STEP THREE: COMMENTARY ON RESTATING FINANCIAL STATEMENTS

Transcription

1 Haitham Haddad Central Queensland University Assignment 2 STEP THREE: COMMENTARY ON RESTATING FINANCIAL STATEMENTS I am apprehensive but excited to start this step. I know it will bring challenges that will cause at least one late night (which it did), but challenges are good for the brain and make you really think about the content you are learning. I suppose that is the emphasis on this step, learning the individual items of financial statements more deeply. s of movements in equity I start by identifying and transferring over the figures that did not need to be restated such as; the balances for the beginning and end of year and the profit for the period. I then split the items in to either other operating comprehensive income or transactions with shareholders. This was a fairly easy task. I made sure the totals matched, they did. An item that immediately stood out to me was one of the transactions with shareholders namely, conversion of loans from banks to shares. So I did some research and found out that in the calendar year ending 2016 the firm sold all of its debt to the bank in return for shares in the firm. This caused the firm to receive a gain on extinguishment of debt of approximately $13,305,000. Then I thought to myself, what is the catch? Surely banks cannot simply just forgive debt. I know it was in return for shares but surely this must incur some sort of financial penalty to the firm. So I did some research and learnt this gain on extinguishment of debt is considered as finance income and of course the firm will have to pay tax on that. To confirm this I found the item finance income in the statements of financial performance and the figure matched exactly to the gain on extinguishment of debt. I decided to look up the definitions of the remainder of items contained within transactions with shareholders such as; exercise of options, cost of share based payment, issue of share capital and capital reserve for capital notes to shareholders and loans from shareholders. This provided clarification on items that I was not entirely sure about beforehand. I found this financial statement fairly easy to restate. The items it contained were fairly straight forward and easy to understand. Items listed under other comprehensive income were easy enough to understand such as translation of foreign operations and remeasurement gain on defined benefit plans. I think that this financial statement was a good one to start with; overall it did not change that much but still provided the opportunity to research items listed in the statement. Completing this financial statement provided me a confidence boost in completing the next two. 1

2 s of financial position I started off by putting O s and F s next to items I believed were operating assets/liabilities and financial assets/obligations respectively. I then researched items that I was not sure of. I had heard of goodwill but was not sure of its exact meaning. I decided to do some research to clarify my understanding and I realised it was far more complex than originally thought. I now understand it to be an intangible asset to a firm that cannot necessarily be sold individually but can be bought or sold together by the seller adding a premium to sale the price, hence selling above fair value to include the price of goodwill. It might be the name of a business and the reputation it brings with it. Continuing on I quickly ascertained what items were related to the operations of the business. It was just a matter of determining if it was an asset or liability. To work out which was which I tried to think of it as; does my firm owe someone money or does someone owe my firm money? Other assets such as inventories and property plant and equipment were not subject to this method because of their obviousness of being an operating asset. Whilst I know equity is suppose to be a straight transfer I still decided to research the definitions of the items listed under equity on the balance sheet. The accumulated deficit immediately stood out to me as I did some research on this for a previous step because it is the reason my firm does not pay a dividend. I understand it to be the amount of money the firm is essentially indebted to itself and has to recover that amount of money before it can start paying a dividend. I started allocating cash and cash equivalents to operating and financial assets whilst watching the lecture. It seems a necessary but simple task to undertake. Whilst watching the lecture I learnt how to link cells. Learning to link cells has changed everything! I have now gone back and re done everything to link all the cells to the previous statement. In saying the above, I calculated the figures as directed whilst watching the lecture; however I did not apply the new figures in the statement until completing this commentary. I went to refer to the cash I had allocated to financial and operating assets whilst writing this draft and I realised I had not put any cash or cash equivalents under financial assets even though I did the working out at the bottom, silly me. I find it odd that only 1% is used as a rule of thumb for allocating cash and cash equivalents to operating assets. Not that I think my firm should be allocated a higher percentage of revenue but where does the remainder 99% go? Is it used later to cover the firm s financial obligations? I started to calculate the sums that underpin the balance sheet by using the formulas listed in chapter four. It was good to calculate the sums myself and see what it meant for my firm as I did not quite understand the meaning of the sums completely when reading the chapter. I subtracted total operating assets by total operating liabilities to get net operating assets. I then used that sum to confirm net financial obligations + equity = net operating assets. The sums were the same so I was happy. Restating this financial statement was definitely a step up from the previous one but was not too daunting of a task. Overall, it is quite a lengthy and slightly more complex financial statement to 2

