Details of BS, CF and Consolidation

Tom goes Public II, and still learning social realities

Tomo Suzuki
WWW.SBS.OXFORD.EDU EDUCATING LEADERS FOR 800 YEARS

Financial Reporting 3

Structure of Lecture 3

1. 2. 3. 4. 5. 6.

General Information Revision of Lecture 1 and 2 Going through details of BS and CF items Consolidation Items (in particular, Goodwill) Discussion: Intellectual Challenge Summary and What to do now.

General Information

1. 2. 3.

ACCA / CA Professional Exam to add value on your career If you are worried about the TEST, please do speak to me. Problem Set: Do your best, and do not get stressed. Please do speak to me individually. We are nicely a small community.

LC2

e.g., Infosys article. Got message? Sales of Software?

Income Statement
Here?

Now when we read this, be careful:10,000 4,000 6,000 2,000 4,000 1,000 3,000 0 1,000 2,000 1,500 500

Here?

Here?

Sales Cost of Sales Gross Profit Operating Expenses Operating Profit Interest Payable Profit before Tax Exceptional Items Tax Profit after Tax Dividends
Retained Earnings for the year

Level of Sales (Revenue Recognition) How evaluate CoS; Whats in CoS?

All the Expenses included, e.g.,

Whats exceptional or not? Differed Tax Assets? Legal Level of Dividends?

What about BS? Yes,

Details of BS
Fixed Assets (Tangible)

Most of them have been already covered while looking at IS.

Historical Cost, Revaluation e.g., Land. Ch. 9. (pp. 164-192)

Historical Cost, Revaluation e.g., Goodwill. Ch. 9. (pp. 164-192). Wait and see Lecture 4. R&D Current/non-current distinction e.g., Inventories, Cash, etcCh. 10 (pp.195-213), Ch. 11 (pp.216-223). Learn how the categorisation changes the figures and think who has the power to categorise, from Banking Industry. See Newspaper articles attached to Lecture 3 handouts. Schuetze, W. (1993) What is an asset?, Accounting Horizons, 7 (3), pp. 66-70. here [This is an Additional Reading] e.g., Off-balance sheet , Contingent Liability. Ch. 11 (pp.223-228) Ch.11 (pp.228-235).

(Intangible) Current Assets

Total Assets

Liability Shareholders Equity Retained Profit Total Finance

Pension Acc

Stock Option

Ch.11 (pp.228-235) Think about Dividends as well (See Lecture 2) -

Objectives and Flow of Lectures

Objective: Theoretical, Practical & Intellectual (see RL)

1 2 3 4 5

Overall Framework Income Statement

Required Efforts

DEB 10 or so calculation 5 or so conceptual

Balance Sheet, CF Statement & Consolidation

Financial Analysis I Creative Accounting Audit and Regulation

TEST Preparation

CF Calculation Goodwill calculation

Reading FS & Ratios

Theory
6

From Lec 2 (S and CoS) if interested, come and see me please? According to Fortune (July 2003), the sales size of Mitsubishi Co., a famous Japanese trading company, was No. 10 in the world. In 2004, however, it went down suddenly to No. 389. Mitsui & Co.s had the same problem: from No. 11 to 117. In total of the both firms, the sales of $100,000,000,000 seems to have disappeared in 2004. In terms of the profit level, however, they maintained the similar ranking positions. What might have happened? Any problem of it? Sales 100 CoS 90 GP 10 Sales 10
7

From Lec 2 (S and CoS) (Only if you are interested)

Which is Real?

Sales 100 CoS 90 GP 10

90

Sales 10

10 90 Supplier 90 Mitsubishi 100 100 End User

Non-current Assets (Fixed Assets)

Study the concept of Materiality, capitalizing, depreciation.

Why is a building a Non-Current Assets / Fixed Asset? So Why is this (a pen) not a nCA/FA?
Do not be too skeptical, but I would like you to think about this notion of Materiality and the notion of categories in reporting, and think where and how to draw a line, which quite dramatically changes the FS.

OK, then what about this PC (1,000)? Relationship with Tax (if Tax regulation has the similar rule)?

