Post on 16-Dec-2015
Slide 7.1
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 7
Published financial statements
Slide 7.2
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
International influences
• Impact of the European Union.
• The IAS Regulation.
• Harmonisation through Directives.
• International Accounting Standards Board.
Slide 7.3
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Accounting framework
• Primary financial statements.
• Notes to financial statements.
• Accompanying information.
Slide 7.4
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Contents of annual reports
• Primary financial statements.– Statement of financial position (balance
sheet).
– Income statement (profit and loss account).
– Statement of changes in equity.
– Statement of cash flows.
• Notes to financial statements.
• Accompanying information.
Slide 7.5
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Contents of annual report (Continued)
• Notes to financial statements.– Required by Companies Act 2006 and accounting
standards.– Accounting policies.– Detailed analysis of some numbers.– Information about uncertainties.
• Accompanying information.– Operating and financial review.– Chairman’s statement.– Directors’ report.– Non-financial information.
Slide 7.6
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Formats
• Statement of financial position, Income statement, Statement of changes in equity. – No standard format under IFRS– Basic lists of items specified but expect variation
in method of presentation.– For non-IFRS companies, formats based on
Fourth Directive and included in Companies Act 2006.
– [See examples in chapter 7]• Statement of cash flows
– Format indicated in IAS 7
Slide 7.7
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Beyond the annual report
What do you want to know about company?
• what drives cash flow and profit?
• quality of management?
• forward-looking information?
Slide 7.8
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Beyond the annual report (Continued)
Where do you find information about a company?• One-to-one meetings with directors.• Company briefings to analysts.• Brokers’ reports.• Press releases.• Letters to shareholders.• Preliminary announcement of results.• Half-yearly (interim) reports.• Prospectus.• Chairman’s statement in annual report.• Financial statements in annual report.
Slide 7.9
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Group accounting
• Define group.
• The importance of control.
• The parent company’s statement of financial position (balance sheet).
Slide 7.10
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Acquiring a subsidiary for cash
Assets – Liabilities = Ownership Interest
Decrease in asset of cashIncrease in asset of investment in
subsidiary
Group financial statements
Slide 7.11
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Acquiring a subsidiary by exchange of shares
Assets – Liabilities = Ownership interest
Increase in asset of investment in
subsidiary
Increase in new shares issued
Group financial statements (Continued)
Slide 7.12
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Net assets of P plc Net assets of S plc
Investment in Assets
S minus
liabilities
of S
Other assets
minus
liabilities of P
Consolidation
Cost of investment in S equals net assets of S
Figure 7.2 Separate net assets of parent and subsidiary
Slide 7.13
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
(a) Bringing together all assets and liabilities
(b) Group’s consolidated balance sheet
Assets Fixed assets of P+S
minus plus
liabilities Current assets of P+S
of S minus
Other assets re-arranged Current liabilities of P+S
minus minus
liabilities of P Long-term liabilities of P+S
equals equals
Consolidation (Continued)
Next page
Figure 7.3 Completing the process of consolidation
Slide 7.14
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
equals equals
Ownership interest for Ownership interest for
shareholders of parent shareholders of parent
Consolidation (Continued)
Figure 7.3 Completing the process of consolidation (Continued)
Slide 7.15
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Consolidation (Continued)
Cost of investment in S greater than net assets of S
(See next page)
Slide 7.16
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Net assets of P plc Net assets of S plc
Investment in Assets
S minus
liabilities
of S
Other assets
minus
liabilities of P
Consolidation (Continued)
Figure 7.4 Net assets of the separate companies P plc and S plc
Slide 7.17
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Group net assets
Assets
minus
liabilities
of S
Difference on
consolidation
Other assets
minus
liabilities of P
Figure 7.5 Group net assets of the P group
Consolidation (Continued)
Slide 7.18
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Goodwill
• Difference on consolidation is called Goodwill.
• It is shown in the Group balance sheet with the Intangible non-current (fixed) assets at the start of the balance sheet.
• Negative difference on consolidation is called ‘Negative goodwill’.
Slide 7.19
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Definition and recognition
• Goodwill is defined as future economic benefits arising from assets that are not capable of being individually identified and separately recognised.
• Goodwill is recognised in the balance sheet as an asset and is measured as the excess of the cost of the business combination over the fair value of the net assets acquired.
Slide 7.20
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Loss of value – impairment
Impairment means ‘damaged’ or ‘spoiled’. When the carrying value of goodwill cannot be recovered through sale or use, it is said to be ‘impaired’. The asset value in the balance sheet must be reduced.