3 restate then the first. In hindsight, it acted as a strong foundation for restating the next financial statement. s of financial performance Commencing the statements of financial performance I immediately noticed Other income, net was listed twice. What is other income, net? And why is it listed twice? There are no notes for these items in my firm s annual report. A quick Google search revealed to me that it is used to describe income generated outside of normal business operations, such as; rent income and profit from the sale of non inventory assets. It now makes sense why it is listed twice as it must have come from two separate income streams. Calculating the tax benefit was by far the hardest part. Whilst a simple task in itself, it still took me quite a bit of time to get my head around the idea of it. I realise part of it is about seeing what tax would have been paid without receiving the tax benefit. What I just could not get my head around for a while was how it is possible to have a negative tax benefit. What I mean by that and the way I interpret it is because my firm had such a huge amount of finance income compared to the firms finance expenses it actually owed more tax than it already paid. The reason for the large amount of finance income was because of its gain on extinguishment of debt as mentioned previously. I calculated comprehensive net profit after tax hoping this figure would be the same as the total comprehensive income (loss) from the original statement, it was not. I went back through the original statement to find what I had missed. Instead of going back and forwards trying to compare the names I instead calculated the difference between the figure I had and the figure I needed. I then looked for that figure in the original statement. This method was by far quicker except for the 2014 year where I missed two items so I was looking for the balance of two items instead of one. I hope I have understood the reasons behind allocating the tax and tax benefit the way we are suppose to. I remember feeling confident after restating the financial statement whilst watching the lecture but now as I go back over it I am feeling less confident and trying to remember how and why I calculated some of the items the way I did. I started this one probably a little too confident. I did not watch the lecture first, which was my first of many mistakes. I actually posted a question on the Facebook page in regards to the allocation of tax and Amanda Mccoombes replied to my question stating the obvious; that I should watch the lectures and they would answer my questions there. How silly of me. Did I not learn that from restating the previous financial statement? I noticed there were quite a few posts on the Facebook page asking for help in restating their firm s financial statements. I clicked on a few of the links to see if I could help. I immediately felt a sensory overload looking at all the new figures and name s to describe the same or similar items as my firms financial statements. I also found and had a look at the annual reports of the people asking for help and I noticed that some firms take a lot of pride in their reports making them look neat and tidy and others did not. After looking at other student s statements and annual reports of those people asking for help I realised I was not going to be much assistance. It is a bit like the blind leading the blind I think. Most 3

4 of the time I was not completely sure if the answer I was going to provide them would help or not, let alone be correct. The last thing I wanted to do was give someone who was already confused a bump steer. I mostly just replied to other student s posts echoing other student s responses to watch or re watch the lectures. I have provided a photo below of a comment I provided to another student on Facebook who was having trouble restating their firm s financial statements namely the tax benefit for their firm. For all three financial statements I found the experience a little frustrating at times but at the same time I found it a valuable experience for gaining a deeper understanding of the meaning behind the items contained in the financial statements. If I was asked to restate another firm s financial statements I probably would be able to do most of it without having to watch the lectures again. The only part I think I would need help with again is the allocation and calculation of the tax benefit in the third financial statement. In conclusion, I enjoyed the experience and would like to get more practice at restating a firm s financial statements. Feedback After receiving feedback from my peers I was glad most just offered praise but I was most appreciative of Jack Gould who picked up on a few mistakes I had made and offered a step by step method and examples of how to rectify my mistakes. The mistakes she identified for me was that because I had both NFA and NFO for different years in my balance sheet it was necessary I include both titles rather than having negative NFA. She also reminded me to add (equity total NFA = NOA) now that I had included NFA in the statement. 4