Fixed Assets:
Study Historical Cost and the nature of profit on disposal/sales

Question: Show FR Original Cost of Building 1st year Depreciation At the end of 2nd year, sold for

100 10 60

Ans:

Cash Depreciation Loss on Sales

60 / Building 10 / 20 /

90
Where in FS?

10

Fixed Assets
Income Smoothing

Old Multinational plc. was in trouble, but it has a lot of lands. 100 1 5 50 4
Market Price: 500 Market Price: 800 Market Price: 400

Cash 500 / Land 1 / Prof. on Sales of Land 499

Problem 1: but still we need to use the land. Solution:( ) Problem 2: we do not want to see such convenient profits suddenly . 11

To avoid income smoothing, .

We do not want to see a sudden convenient profit. So, we should revalue FA every year at the Fair Value.

Land 199

Prof 199

(IS)

(As soon as value changed)

Arbitrary figure. Say, this year, the Land value has gone up to 200.

Problem 1: so, we have to do this every year! FV can go down too. Solution 1: none, I am afraid. Problem 2: what is the nature of this Profit? Dividends? Solution 2: Land 199 / Reserve 199 (BS)
Revaluation Reserve, which does not come through IS and is
directly recorded on the Right hand side of BS. Within the Capital section but not the Retained Profit for Dividends., Ok, well, still aggressive

12

Fixed Assets & Tax saving, etc.. Hartwell plc (Oxford). Try Fame database. How would this be reflected in FS? 01/03/2003 21/10/2003 Finished?

13

26/Nov

27/Nov

Assumption: Hartwell plc. (01/12/02 30/11/03) wanted to complete the construction so that
27/Nov 30/Nov

Impressive!

14

Current Assets

1. 2. 3. 4.

Stocks done. Accounts receivables done. Deferred Tax Assets done. Available-for-sale securities See attached.

15

Re-categorization of Assets

1. 2. 3.

Read the Newspaper Article Explain the issue at stake The nature of the problem?
How objectively can we define categories Is there such a clear-cut fact / truth in reality? We are dealing with social reality.

4.

Who has the power to categorize, classify or reclassify things, and therefore who has the power to control accounting? See textbook type explanation (which is smooth, but perhaps, missing the point) In post-2008 economic conditions, how were banks trying to pay the bonus to managements, and how did regulators and watch dogs try to prevent it?

5.

16

Liabilities, Provisions and Off-balance 1.

Pension Accounting (See pp. 461-5 & Article attached)

In 2001, Professor of Accounting, C. H. in London known as a researcher of Auto industry said Thank you, Tomo, but that was the end of our relationship. Because, Toyotas labor costs were in fact very high which did not appear in the FS at that time when Pension Accounting was not done in Japan. In 2008, again, Professor of Management X in Oxford said What?! Is GM so dangerous, Tomo?. We all know what happened with GM in 2009, right? He knew technology and operations, but not accounts and the impacts of accounts on operations.

2.

Loan Guarantee
See the off-balance article in Lec 1.

3.

Leases:
See article attached this used to be off-balance.
17

Making Profits by Performing Badly Someone is known to be the man who turns assets into liabilities; liabilities into profits; and now he tries to turn bad performance into good performance? How does this happen? Show me double-entry!

(See a short article attached)

18

Oxford way to study accounting. Account X, Y, Z you gradually learn the details of FR in this way. Now, the rest is left for you in the real business. However, .
Please do NOT pretend that you know accounting. Rather watch and control your accountants / accounting experts, by asking sensible questions. As a senior management or fund-manager, you cannot know all the details of accounts. However, you learnt quite a lot about account-ing already - the basic principles and framework of FR, and where the tricks may exist. If you do not know anything, you cannot ask even questions, but by the end of the course, you should feel comfortable to ask questions. Be confident in asking questions.

19

IS BS or BS IS? 1. When you were doing first degree, IS BS. Now, BS IS.
What does the former mean? What does the latter mean?

2. Actively learn the recent development/revolution of Fair Value Accounting; using such terms as Historical Cost Accounting, IS Approach vs BS Approach, and performance measurement.
Read Textbook Ch 1-6. And Dichev, Ilia D.. (2008) in the Reading List.

20

History: Evolution of Fair Value Accounting

Actually, FVA BS Approach
for long (say 50-100 yrs) 90-08 Oct. 08

HCA IS Approach

FVA BS Approach

Political Battles

Freeze

BS L E

IS Sales XXX CoS XXX Dep. XXX What can we know from BS? What can we know from IS?

