 100 EUR and operating expenses of 500 EUR. In November 2003 S
sells goods to P for 600 EUR, including a loss of 100 EUR. P pays in cash. This
inventory is still on hand on the 31st of December 2003. The goods are sold to an
external party on the 1st of January 2005.
71
On the 2nd of February 2003 S sells a machine to P for 450 EUR, including a loss of
150 EUR. Without the intragroup sale, S would have depreciated the machine for
the remaining three years (at the end of 2003, 2004 and 2005) at 200 EUR a year.
Given the intragroup sale, it is now P that will depreciate the machine on a straightline basis over the same three-year period (at the end of 2003, 2004 and 2005).
Below the individual accounts of P and S AFTER result allocation are shown.
BALANCE SHEET 2003
Question:
On the 31st of December 2003 P will draw up the consolidated statements of the
group PS. Give the consolidation entries that need to be included in the
consolidation. Also give the table of the consolidated result distribution.
Entries:
1) Revaluation of building ( separate entry only for building!)
22
630
Depreciations on TFA
229
Land and buildings
3) Impact on the result
14
3 000
3 000
275
275
70/7
Operating revenues
100
73
4
9904
10
13
12
2x0
Capital
Reserves
Revaluation surplus
Goodwill
280
Participating interests in affiliated enterprises
14
Preacquisition result
1y
MI
22
Revaluation of land
6) Depreciation of goodwill
63or
65
Depreciation
10 500
2 000
3 000
2 060
11 000
400
5 960
200
378
2x9
Depreciation of the goodwill
7) Impact on the result
14
9904
500
378
378
378
X
700
S
600
P (paid in cash) 100% in inventory
End balance of P: 600 EUR. What would have been if S wouldnt sell to P? 700. We
increase inventory by 100.
1) End balance inventory
P: 600
S: 700 => 100 loss
2) Result
(600-700)*100%= -100
Entries:
1) Eliminate intragroup charges and income
70
34
Turnover
60
Goods for resale
2) Change in inventory
600
100
9904
14
600
100
100
100
S has a book value at the start of the year of 600. Sold it for 450. If the transaction
would never occur and BV would still be 600 200 = 400 at the end of the year.
Therefore, we need to increase the book value by 100. (Value at P = 450-150 =
300)
S
200 200
3
200 200
4
200 200
5
Entries:
P
150
150
150
Machinery
663
Loss on disposal of FA
2) Impact on the result
9904
63
150
150
150
Depreciation
239
Machinery
4) Impact on the result
50
14
9904
150
50
50
50
Class 20.05
Result distribution
of P = 1000: 500 -471; 500- 13
Reverse the result of P
471
13
694
692
9904
14
500
500
500
500
1 000
1 000
Reserves
Increase in reserves
Result for the period
Result for the period
4 000
4 000
4 000
400
Now we look at all the entries and look for changes in 14 account to which company
it is allocated and how it affects the end result.
275 Decreases S
400 Increases S
378 Decreases P
100 Increases S
150 Increases S
50 Decreases S
Result
Reserves
Dividend
Corrections
Preacquisition
Depreciation of the
goodwill
Depreciation of building
Adjustment in stocks
Depreciation machinery
Elimination of loss
100
0
500
400
0
400
0
Group reserves
(13)
Minority i.
(1y)
500+4000*0.6=
2900
1600
500
Dividend
(471)
500
400
240
-378
160
-275
100
150
-50
-165
60
90
-30
2 717
-110
40
60
-20
1 730
-378
4 947
Always
Empty
500
4 947
2 717
500
1 730
500
2 717
1730
4 947
Exercise 11 result before the distribution there will not be result distribution if
there is no table given. If its not asked no points.
BS and IS before or after result distribution makes a big difference.
Important to determine equity at the moment of purchase. If we say after result
allocation the same as in this this excercise. BUT if it is before result allocation we
look at equity of S what we are going to use? In exercise 11 it is capital + reserves
= 1 600. Result of the period is not taken into account as it is a part of
consolidation.
There are also 2 exercises in textbook page 37. Page 39 and 41 is not part of the
exam. Solutions for textbook exercises are on Toledo.
Proportional and equity method just the theory. No excercises.
Proportional method
Equity method
IFRS
Chapter 6 in textbook
It can be included only in MC part
1. Accounting policy and National Institutional Context
2. Call for global accounting standards
3. IASC
4. IASB
5. Use of IFRS
6. Differences with BE GAAP already saw in previous chapter
In every country there is a different accounting standards and policies. The problem
is that overall during the year there are two different systems:
Legal system:
Common law (Anglo-Saxon) much more freedom of choice in
depreciation rules, etc.
Code law (Continental Europe) strict rules, format, etc. Financial
Report has many purposes:
Purpose of financial reporting according code law:
Tax purposes
Government's need for information
Strong connection between legislation and legal requirements
Uniform representation- standard formats
No individual judgment of the accountant or company
Tax system:
Continental Europe: strong connection between accounting and tax
Anglo-Saxon: weaker connection
Financing/shareholder structure:
Continental Europe: concentrated shareholder structure
Anglo-Saxon: widespread shareholder structure
77
78
Europe:
Since 2005: obligation for all listed EU companies to report the consolidated
annual accounts according IFRS
EU members are authorized to extend IFRS requirements to the consolidated
statement of non-listed companies (BE permit this)
Endorsement procedure not all the standards are applied. They shouldnt
contradict with EU legislation.
ARC and EFRAG
Carve-outs (e.g. IAS 39) some standards are called like that if they
contradict with EU legislation. They are applied partly or with some
adjustments
United States:
Since 2008 non-US registrants (NYCE) are permitted to file financial
statements in accordance with IFRS without reconciliation to US GAAP
US listed companies are required to deposit according US GAAP
Convergence for US listed companies to IFRS still ongoing. The SEC is not a
fan of convergence to IFRS
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80
81