Lecture Intermediate accounting (IFRS/e) - Chapter 3: The statement of financial position and financial disclosures

Chapter 3

THE STATEMENT OF
FINANCIAL POSITION AND
FINANCIAL DISCLOSURES

© 2013 The McGraw-Hill Companies, Inc.


Slide 2

The Statement of Financial Position
Reports a company’s financial position on a particular date.
Limitations:
Limitations:

The
TheStatement
Statementof
ofFinancial
Financial
Position
Positiondoes
doesnot
notportray
portraythe
the
market
marketvalue
valueof
ofthe

theentity
entityas
as
aagoing
goingconcern
concernnor
norits
its
liquidation
liquidationvalue.
value.

Resources
Resourcessuch
suchas
as
employee
employeeskills
skillsand
and
reputation
reputationare
arenot
notrecorded
recorded
ininthe
theStatement
Statementof
ofFinancial
Financial

Position.
Position.

Usefulness:
Usefulness:

The
TheStatement
Statementof
ofFinancial
Financial
Position
Positiondescribes
describesmany
manyof
of
the
theresources
resourcesaacompany
company
has
hasfor
forgenerating
generatingfuture
future
cash
cashflows.
flows.

ItItprovides

providesliquidity
liquidity
information
informationuseful
usefulinin
assessing
assessingaacompany’s
company’s
ability
to
pay
its
ability to pay itscurrent
current
obligations.
obligations.

ItItprovides
provideslong-term
long-term
solvency
solvencyinformation
informationrelating
relating
to
tothe
theriskiness
riskinessof
ofaa
company

companywith
withregard
regardto
tothe
the
amount
amountof
ofliabilities
liabilitiesininits
its
capital
capitalstructure.
structure.


Slide 3

The Statement of Financial Position

Claims
Claimsagainst
against
resources
resources(Liabilities)
(Liabilities)
Resources
Resources
(Assets)
(Assets)

Remaining
Remaining claims
claims
accruing
accruingto
toowners
owners
(Owners’
(Owners’ Equity)
Equity)


Assets
Assetsare
areresources
resourcescontrolled
controlled by
bythe
the entity
entity as
asaa result
result of
of
past
past events
eventsand
andfrom
fromwhich
whichfuture
futureeconomic

economicbenefits
benefits are
are
expected
expectedto
toflow
flow to
tothe
theentity.
entity.


Slide 5

Current Assets
Current
Current
Assets
Assets

Will
Willbe
beconverted
converted
to
tocash
cashor
or
consumed
consumedwithin

within
one
oneyear
yearor
orthe
the
operating
operatingcycle,
cycle,
whichever
whicheveris
is
longer.
longer.

Cash
Cash
Cash
CashEquivalents
Equivalents
Short-term
Short-term Investments
Investments
Receivables
Receivables
Inventories
Inventories
Prepaid
PrepaidExpenses
Expenses

Cash equivalents
include certain
negotiable items
such as commercial
paper, money market
funds, and Treasury
bills.


Slide 6

Operating Cycle of a Typical Manufacturing Company
Use cash to acquire raw materials

Convert raw materials to finished
product

Deliver product to customer

Collect cash from customer


Slide 7

Noncurrent Assets
Noncurrent
Noncurrent
Assets
Assets
Not

Not expected
expectedto
to
be
beconverted
convertedto
to
cash
cashor
or
consumed
consumedwithin
within
one
oneyear
yearor
orthe
the
operating
operating cycle,
cycle,
whichever
whicheveris
is
longer.
longer.

Investments
Investments
Property,

Property,Plant,
Plant, &&
Equipment
Equipment
Intangibles
Intangibles
Other
Other Assets
Assets


Slide 8

Noncurrent Assets
Investments
1.
2.

Not used in the operations of the
business.
Include both debt and equity securities of
other corporations, noncurrent
receivables, and cash set aside for
special purposes.

Intangible Assets
©
1. Used in the operations of the
business but have no physical
substance.

2.

Include patents, copyrights, and
franchises.

3.

Reported net of accumulated
amortization.

Property, Plant, and Equipment
1.

Are tangible, long-lived, and used in the
operations of the business.

2.

Include land, buildings, equipment,
machinery, and furniture.

3.

Reported at original cost less
accumulated depreciation.

Other Assets
1.

Include long-term prepaid

expenses and any noncurrent
assets not falling in one of the
other classifications.


Liabilities
Liabilitiesare
are
present
present
obligations
obligationsof
of
the
theentity
entity
arising
arisingform
form
past
pastevents,
events,
the
thesettlement
settlement
of
ofwhich
whichis
is
expected

expectedto
to
result
resultin
in
outflow
outflowfrom
from
the
theentity
entityof
of
resources
resources
embodying
embodying
economic
economic
benefits
benefits


Slide 10

Current Liabilities
Current
Current
Liabilities
Liabilities

Obligations
Obligationsexpected
expected to
tobe
be
satisfied
satisfiedthrough
through current
current
assets
assetsor
or creation
creation of
of other
other
current
current liabilities
liabilitieswithin
withinone
one
year
yearor
orthe
theoperating
operatingcycle,
cycle,
whichever
whicheveris
islonger.
longer.