A
Build

Profit XXX
21

Simple Cashflow Statement (CF)

Balance Sheet
Non-Current assets +10,000 Current assets +5,000 Current liabilities -3,000 Net current assets +2,000 Non-Current liabilities -1,500 Net Assets +10,500 SE and RE +10,500
Figures are arbitrary

Suppose, within CA, Cash was 1,500 in 2007 and 2,500 in 2008 We want to know how cash increased, as cash is the most important asset. We cannot know instantly from IS and BS, but we can make CF, from IS and BS, that shows the clear answer.
1,000 Difference

22

CF

Cashflow Statement (e.g., UK model)

Net Cash inflows from operating activities Returns from investment and servicing of finance Taxation Capital expenditure Equity dividends paid Management of Liquid Resources Financing +2,500* +800 -1,000 -500 -1,500 -100 +800 1,000

Start from here!

Net increase in cash

* Figures are arbitrary

23

e.g., UK layout of the cashflow statement

plus or minus

plus or minus
plus or minus plus or minus plus or minus plus or minus

equals Increase or decrease in cash over the period

24

Step 1
Net cash flow from operating activities

plus or minus plus or minus

How shall we do this box? Difficult. Let us come back. See Step 1-5

plus or minus
plus or minus plus or minus plus or minus

equals
Increase or decrease in cash over the period
25

Step 2
Net cash flow from operating activities Returns from investment and servicing of finance

plus or minus plus or minus plus or minus plus or minus plus or minus plus or minus

What are they?: e.g., dividends and interests received; interest paid.
Was this self-evident? No. Then, check in practice, through your accountant! Do not pretend that you know it. This is IMPORTANT.

Try to get the real sense by doing the Q&A

equals Increase or decrease in cash over the period

26

Step 3
Net cash flow from operating activities Returns from investment and servicing of finance Taxation plus or minus plus or minus plus or minus plus or minus

plus or minus plus or minus

We will do this in the case study as a case soon.

equals Increase or decrease in cash over the period

27

Step 4
Net cash flow from operating activities Returns from investment and servicing of finance Taxation plus or minus Capital expenditure minus

plus or minus plus or minus

We will do this in the case study as a case soon.

plus or minus plus or minus

equals Increase or decrease in cash over the period

28

Step 5
Net cash flow from operating activities Returns from investment and servicing of finance Taxation plus or minus Capital expenditure minus Dividends paid plus or minus plus or minus

plus or minus plus or minus

We will do this in the case study as a case soon.

equals Increase or decrease in cash over the period

29

Step 6
Net cash flow from operating activities
Returns from investment and servicing of finance Taxation plus or minus Capital expenditure minus

plus or minus plus or minus

Dividends paid
plus or minus Management of liquid resource plus or minus
What is it? Readily disposable short term investments: such as buying and selling listed shares or government bond.

equals Increase or decrease in cash over the period

30

Step 7
Net cash flow from operating activities

plus or minus plus or minus plus or minus

Returns from investment and servicing of finance

Taxation

Ok, now, let us go back to the top box.

Capital expenditure minus Dividends paid plus or minus Management of liquid resource plus or minus

Financing
equals Increase or decrease in cash over the period

e.g., Borrowing or Issuing new shares

31

Step 1-1

Indirect method of deducing Net Cash Flow from the Operating Activities

plus

plus or minus

plus or minus

plus or minus

equals Net cash flow from operating activities

To the Top Box of the main flow
32

Step 1-2

PBIT / Operating profit plus

Any Question?

plus or minus

plus or minus

plus or minus

equals

Net cash flow from operating activities

33

Step 1-3

PBIT / Operating profit

plus Depreciation expense plus or minus

Why Add / Plus?

plus or minus

plus or minus

equals Net cash flow from operating activities

34

Cashflow (Depreciation) - Why add back?!

When you calculate Operating Profit (OP)
Sales CoS G.P. SGA O.P 10,000 4,000 6,000 5,000 1,000 Depreciation expenses are already subtracted from revenues, because they are included in eg, CoS or SGA.

Now, imagine that all the external transactions (with suppliers and customers) were done in cash, then the amount of cash that operating activities brought in (as a net) should be X. X = Operating Profit + depreciation expenses; because the depreciation expenses do not actually entail any cash outflow. The cashoutflow may have happened already when the fixed assets were bought, but this cashflow is dealt with in the section of Capital Expenditure in the Cashflow Statement. And we did this Capital Expenditure section already in the main flow box (Step 4).