5 When I posted my financial statements in Moodle for feedback I was worried that someone would pick up on a massive mistake and I would have to start all over again. I am glad to say this did not happen. I also found it quite helpful reviewing my peer s financial statements to compare the difference. In conclusion, providing and receiving feedback proved a necessary and helpful step in understanding how to and why we restate financial statements. Feedback received STEP FOUR: FEEDBACK RECEIVED AND PROVIDED PEER FEEDBACK SHEET: ASS#1 Feedback From: Amanda McCoombes Feedback To: Daniel Haddad Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity I can see that you have linked back to your financial statement me and your totals appear to be correct. I would suggest that you change your totals to a formula as this is another check. This will insure that you have not missed anything from your financial statement. Overall you have done a great job. I agree with the way you have laid out this statement and I can see again that you have linked this statement back to your original statement. Total equity I can see that you have linked back to your original statement and would suggest you also change this to a formula, it s just good practice. However, another well executed statement. I can see that your tax reported is not linked back to your original statement and would suggest you change this if possible if not then I would add a note down the bottom explaining why. I have checked your totals (CI) back to your original financial statement and they are matching up. other students Overall you have done a great job, as I believe this was a very time consuming 5

6 and number crunching task. PEER FEEDBACK SHEET: ASS#2 Feedback From: Jacky Gould Feedback To: Daniel Haddad Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity I can see the formulas are linked to your original statement. Your balances add up. Your total comprehensive income matches your original figures. Nice formatting as it s very easy to read. Well done on this section I can make the following recommendations as a result of my restated financials being wrong! When financial obligations are larger than financial assets as in your 2016FY, it should equal Net Financial Assets (NFA). The sum formula can be replaced by subtracting the smaller figure from the larger figure. I understand in your case that the financial obligations already show zero for 2016FY however for marking purposes I m wondering if it may be a good idea to include the formula for the assessors, so they can see you understand the concepts i.e. for 2016FY =SUM(I62-I58)? This will give you a positive figure which is what we want. It may also be worthwhile to add NFA to your heading, maybe something like this; Net financial obligations (NFO) / Net Financial Assets (NFA) As a result of the above it may also be worthwhile to consider row 77 s heading and the formula for 2016FY. Maybe for the heading you can use something like; Total NFO + Equity / Equity - Total NFA As 2016FY is a NFA the formula for NOA is; Equity Total NFA = NOA. i.e. for 2016FY NOA =SUM(I75-I64) For the remaining years the formula for NFO is; Equity + total NFO = NOA I.e. for 2015FY NFO =SUM (J75+J64). I have reworked a copy and inserted it at the end for three years to help show what I am trying to explain. The comprehensive net profit after tax (CI) in the restated financials match the comprehensive figure in the originals workings. Meaning all data and formulas are correct. I noticed your finance income is separated out. I have also noticed that you have NFI for the 2016FY and the remaining years are NFE. The reason being that; NFE = larger finance costs than finance income. NFI = larger finance income then finance costs. At about the 54 minute mark of week 7 video tutorial Maria explains regardless if the number is a negative it is the larger number out of the finance costs and income that determines whether it is NFI or NFE. The formulas are worked out correctly. With the headings I m wondering if it would be worthwhile to do something similar as in the 6

7 other students balance sheet. Maybe something like this; NFI / NFE before tax NFI / NFE after tax (NFI) This way it shows that you understand that you have both NFI and NFE. I have also checked your tax rate for Israel and it is 25% as you have included. You have provided me with some great feedback. To answer your question on the tax benefit calculation the reason I have done this is due to the following; This was entered in error. After going through my whole income statement workings again I had entered a divide instead of multiply which gave me my tax benefit figure of zero. I had also entered my Net Financial Expenses after Tax (NFE) formula wrong as I did not add NFE before financial CI to the Total other financial comprehensive income, which caused my final CI to be out. Due to the wrong formula this equalled my tax benefit total which had me totally stumped and that s why I used a divide instead of multiply, because I made it add up, without really knowing why. I know totally dodge! The moral of the story don t do something because it works. Nut it out until it all makes sense and adds up!! You have done a fantastic job Daniel. Only a few minor items to consider based on the way I view things. Well done 7

