STRUCTURE AND BACKGROUND

LEV EL S FOR D I S C U S S I N G F I N A N C I A L R EP O R T IN G

• Relationships between the financial reports

• What components should be/can be included in the financial

reports? (recognition)

• Valuation of items in the financial reports

• Thereafter, the usage/implication of accounting data can be

discussed!
R E G U L A T ION

Practices

Standards

Qualitative
characteristics/Accounting
principles

Laws Directives
G U I D I N G PR I N C I P L ES

• Going concern • Conceptual Framework

• Prudence

• Realization

• Matching

• Verifiability
ASSETS
ASSETS

• Definition
• A resource controlled by the enterprise as a result of past
events and from which future economic benefits are
expected to flow to the enterprise

• Recognition
• An asset shall be recognized on the balance sheet when
• It is probable that any future economic benefit will flow
to the enterprise; and
• The item has a cost or value that can be reliably
measured.
ASSETS

• Fixed assets = non-current assets

• Tangible non-current assets:

• Held for use in production or supply of goods or services and expected to be used during more than
one period

• Intangible non-current assets:

• An identifiable non-monetary asset without physical substance

• Financial assets = investments

• Current assets are other assets

V A L U A T I O N AND PROFIT
CURRENT ASSETS
C U R R E N T ASSETS

Purpose: Current assets are aimed

at continuously being turned over
in the ordinary business

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V A L U A T I O N A P P R O A CH E S

The lower of cost and Inventories

net realizable value

Assets with a fixed final payment,

Amortized cost like trade receivables, initially
discounted cash flow

Fair value Mainly financial current assets

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I N V E N T O RI ES

• The lower of cost and net realizable value

• Cost is the expenditure for acquiring or producing the asset

• Net realizable value

• Net selling price
• Repurchasing price
NON-CURRENT ASSETS
=
FIXED ASSETS
NON - C U R RE N T ASSETS

Purpose: Non-current assets are to

be used and/or held for multiple
periods

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G E N E R A L P R I N C I P L E S FOR NON - C U R R E N T ASSETS

• Valuation based on acquisition cost

• Depreciation if there is a limited useful life
• Impairments
• Revaluations
NON - C U RRE N T ASSET S – D E P R E C I A T I O N AND A M O R T I Z A T I O N

DEPRECIATION and AMORTIZATION

are the systematic allocation of the
depreciable amount of an asset
over its useful life.

Useful life: physical and economic

reasons
Depreciation tangible assets
Amortization intangible assets

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I N T A N G I B L E NON - C U R RE N T ASSETS

• Goodwill, patents, licenses, brand, research and development

• Generally, treated as tangible non-current assets

• Normally, short economic life, but there are exceptions

• Limitations to which self-made intangible assets can be recognized!

• Difficult to estimate and control future expected benefits

I N T A N G I B L E NON - C U R RE N T ASSET S - G OOD WI LL

IF R S L O C A L SW ED I SH – K3
• Goodwill is the remaining part of the • Goodwill is the remaining part of the
acquisition cost of another company acquisition cost of another company
that cannot be allocated to that cannot be allocated to
identifiable and recognizable assets identifiable and recognizable assets
and liabilities and liabilities

• Identifiable and recognizable assets • Identifiable and recognizable assets

may include otherwise not recognized may include otherwise not recognized
assets and liabilities assets and liabilities

• Goodwill is valued at acquisition cost • Goodwill is valued at acquisition cost

less impairments – no amortizations are less amortization and less impairments
made

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I N T A N G I B L E NON - C U R RE N T ASSET S – R & D

• Development costs should be recognized on the

balance sheet and depreciated over the useful life.
• For small firms these should be expensed too
• Strict criteria to separate from research: including
commercial product/service, financially and
technologically feasible to complete process

• Research costs must not be recognized on the

balance sheet. They must be immediately
expensed.
FINANCIAL ASSETS
F I N A N C I A L ASSETS

