Financial Statement Analysis. Chapter 2

Financial Statement Analysis Chapter 2 International Financial Reporting Standards (IFRS) Index • • • • Introduction International Accounting Standard Board (IASB) Conceptual Framework Chromosome of Valuation for each company Index • • • • Introduction International Accounting Standard Board (IASB) Conceptual Framework Chromosome of Valuation for each company Introduction • Different national accounting standards has contributed to the advent of inconsistencies and difficulties to have a global securities market • EU and many other countries adopted a global accounting standards called IFRS (International Financial Reporting Standards). • Some USA regulators have decided to bring into convergence their standards Index • • • • Introduction International Accounting Standard Board (IASB) Conceptual Framework Chromosome of Valuation for each company International Accounting Standard Board (IASB) • The International Accounting Standards Board (IASB) is an independent and privately-funded accounting standard-setter based in London, UK. Its main objectives are: – To develop, in the public interest, a set of high quality, understandable and enforceable global accounting standards – To co-operate with national accounting standard-setters to achieve convergence in accounting standards around the world. Index • Introduction • International Accounting Standard Board (IASB) • Conceptual Framework – Objective of financial statements – Qualitative characteristics – Definition, recognition and valuation of the elements of financial statements – Capital and capital maintenance • Chromosome of Valuation for each company Conceptual Framework • Although it is not a standard, it serves as a guide to resolving issues that are not addressed directly in a standard. The Framework addresses: – The objective of financial statements. – The qualitative characteristics that determine the usefulness of information in financial statements. – The definition, recognition and measurement of the elements from which financial statements are constructed. – Concepts of capital and capital maintenance. Conceptual Framework • Objective of financial statements “… is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions” financial position: economic resources, capital structure, solvency, liquidity performance: ability to earn profit, profitability Conceptual Framework • Qualitative characteristics “understandability, relevance, reliability and comparability” understandable: to those involved in economic activities relevant: if influences the decision making process reliable: in absence of error and bias comparable: to identify behaviors and trends Conceptual Framework • Definition, recognition and valuation of the elements of financial statements – Assets: “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events” – Liabilities: “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events” – Equity: “the residual interest in the assets that remains after deducting its liabilities” Conceptual Framework • Definition, recognition and valuation of the elements of financial statements – Income: “increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”. – Expenses: “decreases in economic benefits during an accounting period in the form of outflows or depletion of assets or incurrence of liabilities, other than those relating to distributions to equity participants” ELEMENTS OF FINANCIAL STATEMENTS Statement of Financial Position Income Statement Assets Liabilities Equity Income Expenses Recognition criteria Measurement methods ASSETS HISTORICAL COST Amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Amount of cash or cash equivalents that would have to be paid if the same or equivalent asset was acquired currently. Amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset was acquired currently. Present discounted value of the future net cash inflows that the item is expected to generate. LIABILITIES Amount of proceeds received in exchange for the obligation or at the amounts of cash or cash equivalents expected to be paid to satisfy the liability. Undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently. Settlement values: Undiscounted amount of cash or cash equivalents Expected to be paid to satisfy the liabilities. Present discounted value of the future net cash outflows that are expected to be required to settle the liabilities. CURRENT COST REALISABLE (SETTLEMENT) VALUE PRESENT VALUE Conceptual Framework • Capital and capital maintenance Two different concepts of capital in the IASB Framework – Net assets, or equity of the company – Productive capacity FINANCIAL CONCEPT OF CAPITAL PHYSICAL CONCEPT OF CAPITAL Capital = net assets or equity of the company Capital is regarded as the productive capacity of the enterprise Index • • • • Introduction International Accounting Standard Board (IASB) Conceptual Framework Chromosome of Valuation for each company Chromosome of Valuation for each company • It is possible to represent a certain company as a chromosome, depending on the alternative options taken into account. It will be useful in the analysis context • Valuation of assets – Alternative options for: • Property plant and equipment • Investment property • Intangibles other than goodwill Notes to the chromosome of valuation • Valuation options • Included in chromosome analysis – IAS 16: Property, Plant and Equipment –cost model or fair value model – IAS 40: Investment Property –cost model or fair value model – IAS 38: Intangible Assets –cost model or fair value model • Excluded from chromosome analysis – IFRS 3 and IAS27: Goodwill –residual fair value (assets-liabilities acquired) – IAS41 and IAS 23: Biological Assets –fair value less cost at the point of sale – IAS 2: Inventories –acquisition cost (FIFO, or weighted average) – IAS 39: Financial Instruments: Recognition and Measurement –depending on category, compulsory valuation method for each category – IFRS 5: Assets Held for Sale –fair value – Source: http://www.iasb.org/IFRS+Summaries/IFRS+and+IAS+Summaries+English+20 08/IFRS+and+IAS+Summaries+English.htm