Financial Accounting Control of Financial Statements Dr. Clive Vlieland-Boddy FCA FCCA MBA
Recommended Reading • Chapters 1-9
Why Produce Financial Statements Enables management to communicate to stakeholders how well they have done. Enables evaluation of achievements.
Accounting Standards With the need to ensure international comparability in financial markets, standardisation of accounting is therefore essential.
The New Debate IAS v Generally Accepted Accounting Practice. • Over the past 3 years, Europe has agreed on universal format of accounting. This has been summarised in a series of International Accounting Standards (IAS) and Financial Reporting Standards (IFRS) under the UK’s David Tweedie. • GAAP is still very relevant but many countries, including Spain, are adopting IAS/IFRS and this could replace their GAAP. • See Chapter 2.
Self Regulatory Vs Statutory • Precise rules Vs shared principles • A book of rules Vs laid out principles.
Convergence of Accounting Standards • High profile failures were the drivers for change. • US still clinging on to its GAAP. EU and rest of world now converging in IFRS
Financial Accounting The Role of The Auditors
Role of the Auditor • The auditor is there to examine the accounts and to express an opinion on their accuracy. • Whether the accounts give a “true and fair view”. • They are watchdogs not bloodhounds. • Consider auditor independence!
Auditor Liability • Now only 4 major firms. • Need to encourage others. • Auditor Independence.
True and Fair View... For accounts to be meaningful they should represent a “true and fair view”. To achieve this there are 4 Fundamental accounting concepts.
Coffee Break • 2.3.1
Financial Accounting Objectives of Financial Statements
The Purpose of Financial Accounting • To provide accurate financial information on the performance of a firm.
Users of Financial Statements Transaction Activity Accounting System Financial Statements Bankers Investors Vendors Government Management Information Users Balance Sheet Income Statement Statement of Owner Equity Statement of Cash Flows Loan Approval Financial Investment Credit Approval Operational & Financial Decisions Decisions
The key issue • Meaningful Vs Misleading • We need a result that makes sense • That is truthful • That that is not distorted
Quality of Financial Information • Understandable • Relevance • Neutral • Reliability • Comparability • Timely ( ie up to date) • Transparent • Materiality
Substance over Legal Form • Some activities like leasing of vehicles have a different legal position to reality. • Essentially leasing is another way to finance a new asset. • In accounting we look at the real position and not necessarily the legal position.
The Balance Sheet Assets Liabilities Shareholders Funds The Income Statement Incomes Expenses Profit or Loss Elements of Financial Statements
Financial Performance • Aims of management is to make money for its owners. • Invests the company funds to achieve a higher return than the owners could personally do elsewhere. • Profit represents the excess income over expenditure. Loss is the converse.
Coffee Break • 3.2.1
Coffee Break • 4.2.1
Financial Accounting Assets Liabilities & The Accounting Equation
Dual Effect of all accounting transactions • Accounting consists of dual entries. By this we mean that we create simultaneously two entries. • An increase in assets represents an increase in either liabilities or Shareholders funds • An increase in liabilities will represent either a reduction in shareholders funds or an increase in assets. • An increase in Shareholders funds will represent an increase in assets or reduction in liabilities.
Duality of Effects Most transactions with external parties involve an exchange where the business entity both gives upsomething and receives something in return.
The Accounting Equation The Assets = Liabilities + Shareholders ( Owners)Equity. Assets = Liabilities & Equity
Assets & Liabilities • Assets - Something valuable that a company owns or has use of. Has to have some future economic value. • Liabilities - Something that is owed to someone else. Has to be a present or future responsibility.
Assets • A resource controlled by the business from which future economic benefits are expected to flow. • To be an asset it must have a value now or in the future.
Assets There are 4 basic categories of Assets. • Current Assets - Those that are used for the day to day trading of the company. These are converted into cash within 12 months. Eg: Accounts Receivable and Inventories. • Non Current Assets - Those that are held to enable the company to function. Eq. Plant and Equipment. • Intangibles- Like Goodwill ( we will deal with later) • Investments - Shares in other companies held for investment purposes.
Liabilities • Represent an obligation of the business arising from past events. The settlement of this is expected to result in an outflow form the recourses of the business having itself created economic benefit. • Basically if we will have to write out a cheque either now or in the future it is a liability.
Liabilities A liability is what its name says. It is a responsibility of the enterprise and is some form of debt. There are 2 essential categories of these. • Current Liabilities - Those that are to be settled within 12 months. E.g. Accounts Payable or a bank overdraft. • Non Current Liabilities - Those that are due to be settled after one year. E.g. Loans with maturity more than 12 months away.
Financial Accounting The 4 Accounting Concepts
4 Fundamental Accounting Concepts • Going Concern - That the business will continue and not be liquidated. • Accruals (or Matching) - That income is matched with expenditure. You match the sale with the cost of that sale. • Consistency - What you did last year you do this. Otherwise figures would be meaningless. • Prudence - Caution is essential. Note “Prudence must prevail”
Accounting Policies • Decided by management. • Basis of how the numbers are put together. • Requires managements judgement
Accounting Policies • Valuation of Inventories • Depreciation of Non Current Assets • Revaluation of Non Current Assets • Writing of on Intangibles • Revenue Recognition
Group Study Projects • 25% of the grade is given to the presentation of a research project. • This is a qualitative and not a quantitative project.
Qualitative Information Consider the following. • How friendly is the info. • It there anything important missing • How does the extent of information compare to competitors. • Do you get a strong feeling of transparency and frankness. Or just hot air! • Consideration of environmental issues. • Risk Management
Coffee Break • 8.3.1
Auditor’s Responsibility • What do you think it is?
Bye for now! Please ensure you Prepare for next session I’m ready forsome leisure time.