We do this adding-back thing, and also adjustments of increased/decreased inventories, etc, because we employ the Indirect Method of Cashflow Statement, in which we start from the notion of profit and then derive cashflow. If we use computers, Direct Method is not difficult, and this seem to be coming in according to recent discussions at IASB. But, the Indirect Method is important in the sense that this will force you to understand the relationships between BS, IS and CF.
35

Step 1-3

PBIT / Operating profit

plus
Depreciation expense plus or minus Increase (minus) or decrease (plus) in stocks
Inventories (for US students)

plus or minus

plus or minus

equals

Net cash flow from operating activities

36

Cashflow (Stocks) why decrease or increase?!

Decrease (then +) or Increase (then -) in Stocks [Based on the Case attached]? The answer is Decrease in Stocks at 4 (=100 96), therefore ADD. Why? Think about the opposite case Increase; year 1:1 Operating Profit at 1000 (ie., eg., Sales 3000 CoS 2000 = 1000) 2 All the transactions were done in cash 3 Opening Stocks 0 (of course, because year 1) 4 Closing Stocks 100 5 (The above indicates that the Purchase was 2100 = 2000 + 100) Now, calculate Cash-inflow starting from the Operating Profit. 1000 (Operating Profit) 100 (Increase in Stocks) = 900 Cash-in-flow

37

Step 1-4

PBIT / Operating profit plus Depreciation expense plus or minus Increase (minus) or decrease (plus) in stocks Increase (minus) or decrease (plus) in accounts receivable plus or minus

plus or minus

equals

Net cash flow from operating activities

38

Step 1-5

PBIT / Operating profit plus Depreciation expense plus or minus Increase (minus) or decrease (plus) in stocks Increase (minus) or decrease (plus) in accounts receivable plus or minus Increase (plus) or decrease (minus) in accounts payable equals

plus or minus

Take a minute. If not sure, come to SC.

Net cash flow from operating activities

Go back to the Top Box of the main flow

39

Case Study - Making CF (Homework)

See 1 Cashflow Statement Question Task 1: Lets read the FS Task 2: Lets construct the CF The purpose is to understand the relationship between BS, IS and CF as a summary of the lecture, and not the calculation of the number per se. You need: BS(t-1), BS(t) and IS(t), to get the number for CF(t). If you do not understand this sentence, it is because you do not understand the relationship between the Financial Statements.

To understand it, utilise the Tomos Chart when you do the Cashflow Statement Question.

40

Cashflow (Capital Expenditure) 2006 B/S Non-Current Assets 588 Plus Buying NCA=Capital Exp. (X)
Once you understood Relationships of Two B/Ss and One IS, then

2007 B/S 688 Minus Depreciation 64 (24+40)

I/S and Additional Info

588 + X 64 = 688 X=164 (Answer)

41

Cashflow (Dividend) 2006 B/S

You have not paid ( ) for dividend You have not paid ( ) for dividend

2007 B/S ( )
IS, 2007

Dividend payable

( )

You have paid (X) during the year

New Dividend is added at ( )

( ) - (X) + ( X= 64

)=(

)
42

Cashflow (Tax) 2006 B/S

You had not paid 32 for tax

2007 B/S
You have not paid 64 for tax

Tax payable

32

64
I/S, 2007

You paid (X) during the year

New Tax is added at 64

What if, this was 74?
10 has been disputed and not paid,.
43

Once you understood 32 - (X) + 64 = 64 Relationships of Two B/Ss X= 32 (Answer) and One IS, then

Accounting for Business Combinations i.e., Consolidation Accounting

We see in the FS:Goodwill, Minority Interests, Amortization, Net Income from Associated Companies, etc These are due to ABC. Before we go on to see the details of these items, why do we need ABC? Basics of ABC follow (Im trying to simplify. Please master the Main Framework.)

44

Need for ABC: Is P doing well?

P Sales Expenses Profit Customers 500 90 410

P+S =?
Customers

S
Customers Customers Customers

Customers Customers
45

Consolidated and non-consolidated Important Note on the two statements.

Consolidated accounts are not a replacement of Non-Consolidated accounts. Non-consolidated accounts are kept reported.
Why? Because, for example dividends and tax are in many cases still a matter of individual non-consolidated legal entities. Please check Nestles Annual Report

46

Which entity and how?