• Fair value – market value

• If active market, otherwise some estimate of fair value or acquisition cost

• Debt instruments at amortized cost

• No depreciation

• Some at amortized cost

• Investments in associates and joint ventures: Equity method

LIABILITIES
L I A B I L I TI E S

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 L I A B I L I T I E S – D E F I N I T I O N AND R E CO G N I T I O N

Definition
• A liability is a present obligation of the entity arising from past
events, the settlement of which is expected to result in an
outflow of resources from the entity

Recognition
• A liability should be recognized when it is probable that an
outflow of resources embodying economic benefits will be
required to settle the obligation and a reliable estimate of
the amount of the obligation can be made

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 L I A B I L I T I E S – S U B G R OUP S

• Provisions are liabilities that are

• Certain or probable in terms of existence of future cash flows
• Uncertain with respect to amount or settlement period

• Long-term liabilities > 1 year

• Short-term liabilities <= 1 year
• Split between interest-bearing and non-interest bearing is
increasingly common

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 L I A B I L I T I E S – P R O V I SI ON S

• Most common provisions are deferred taxes and

retirement obligations/pensions

• Other types
• Warranties
• Clean-up costs/environmental
• Restructurings

• Different traditions between countries

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EQUITY
EQU IT Y – IFRS VIEW

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EQU IT Y – C H A N G E S OVER TIME

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SHARE ISSUES

• New resources to the company (often money)

• Assets increase

• Equity increases
• Share capital increases with: Number of shares x quota value of the
share
• Reserves increase with: The difference between the amount paid by
the shareholders and the amount with which share capital increased

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SHARE R E P U R C H A S E S – BUY BACKS

• Resembles a dividend
• Cash decreases
• Equity decreases
• Restrictions are similar to those of dividends

• Can be used for acquisitions and option programs etc

• Repurchased share are not visible in the balance sheet as
assets even though they have not been cancelled

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BALANCE SHEET OVERALL
THE B A L A NC E S HE ET – TWO WAYS OF S H O W I N G THE SAME THING

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THE B A L A NC E S HE ET – U N R E C O G N I Z E D VALUES

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THE INCOME STATEMENT
THE INCOM E S T A T E M E NT

• Shows the performance of a company or a group

• The performance is based on the valuation made in the

balance sheet
• Income and expenses depend directly on the valuation

• Divided into three parts (though not IFRS mandatory yet)

• Operations
• Finance
• Taxes
THE INCOM E S T A T E M E N T - REVE NU ES

• Definition:
• Revenue is the gross inflow of economic benefits during the
period arising in the course of the ordinary activities of an
entity when those inflows result in increases in equity, other
then increases relating to contributions from equity
participants

• Recognition:
• When the entity has transferred control of the goods/services
to the buyer, i.e. when the seller has completed its
performance obligations to the buyer
• Revenues shall be recognized in the income statement when
it is probable that the economic benefits associated with the
transaction will flow to the entity; and
THE INCOM E S T A T E M E N T – R E V E N U E S CONT.

• When should revenues be recognized in practice?

• Delivery?
• Invoice?
• Payment?

• How do you do?

• Long-term projects?

• Multiple element contracts

THE CASH FLOW STATEMENT
THE CASH FLOW S T A T EM E N T

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THE CASH FLOW S T A T E M E N T – I N D I R E C T M E T H O D
The Cash Flow Statement

Profit measure after tax from income statement

Adjustments for non-cash items in the income statement, e.g. depreciation

+/- Change in working capital (excl. Cash)

CASH FLOW FROM OPERATING ACTIVITIES (1)

+/- Investments in non-current assets

CASH FLOW FROM INVESTING ACTIVITIES (2)

+/- Financing e.g. borrowing, installment, dividends, new issues

CASH FLOW FROM FINANCING ACTIVITIES (3)

CASH FLOW FOR THE YEAR (1+2+3)

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CASH FLOW S T A T E M E N T S SHOW

• The ability to generate positive cash flows;

• The ability to meet payment requirements and to distribute dividends;

• Investment activities;

• The need for external financing; and

• The relationship between net income and cash in- and outflows.

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THE FINANCIAL STATEMENTS
-
A SUMMARY
THE F I N A N C I A L S T A T E M E N T S – A SUMMARY