Accounts
AccountsPayable
Payable
Notes
NotesPayable
Payable
Accrued
Accrued Liabilities
Liabilities
Unearned
UnearnedRevenues
Revenues
Current
CurrentMaturities
Maturities
of
of Long-Term
Long-Term Debt
Debt


Slide 11

Long-term Liabilities
Long-Term
Long-Term
Liabilities
Liabilities

Obligations
Obligationsthat
that
will
willnot
not be
be
satisfied
satisfiedwithin
within
one
oneyear
yearor
or
operating
operatingcycle,
cycle,
whichever
whicheveris
is
longer.
longer.

Long-term
Long-termNotes
Notes
Mortgages
Mortgages
Long-term
Long-term Bonds

Bonds
Pension
PensionObligations
Obligations
Lease
LeaseObligations
Obligations


Slide 12

Shareholders’
Shareholders’ Equity
Equity is
is residual
residualinterest
interest in
in the
theassets
assets
of
of the
theentity
entityafter
afterdeducting
deductingall
allits
itsliabilities.
liabilities.

Slide 13

Shareholders’ Equity
Issued
Issued
Capital
Capital

Retained
Retained
Earnings
Earnings

Treasury
Treasuryshares,
shares, capital
capital reserve,
reserve,translation
translation
reserve
reserveand
and other
other reserves,
reserves, and
andother
other
comprehensive
comprehensiveincome
incomeitems

items


Disclosure Notes
Summary of
Significant
Accounting Policies

Conveys valuable information
about the company’s choices from
among various alternative
accounting methods.

Subsequent Events

A significant development that
takes place after the company’s
financial year-end but before the
financial statements are issued.

Noteworthy Events
and Transactions

Transactions or events that are
potentially important to evaluating
a company’s financial statements,
e.g., related-party transactions,
errors, and fraud.

Slide 15

Management Discussion and Analysis

Provides
Provides aa biased
biased but
but
informed
informed perspective
perspective of
of
aa company
company’s
’s
operations,
operations, liquidity,
liquidity,
and
and capital
capital resources.
resources.


Management’s Responsibilities
Preparing

the financial statements and other
information in the annual report.

Included

in annual reports to assert the
responsibility of management and directors


Auditors’ Report
Expresses the auditors’ opinion
as to the fairness of
presentation of the financial
statements in conformity with
accounting standards.
Must comply with the auditing
standards of the specific
jurisdictions over which the
company operates.


Auditors’ Opinions
Unqualified

Issued when the financial statements
present fairly the financial position,
results of operations, and cash flows
are in conformity with accounting
standards.

Qualified

Issued when there is an exception

to the standard unqualified opinion
but is not of sufficient seriousness
to invalidate the financial
statements as a whole.

Adverse

Issued when the exceptions are so
serious that a qualified opinion is
not justified.

Disclaimer

Issued when there is insufficient
information on which to express an
opinion.


Slide 19

Compensation of Directors & Top Executives

Disclosure
Directors’ remuneration
Remuneration policies and
practices
Auditor’s report on
remuneration policies
In the U.S., a proxy statement is
sent each year to all shareholders,

usually in the same mailing with the
annual report.


Using Financial Statement Information
Comparative Financial
Statements

Allow financial statement users to
compare year-to-year financial
position, results of operations, and
cash flows.

Horizontal Analysis

Expresses each item in the
financial statements as a
percentage of that same item in the
financial statements of another
year (base amount).

Vertical Analysis

Involves expressing each item in
the financial statements as a
percentage of an appropriate
corresponding total, or base
amount, within the same year.

Ratio Analysis

Allows analysts to control for size
differences over time and among
firms.


Slide 21

Liquidity Ratios
Current ratio =

Current assets

Current liabilities
Measures a company’s ability to satisfy its
short-term liabilities

Acid-test ratio

=

Quick assets
Current liabilities

Provides a more stringent indication of a
company’s ability to pay its current
liabilities


Slide 22

Financing Ratios
Total liabilities
Debt to equity
=
ratio
Shareholders’ equity
Indicates the extent of reliance on
creditors, rather than owners, in providing
resources

Times interest
earned ratio

=

Net income + Interest
expense + Taxes
Interest expense

Indicates the margin of safety provided to
creditors


Appendix 3: Reporting by Operating Segment
Many companies operate in several business
segments as a strategy to achieve growth and to
reduce operating risk through diversification.
Segment reporting facilitates the financial
statement analysis of diversified companies.

Reportable Operating Segment Characteristics
Engages in business activities
from which it may earn revenues
and incur expenses.
Discrete financial information is
available.

Operating results are regularly
reviewed by the entity’s chief
operating decision maker to make
decisions about resources to be
allocated to the segment and
assess its performance.


What Amounts Are Reported By An Operating Segment?

General information about
the operating segment.

Segment profit or loss,
segment assets, segment
liabilities, and the basis of
measurement.

Reconciliations of the totals of segment revenues,
reported segment profit or loss, segment assets, segment
liabilities and other material segment items.

Segment Reporting
Reporting by
Geographic Area

IFRS No. 8 requires an entity to
report certain geographic
information unless it is
impracticable to do so

Information About
Major Customers

Revenues from customers
generating 10% or more of the
revenue of an entity must be
disclosed.