Type of Entity Subsidiary Type of Relation Control ( 50%) ABC method Full Consolidation Equity Method Your Study To be studied here

Associate

Significant Influence ( 50% & 20% )

To read textbook pp.285-

(Passive Investment)
Joint Venture

(Investment)
See next page

(Dividend revenue)
Proportionate Consolidation

Normal revenue
Out of scope of this course. Ask your accountants.
47

Question of entity definition (e.g.)

Control

Significant influence

Joint control

Type of relation Power to govern the financial and operating policies of an entity so as to obtain benefits from its activities (IAS 27, revised 2003, 4) Power to participate in the financial and operating policy decisions of the investee but it is not control or joint control over those policies (IAS 28, revised 2003, 2) Contractually agreed sharing of control over an economic activity, () exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers) (IAS 31, revised 2003, 3)

Type of group company Subsidiary Entity () that is controlled by another entity (known as the parent) (IAS 27, revised 2003, 4) Associate Entity () over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture (IAS 28, revised 2003, 2) Contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control (IAS 31, revised 2003, 3)

Joint venture

48

Then, How to do ABC?

When P owns 100% of S; and Inv = SE.

BS of P

Consolidated BS

A
Investment to S

SE L

Add

A
A

SE L

Eliminate

BS of S

SE SE L

In terms of Elimination Entry:(Dr) SE / (Cr) Inv.

(Say, 100 for

)
49

Goodwill
What about when 100%, but Inv. > SE.

BS of P

Consolidated BS

A
Inv. 120
BS of S

SE L
But you cannot leave it as Inv.

A
Gw. Inv. 20

SE L

A
(Dr) (Dr)

SE SE. 100 L

SE 100 / (Cr) Inv. 120 Gw 20 /

50

From Goodwill to concrete stuff Once Goodwill is recorded, then, this is happens next) . Land IP License 2 3 / Goodwill 5

This way, we try to be specific, but still Goodwill is left at 15.

This means, the left over net Goodwill is something we really do not know. and on Nestles BS, we have $ 30 billion. Let us come back to discuss how we should do with this thing, called Goodwill.

Minority Interests (MI)

What about when 60%; and Inv.= SE60%.

BS of P

Consolidated BS

A
Inv. 60

SE L
But this is not Ps SE

A A

SE L
SE. MI. 40

BS of S

SE SE. 100 L

(Dr)

SE 100 / (Cr) Inv. 60 / (Cr) MI. 40

52

840 Ordinary shares Share premium Retained profit Minority interest 500 200 140 840

Goodwill

-80

-72 -60 -6 -6 -72

100 10 35 145

600 210 175 985

-40 -4 -14 58 0

Other Off-settings

Minority Interest

Fixed assets Goodwill Stock Debtors Cash Investment in S Loan Loan to toS S Creditors Loan from Loan fromP P

P 570 80 56 90 80 30 -66

S P+S 120 690 130 91 103 80 30 -43 -109 -30 -30 145 985 50 35 13

I 8

II

III CBS 690 8 130 91 103 0 -30 0 -109 30 0 0 913 500 200 155 58 913

Consolidated BS

53

More detailed case What about the case of 60%; and Inv. > SE60%?
Fixed assets Goodwill Stock Debtors Cash Investment in S Loan to S Creditors Loan from P P 570 80 56 90 80 30 -66 840 500 200 140 840 S 120 50 35 13 P+S 690 130 91 103 80 30 -109 -30 985 600 210 175 985 I 8 II III CBS 690 8 130 91 103 0 0 -109 0 913 500 200 155 58 913
Consolidated BS

-80 -30 30 0

Net Assets

-43 -30 145 100 10 35 145

-72 -60 -6 -6 -72

0 -40 -4 -14 58 0

Ordinary shares Share premium Retained profit Minority interest

S-E

Say, it was 10 when acquired, then increased. (arbitrary setting.)

Not Sure? Come and see me. Spend 10 minutes at home.

Any other items to eliminate?

Can you think of any other items to eliminate?

- in BS?
- in IS?
In one way, you need not to worry, because you will not see them on FS.

Accounting for Goodwill

Treatment 1: Write off immediately against reserves (was preferred in UK)

Treatment 2: Amortise over useful life time

US (previously up to 40 years) UK (previously allowed 20 years) Japan 5 years IAS

(Treatment 3: New trend)

but before that, let us see a Case from the UK company.

If this is the case, how can we compare the performance?

