reparis workshop the importance of reliable financial reports: a banker‘ s perspective risk...
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REPARIS WorkshopThe Importance of ReliAble Financial Reports:
A Banker‘s PerspectiveRisk Control
March 14-15, 2006Vienna, Austria
2
Agenda
4./5.
8./ 9.
3.
6./7.
10./11.
12.
Debt / Equity Classification
Extraordinary Result
Financial Analysis Process
Evaluation Finished Goods
Off Balance - Leasing
Summary / Short Discussion
Page
13.Definition of Ratios
3
Financial Analysis Process
Fairness and CorrectnessBanks expectFinancial
Data
Understandability
Comparability
Relevance
Reliability
Timeliness
Transparency
FinancialAnalysisSystem
Ratios
Bench-marking
Rating(PD)
Financial Reports
arepresented to
the Bank
Financial Data
Balance Sheet
Profit & LossAccount
Cash FlowStatement
Entry of financial data by an external company
Reliable Financial Reports are the basis for a realistic evaluation of clients‘ business .
4
Criteria(Silent Partnership)
Term > 7 Years
Subordination
Loss Participation
Result – Related Dividends
German Accounting Standard (HGB 266)
IFRS(IAS 32)
All Criteria met
Treatment as Equity
Treatment as Financial Debt
Debt / Equity Classification - Theory
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial
DataRating(PD)
Balance SheetP & L Account
Cash Flow Statement
5
CriteriaGerman Accounting
StandardIFRS
All Criteria fulfilled
Treatment as Equity
Treatment as Debt
Registered Capital 100
Silent Partnership 400
Other Financial Debt 500
Equity
Gross Debt Capitalization
Extended Tangible Net Worth
500
0,5
500
100
0,9
500
Debt / Equity Classification – Example
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial Data
Rating(PD)
Balance SheetP & L Account
Cash Flow Statement
Different Treatment results in different Ratios
But: Transparency allows fair Analysis
Different Treatment results in different Ratios
But: Transparency allows fair Analysis
6
German Accounting Standard
IFRSCriteria(Cost of Goods - Finished Goods)
Directly Attributable Costs
Required Required
General Costs
General Overhead, Social, Pension Provision Costs
Optional, as far as related toProduction
Required, as far As related to Production
Debenture Capital Costs (Interest)
As a rule not allowed, sometimes optional
As a rule not allowed,sometimes optional
(IAS 23.11)
Costs of Distribution
Not allowed Not allowed
Evaluation of Finished Goods - Theory
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial
DataRating(PD)
Balance SheetP & L Account
Cash Flow Statement
7
Other ST Assets 500 Total ST Liabilities 800
German Accounting Standard
IFRSCriteria
Directly Attributable Costs
500 500
General Costs
General Overhead, Social, Pension Provision Costs
200 2000
Debenture Capital Costs (Interest)
100 00 100
Costs of Distribution
100 100
Many Options result in different Ratios
But: Transparency allows fair Analysis
Many Options result in different Ratios
But: Transparency allows fair Analysis
Finished Goods
Total ST Assets
Working Capital
800
1300
500
500
1000
200
800
1300
500
700
1200
400
Evaluation Finished Goods – Example
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial Data
Rating(PD)
Balance SheetP & L Account
Cash Flow Statement
8
Extraordinary Result
Criteria
The Annual Resultcontains both, the Result ofOrdinary and the Resultof Extraordinary Business.
German Accounting Standard (HGB 277,4)
IFRS(IAS 8.10)
Extraordinary Result - Theory
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial
DataRating(PD)
Balance Sheet
P & L AccountCash Flow Statement
9
No Information, Treatment asExtraordinary Income
Total Sales 1000
Cost of Sales 400
Other Oper. Expenses 100
Other (?) Income 200
Depreciation 100
Information are available - partial Treatment as Extraordinary Income only
Total Sales 1000
Cost of Sales 400
Other Oper. Expenses 100
Other Income 200thereof Government Grant 50thereof Rents 150
Depreciation 100
Extraordinary Result – Example
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial Data
Rating(PD)
Balance Sheet
P & L AccountCash Flow Statement
EBIT
Debt Capacity
400
1.625
EBIT
Debt Capacity
550
2.235
Adjustments result in different Ratios
But: Transparency allows fair Analysis
Adjustments result in different Ratios
But: Transparency allows fair Analysis
10
Off Balance - Leasing
German Accounting Standard
IFRS(IAS 17)
Alternatives
Operating Leases Finance Leases Sale-and-Leaseback
Off Balance – Leasing - Theory
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial
DataRating(PD)
Balance SheetP & L Account
Cash Flow Statement
11
Transparency results in exact Ratios
and Fair Analysis.
Transparency results in exact Ratios
and Fair Analysis.
Balance Sheet
Total Financial Debt 500
Profit & Loss Account
Total Sales 1000
Cost of Sales 400
Leasing 100
Other Expenses 100
Off Balance – No Information
1,0
Balance Sheet
Total Financial Debt 500
Profit & Loss Account
Total Sales 1000
Cost of Sales 400
Leasing 100
Other Expenses 100
Off Balance Leasing Obligations 500
Gross Debt + Off Balance Leasing / EBITDAR
2,0Gross Debt + Off Balance Leasing / EBITDA + Leasing
Off Balance – Leasing – Example
Financial Reports
arepresented to
the Bank
FinancialAnalysisSystem
RatiosFinancial Data
Rating(PD)
Balance SheetP & L Account
Cash Flow Statement
12
Summary
Banker‘s Perspective:
Transparent Financial Reports result in True and Fair Treatment !
13
Ratios – Definition
Equity
Gross Debt Capitalization
Extended Tangible Net Worth
Finished Goods
Total ST Assets
Working Capital
EBIT
Debt Capacity
Gross Debt + Off Balance Leasing /
EBITDA + Leasing
Registered Capital as per Balance Sheet
Other Financial DebtOther Financial Debt + Equity
Registered Capital + Silent Partnership
Sum of Costs – Costs of Distribution
Other ST Assets + Finished Goods
Total ST Assets – Total ST Liabilities
Total Sales - Cost of Sales – Other Oper. Expenses+ Other Oper. Income - Depreciation
Present Value of Adjusted EBIT, 7 Years, Tax Rate 35 %
Total Financial Debt + Off Balance LeasingEBITDA + Leasing (as per P&L)