8 Feedback From: Shane Salazar Feedback To: Haitham Haddad of Changes in Equity Balance Sheet When checking on your restated changes in equity, I see that you have the 3 parts on it which is good! I also noticed that you have labelled each of the items correctly whether it s a financial or operating activities but I see that you only have operating activities on this part which is okay. You have encoded the proper formula especially when getting the closing balance and of course it matched the amount on what s in your financial statement. Good job! I see that you have labelled each of the items correctly that makes your NFO and NFO + equity equal. And because of the formulas you have provided, you got the answers correctly and matched on your financial statement. You are really doing a good job on this assignment so far. As we know that this is the hardest part for all of us but I think you did not even have a hard time trying to find out the answers with this part. Because as I go through your formulas it is all correct and I could not see any error on this part plus it just matched on what s written in your financial statement. Well done buddy! Commenta ry and discussion with others (Note: You may wish to give some comments feedback with other students I did not see the feedback you have provided with others. 8

9 Overall ASS#2 (Steps 3 & 4) Job well done! You will definitely have a high grade for this assignment because I just could not see anything wrong on this. It goes to show that you have applied what you have learned on the lectures and tutorials we have. Great job PEER FEEDBACK SHEET: ASS#1 Feedback From: Talitha Smith Feedback To: Daniel Haddad Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments s of Changes in Equity seems correct, your figures match the figures provided in the original financial statement. I like the way you have set your document out, it s clear to read and presentable. Balance sheet is well presented, easy to read. Figures all matched up, you have linked all information from the previous statement and have done the correct working out. is also well presented and easy to read. Again, all figures matched up and the sums had been worked out correctly. Well done! Your commentary on the s of movement in equity was fascinating to read, the bank purchasing shares to clear the debt was interesting. Your commentary on the s of Financial Position was also interesting and easy to read, you have researched a lot of the concepts and shared your thoughts on this subject, which is great. Your commentary on the s of Financial Performance, was also well done you have added in detail how you completed this sheet and is well said. Your commentary was in-depth and easy to read. This document is also well 9

10 presented and I believe you have done very well. Great job! Not provided other students I think you have done a wonderful job on this step of assessment 2, I honestly could not have thought of anything to change as you have done everything I did and more. It seems you re a natural at this and I wish you well with your studies. Feedback Provided PEER FEEDBACK SHEET: ASS#1 Feedback From: Daniel Haddad Feedback To: Talitha Smith Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity I can see that you have linked your statements and totalled appropriately. I noticed that on your restated statements that you had your Total comprehensive loss as but in your original statement you had (18,572) as Total comprehensive / (loss) for the year. These figures are inconsistent. If you have done this intentionally I suggest you explain your reasoning for this in the notes section for the assessors to see. The first thing I noticed when looking at your balance sheet is you don t have a subheading for financial assets. As per Martins direction and the advice provided in the lectures you have to split your cash and cash equivalents in to operating and financial assets. So you should have at least one financial asset being cash. You do this by calculating 1% of your total revenue and then allocating that amount of cash to your operating assets and the remainder to your financial assets. Have a look at my spreadsheet to know what I mean and look right down the bottom in the notes to see how I did the calculations. I can see you have done your calculations correctly and your equity figures match your original statement. - I can see that you have linked your tax reported, good work. I can also see that the tax benefit under operating and financial expenses is listed as opposites in regards to being positive and negative numbers. I can also see that your CI matches your original statement. Overall, good work on this one. Commentary - Cannot provide feedback as commentary not provided. 10

11 Other I can see that you have a decimal at the end of every figure followed by the number 0. I suggest you get rid of that decimal and 0 to make it a bit easier to look at and you can do that by going up the top and moving the decimal place one space to the right. Bold and underlines used appropriately and consistently were a positive. Using the same font throughout your statement would help in the presentation department as well as centring all the figures (some are to the right). other students Overall you have done a good job but need to fix a couple of things. Most importantly the cash allocation between financial and operating assets and on a less important note a few items that I mentioned may improve the presentation. Good work. PEER FEEDBACK SHEET: ASS#1 Feedback From: Daniel Haddad Feedback To: Shane Salazar Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity You have linked your figures to the original statement which is a good start. Your comprehensive income is the same as your original statement so good work. You have not totalled your ending balance which I think is one of the checks. Overall, this one is pretty good. Very well presented. I can see that you have calculated your cash and cash equivalents correctly and have allocated the cash correctly also. I think you have calculated your NFO + equity incorrectly. You have calculated it as both being negatives rather than the equity being a positive number. The new answer I got was by adding NFO + Equity. I think you have subtracted it instead. I suggest you review your calculations. Your tax has been linked which is good and I can see that your tax benefit has opposite values in their respective places, so good work; however, your CI does not match your original statement. You have significantly overstated it by $59.83m. I tried to find out where you went wrong but I couldn t find it. I know this is the most important check involved so I suggest you go over it and find where you made the error. 11