Company (country GAAP) Baltimore Technologies (UK UK GAAP) Bayer (Germany German/IAS GAAP) BT (UK UK GAAP) Bull (France, French/US GAAP) Club Mditerrane (France French GAAP) EMI (UK UK GAAP) Interbrew (Belgium Belgian GAAP) ISS (Denmark Danish GAAP) Philips (Netherlands Dutch GAAP) Pirelli (Italy Italian GAAP) Racing champions (USA US GAAP) Repsol YPF (Spain Spanish GAAP) Roche (Switzerland IAS GAAP) Saint Gobain (France French GAAP) Sandvik (Sweden Swedish GAAP) Securitas (Sweden Swedish GAAP) Activity Security services for e-commerce Chemicals and health care Telecommunications IT Group Leisure Music Brewery group Support services Consumer products (electronics) Tires, cables and systems Racing replicas Oil and gas Pharmaceuticals, chemicals Glass Engineering Guard services and alarm systems Method Straight-line Straight-line Straight-line Straight-line Not mentioned Straight-line Not mentioned Straight-line Straight-line Not mentioned Straight-line Straight-line Not mentioned Straight-line Straight-line Straight-line Number of years 5 15 20 20 20 20 40 20 20 10 to 20 40 20 20 40 5 to 20 5 to 20

Can you think of the implication of this for M&A?

Case 1: Granada, needs to grow globally

Granada A company of
1. Spend 3 minutes for FS reading 2. Spend 2 minutes for Granada Article

Let us concentrate on ABC issue only. Can you read and explain what happened, and lets discuss the real accounting issue.

Case 2: Nestle, Trend Analysis based on ABC

See attached.
Do a Trend Analysis of Nestle See the impact of Goodwill on BS See the impact of Goodwill on IS

Learning outcome
Overall: the impact of Goodwill on IS and BS. From 2005: Accounting Change; Impacts on IS; and the way how they do Impairment Test From 2007-8: Stability of Goodwill Impairment so far; and the way how they initially record Goodwill. Think also implications of Goodwill calculations for Auditing practices (Lec 6)

Treatment 3: Impairment test (As problem)

From the case of Nestle .

We know IFRS requires Goodwill to be tested for impairment annually, ie, the accounts will reflect any loss in value found through impairment test. But who will do the evaluation?
Accounting firms (Trusted Professionals!?) Valuation Companies (Trusted Professionals!?) and who pays them?

Problem of ABC 1: What is S ?

51%

Company A

Company B

What happened at Enron? Anyone? (Reading)

31%
Difficult to determine S What about Coca Cola?
Next Page

Company C 20%

Case 3: Coca Cola Coca Cola Company holds

just under 50% ownership in all of its subsidiaries, albeit they are completely under the control of the mother company. Coca Cola applies the Equity Method for affiliate investments and does not consolidate its results. So, not Full Consolidation Method.
This fact can lead to the ratios .

Equity Method (Homework)

Read a Textbook (pp. 285-7) for the meanings of Equity Method. To supplement the textbook explanation, you should imagine the following accounts appear on IS as Revenue/Profit. Net Income from Associated Companies, or Share of Results of Associates (SRA)
< i.e., >

Investment in Y (B/S) 100 /

SRA 100 (I/S)* (* See Nestles I/S)

We have already done quite an advanced issue related to accounting for business combinations. So, for the Equity Method, this is good enough. Please just check the meaning of it in the textbook.

Strategic Affiliation?
Example

Source: J.E Ketz Hidden Financial Risk

Problem of ABC 2: Need for Segment Report Aggregation of accounts hides contexts
Segmental reporting is required (Herrmann & Thomas, 2000) What is a segment?
UK - Left to companies to decide US - Should mirror internal reporting structure IASB - Line of business geographic
which has just changed.

The segment is now about to be defined by the Management Approach.

See attached article. Is it really true that management reports are useful for investors? On a separate note (and an important one), is it ok for issuing companies to disclose the management report to everyone including competitors? Will they disclose such info, or ?

Discussion Intellectual Challenge

1 Cash is fact, Profit is someones opinion Nokias CFO What did he mean by this? Yes, good, cash may be better to some extent but 2 We (Accountants) create Reality Some Academic accountants*
* Social Constructivist School of Accounting

What did they mean by this? What is your evaluation? We will come back to this in following lectures.

66

What can we put on Balance Sheet?

BS

Beckham's Value for Manchester Utd.

