cash flow statement ( sample- direct & indirect)-easy

Use with Global Financial Accounting and Reporting ISBN 1-84480-265-5© 2005 Peter Walton and Walter Aerts

Book overview Part 1 – Environment of financial reporting Part 2 – Basic accounting techniques and

the preparation of annual financial statements

Part 3 – Interpretation and analysis of financial statements

Part 4 – Consolidated financial statements and issues related to multinational groups

Part 5 – Advanced financial statement analysis and accounting values.


CHAPTER 1Financial reporting and

regulation


Contents

Annual financial statements Uses of financial statements Accounting choices Accounting regulation International Financial Reporting

Standards


Financial versus management accounting

Financial accounting (FA) -> external financial reporting

Management Accounting (MA) -> financial information useful in internal decision and management processes

Starting from the same source data + FA is frame of reference for MA


Annual financial statements

Income statement Balance sheet Notes to the accounts Cash flow statement Statement of changes in equity Audit report


Uses of financial statements Objective of financial statements User groups Accounting traditions

Anglo-Saxon accounting Continental Europe Link with taxation


Objective of financial statements

“The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.”

IIASB, Framework for the Preparation and Presentation of Financial Statements, par.12


Users of financial statements

Investors Employees Lenders Suppliers Customers Governments Public


Users of financial statements

Management

Shareholders

Government

Loan providersPotentialInvestors

Public

Customers

Trade creditors

Employees


Users – Focus on investors

ManagementGovernment

Loan providersPotentialInvestors

Public

Customers

Trade creditors

EmployeesShareholders/ Investors


Accounting traditions

Anglo-Saxon tradition Continental European tradition


Anglo-Saxon accounting US, UK, Australia, Canada, New

Zealand, etc. Financial statements as a function

of a company’s financing Market solution to accounting rules

Powerful accounting profession


Continental European accounting

Financial statement as a product of government regulating of the economy

All businesses are subject to accounting rules, with extra rules for: Limited liability companies Listed companies


Link with Taxation

Link between measuring performance for shareholders and measuring profit for tax purposes Looser in Anglo-Saxon tradition Greater impact on individual accounts (less on

consolidated group accounts) Impact of taxation on company accounting

also depends on ownership of the company, which is in turn an issue frequently linked to size


Accounting choices Accounting is not a set of precise

measurement rules which permit the exact measurement of company profit and company value

Measurement of profit can never be anything but an estimate

Accounting measurement is full of choices Choices made should be stated clearly in the

annual financial statements


Accounting choices – Relevance versus reliability

To be useful, accounting information should be both relevant and reliable

Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting their past evaluations Relevant information is timely Relevant information has predictive or

feedback value


Accounting choices – Relevance versus reliability (cont.)

Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully what it purports (or is expected to) represent

Accounting choices may imply trade-offs between relevance and relaibility of information


Accounting regulation Accounting regulation will discipline

accounting choices Types of regulatory body:

Government Stock exchange Private sector body Professional accountants Specialist industry organizations

Usually separate rules for banks and insurance companies.


Government as accounting regulator

Regulation of accounting designed to ensure that the markets can operate free from fraud and misrepresentation Accounting laws Commercial codes Government regulatory agencies

Regulation of accounting for tax collection purposes


Stock exchange as accounting regulator

Stock exchange regulates the financial information to be provided by listed companies

In some countries this is done by a government regulator US: Securities and Exchange

Commission (SEC) as accounting regulator


Private sector as accounting regulator

Delegation of responsibility of writing detailed accounting rules to private sector bodies, financed by contributions from companies, audit industry, etc.. US: Financial Accounting Standards Board (FASB) Global: International Accounting Standards Board (IASB)

Flexible and rapid rule-making, as opposed to governmental rule-making

Technical committees from professional accounting bodies may function as catalyst


International bodies International Accounting Standards Board (IASB)

Accepted as an international source of best practice Issues the International Financial Reporting Standards (IFRS)

International Organization of Securities Commissions (IOSCO) Represents the world’s stock exchange regulators Strives for a single, uniform set of accounting standards worldwide

Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) Under the auspices of the UN Conference on Trade and Development

(UNCTAD) Commissions research reports into current accounting problems

International Federation of Accountants (IFAC) International representative of the accounting profession