12 Commentary Cannot provide feedback as commentary not provided. Other You have used a minus sign instead or brackets in negative numbers. Possibly something to consider changing. other students Overall, after you review a couple of your calculations you will have done a really good job. PEER FEEDBACK SHEET: ASS#1 Feedback From: Daniel Haddad Feedback To: Peter Sleeman Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity First off I can see that some of your figures are linked and some are not. Consistency would help if you had to make changes. I can see you have totalled the ending balance which is good. I can see that you have calculated your cash correctly which is good to see. Sub headings are clear and concise. I agreed with all the other calculations you got in this statement. Overall, balance sheet was put together very good. I can see that you have linked your tax reported, good work. I can also see that the tax benefit under operating and financial expenses is listed as opposites in regards to being positive and negative numbers. Your CI matches your original statement, excellent work. Commentary Cannot provide feedback as commentary not provided. Other I suggest you move the decimal place one space to the right to be consistent with your $000 for the spreadsheet. 12

13 other students Overall you have done a great job. Best one I have provided feedback on so far. PEER FEEDBACK SHEET: ASS#1 Feedback From: Daniel Haddad Feedback To: Jacky Gould Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity I can see that you have linked your figures to the original statement which is a good start. Your ending balance has been totalled correctly and your sums matched your original statement. Overall, good work on this statement! Nice work on calculating and allocating your cash correctly. The use of colours in your subheadings made it easy to separate sums. NFO + equity were calculated correctly. So far, really good stuff. I don t understand why you think you have $0 tax benefit. I calculated your tax benefit to be $412,000. I calculated this by subtracting finance costs by finance income and x that figure by the corporate tax rate. If there is another reason you have 0 that I have missed I suggest you explain the situation in the notes section of your statements. I understand you must have a reason as your total CI figure matches up. Commentary Cannot provide feedback as commentary not provided. Other Use of bold, underlines and other subtle affects were used well in the presentation of the statements. 13

14 other students Overall you have done a great job. I just suggest you review your tax benefit calculations and if it still remains as 0 provide the reason in the notes section on the statement. PEER FEEDBACK SHEET: ASS#1 Feedback From: Daniel Haddad Feedback To: Kayla O Carrigan Changes in Equity Commentary and discussion with others (Note: You may wish to give some comments Changes in Equity You have linked figures back to your original statement which is really good to see. You have totalled your ending balance correctly. I think you have confused the items listed under financial comprehensive income with transactions with shareholders. For example, share based payments and other negative items listed there are definitely not financial income but transactions with shareholders. On a similar note, you have listed the cost of raising funds as operating liabilities. Raising funds would generally be considered a financial item or a transaction with shareholders. I suggest you review this statement in comparison with the example Martin gave us in chapter four. I can see that you have calculated and allocated your cash appropriately. Good work. Your calculations appear to be done correctly. Something that immediately stood out to me was that loss per share was listed under operating expenses. Shares are usually to do with financing so I probably would have considered that a finance expense. Are you sure that the exceptional write down of obsolete inventory should be considered an operating expense? The way I read it, it is an exception to inventory write down rather than an actual inventory write down. I could be wrong and if I am please let me know why. Your tax reported is linked which is good. Your tax benefit has opposite values where it needs to be so good work there as well. Your tax benefit has also been calculated correctly. Your CI doesn t match up with your original statement. I am not sure how you have calculated this and I suggest you review this sum as this is the final and probably one of the most important checks for the statement. Commentary Cannot provide feedback as commentary not provided. Other The way you have presented the statements was excellent. Good use of bold, underlines etc. You have used brackets in some areas to represent negative figures and in other areas you have used the minus symbol. Consistency would make it a little better. 14

15 other students Overall it was very well presented and most of the sums were calculated correctly other than the ones I mentioned. After you have reviewed these sums it should look really good. 15