Slide 7.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education...

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Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011

Chapter 7

Published financial statements

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International influences

• Impact of the European Union.

• The IAS Regulation.

• Harmonisation through Directives.

• International Accounting Standards Board.

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Accounting framework

• Primary financial statements.

• Notes to financial statements.

• Accompanying information.

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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.

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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.

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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

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Beyond the annual report

What do you want to know about company?

• what drives cash flow and profit?

• quality of management?

• forward-looking information?

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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.

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Group accounting

• Define group.

• The importance of control.

• The parent company’s statement of financial position (balance sheet).

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Acquiring a subsidiary for cash

Assets – Liabilities = Ownership Interest

Decrease in asset of cashIncrease in asset of investment in

subsidiary

Group financial statements

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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)

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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

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(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

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equals equals

Ownership interest for Ownership interest for

shareholders of parent shareholders of parent


Figure 7.3 Completing the process of consolidation (Continued)

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Cost of investment in S greater than net assets of S

(See next page)

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Net assets of P plc Net assets of S plc

Investment in Assets

S minus

liabilities

of S

Other assets

minus

liabilities of P


Figure 7.4 Net assets of the separate companies P plc and S plc

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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


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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’.

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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.

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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.

Slide 7.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education...

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