International Financial Reporting Standards

Single set of global accounting and reporting standards, issued by the IASB

Increasingly used by many large and mutinational companies

Accepted by most security market authorities

Used as a basis for national accounting requirements (partially or in full) or as a benchmark for the development of national accounting rules


International Accounting Standards Board

A private sector body Operates under the International Accounting

Standards Committee Foundation (IASCF) Has no responsibility to any governmental

organization Has no enforcement authority Develops and issues both main standards

(IAS / IFRS) and interpretations (SIC / IFRIC)


Fig. 1.1 The structure of the IASB

IASC Foundation22 Trustees

Appoint, Oversee, Raise Funds

Standards Advisory Council

30 or more members

Board12 full time and 2 part time

Set technical agenda. Approve standards, exposure drafts and Interpretations

Working groupsfor major agenda projects

International financial reporting interpretations committee

12 members

Key:AppointsReports toAdvises


IFRS – Standard-setting due process

The IASB’s standard-setting procedures have to ensure that resulting IFRS are of high quality and are issued only after giving IASB’s constituencies opportunities to make their views known at several points in the standard-setting due process

An overview of the due process is presented in figure 1.2


Fig. 1.2 Standard-setting due process of the IASB

Discussion paper

Comment analysis

Exposure

draft

Standard

Effective Date

Comment analysis

Research

National Standard

SettersOthers

9-15 months 9-15 months 6-18 months


IFRS in the world Recent decisions of various governments result in

the requirement or permission of the use of IFRS by more than one hundred countries

Europe: IAS Regulation of 2002 Requirement of use of IFRS for consolidated financial

statements of EU qouted companies as from 1 January 2005

Member state option to extend the application of IFRS to not-listed companies and to individual financial statements

Adoption of IFRS (-equivalent) as national accounting rules in a number of countries (Australia, Singapore, Hong Kong, …)

US: convergence process of US accounting rules and IFRS started in 2002 (“Norwalk Agreement”)


Table 1.2 Financial reporting in the European Union – Main

developments1978 4th Company Law Directive (Individual financial statements)1983 7th Company Law Directive (Consolidated financial

statements)1995 Decision on new accounting strategy (adhering to IAS

instead of further development of specific European accounting rules)

2000 Announcement of plan to require IAS for consolidated financial statements of listed companies by 2005

2001 Fair Value Directive (requiring/allowing for fair value measurement of specific balance sheet items (mainly financial instruments))

2002 IAS Regulation (Application of IFRS by 2005 - see Table 1.3)2003 Modernization Directive (reflecting IFRS developments in the

4th and 7th Directive)2005/2007 IFRS mandatory for listed companies in European Union


Table 1.3 Effects of the IAS Regulation (EU)

Individual financial statements

Group/ Consolidated

financial statements

Listed companies Member state option IFRS mandatory from 2005/2007

Not-listed companies

Member state option Member state option


Table 1.1 List of IASB rules as of September 2005

Conceptual Framework CF Framework for the Preparation and Presentation of Financial Statements Main standards IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Cash Flow Statements IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 11 Constructions Contracts IAS 12 Income Taxes IAS 14 Segment Reporting IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue IAS 19 Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures


Table 1.1 List of IASB rules as of September 2005 (cont.)

Main standards (continued) IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies IAS 30 Disclosure in the Financial Statements of Banks and Similar Financial Institutions IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures


Table 1.1 List of IASB rules as of September 2005 - Interpretations

Interpretations SIC 7 Introduction of the Euro (IAS 21) SIC 10 Government Assistance – No Specific Relation to Operating Activities (IAS 20) SIC 12 Consolidation – Special Purpose Entities (IAS 27) SIC 13 Jointly Controlled Entities – Non-Monetary Contributions By Venturers (IAS 31) SIC 15 Operating Leases – Incentives (IAS 17) SIC 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets (IAS 12) SIC 25 Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders IAS (12) SIC 27 Evaluating the Substance of Transactions involving the Legal Form of a Lease SIC 29 Disclosure – Service Concession Arrangements SIC 31 Revenue – Barter Transactions Involving Services SIC 32 Intangible Assets – Web Site Costs IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments IFRIC 3 Emission Rights (withdrawn by the Board in June 2005) IFRIC 4 Determining Whether an Arrangement contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental

Rehabilitation Funds

cash flow statement ( sample- direct & indirect)-easy

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