Guardian, Wednesday 19 November 2003 < What and Who can be on Balance? >
Manchester United chairman Sir Roy Gardner has spoken out about David Beckham for the first time since he quit the club, dismissing the footballer's performance as "not great". "It didn't take us very long to come to the decision to sell him," he said.

He said that "David Beckham sat on the balance sheet with zero value because he was home-grown" - he started with the club when he was 14, whereas Rio Ferdinand, who was bought from Leeds United, "sits on the balance sheet at 30 million", quipping that "he will be amortised over the value of his contract, or sooner as the case may be.
"We sold Beckham and Veron, and replaced them with five much younger players. We reduced the average age of the squad by two years," said Sir Roy, who was speaking at the Marketing Society annual conference today. (Beckham) has amassed a fortune by endorsing brands such as Vodafone, Pepsi and Police sunglasses.
Tomo Suzuki Commented: so, Manchester United must have made a big profit on sale of a zerovalued asset, oh, sorry, a human. Is this a matter of accounting treatment, or a human trafficking? Joking apart, check when you can put something on balance, and when not. Trying to put Bill Gates brain on BS is not a joke, is it, because we do BS approach and Fair Value accounting? But once we started doing this, where will we end up ?

Reading 1. Textbook.
Not too important, but see the Reading List for details. Problem Sets are more important, if you do not have time.

2. Annual Report of Oxford BioMedica.

Check again the basis on which Oxford BioMedica accounted for R&D.

3. Extra Reading in Handout, and Critical Accounting Literature (Use Business Source Complete / EBESCO)
Use this online academic literature database to find articles on for example revaluation of nCA, accounting for R&D, and Cash is fact, etc As to the Cash is fact, a lot of business magazines and articles are still half-understanding too much trust in cash. I do not suggest specific articles here. You do not need to read any long and tooacademic articles, but still your active search through on-line academic database is a vital skill to acquire intellectual knowledge. Can I remind you that it is also vital to understand these issues with good examples. (Just only if you are so interested in Accounting. )
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Summary and What to do now?

Overall: Following the details of IS last time, the first topic today was the details of BS and CF. However, first, I would like to remind students the importance of the relationships between IS, BS and CF. Secondly, I want students to understand the structures of each IS, BS and CF. Then the details of each IS, BS and CF. The second topic was Consolidation Accounting. What is Goodwill? One big number isnt it? Is it an objective number? Today, banks, IASBs, etc., are talking about the value of Greek bonds, but what about Goodwill? As an intellectual Oxford graduate, you need to be able to evaluate the overall magnitude of subjective elements of Financial Reporting. Details: Looking at each item, now, how should we account for Non-Current Assets (Fixed Assets)? Should we use Historical Costs or Fair Value? How can we avoid convenient Profits on Sales of nCA? Related to this is the nature of Revaluation Reserve. What is the nature of this account? We will come back to this point in the next lectures when we think about performance measurement (using financial ratios). Moving on to CF, you start from the bottom of it check the relationship with the Cash (t-1) and Cash (t). Why do we need to add back Depreciation figure to Operating Profit? Similar to this, although I did not cover in the lecture, you should think about other transactions (say Goodwill Impairment Loss in LC4) which have no cash-out-flow (then, you need to add back). For other sections of CF, use Tomos Chart, I hope this helps. On Goodwill, please try to read this hand-out and be able to calculate Goodwill. Intellectual: Similar to Lec 2, for BS accounting, there are no single theoretically correct answers. In practice, you, as an issuer of financial statements, will need to consult regulations, but remember, IFRS is Principlesbased Regulation and guidelines may not be available. // BS items (indirectly) affect the performance measurement (in a long run), therefore you need to plan ahead about how to account for them. We will come to it in Lec 4. If you are a user of financial statements, on the other hand, you need to be aware of these accounting rhetoric. For example, R&D. What is the real value of R&D in this company? You need to look into the Annual Report. // On the Cashflow, yes, cash is certainly good. But even Cash can do a few trick later lectures. // On Goodwill, it is a big number. Do we want to keep it on the Balance Sheet? Lets talk in Lec. 4. What to do now: Now please do Problem Set 3. These are extremely important Q&As both in terms of substantial knowledge in practice and in the TEST If you are stuck with numerical questions, leave them. Time management is very important. Ask for help from course mates, which will also develop friendship for life.

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Important Homework Please check and read: Annual Report of Oxford BioMedica (2007 March) Check how the performance was and what may have been the strategy of CFO.

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