New Zealand Scholarship Accounting Workshop

Transcription

1 New Zealand Scholarship Accounting Workshop 13 October 2016 Facilitator: Dr Julia Wu 1

2 Welcome! Introduction Topic one: New Zealand Framework (2010) Topic two: Topic three: Topic four: Topic five: Transactions, events and adjustments Preparation of Financial Statements Integrated Reporting, the natural capital of Sanford Limited Analysis and Interpretation of Financial Statements 2

3 Introduction The exam, some details Date: Wednesday 30 November Time: 9:30am There will be five (5) questions. Coverage: a combination of a statement of comprehensive income and/or statement of financial position and/or a statement of changes of equity, and accompanying notes for a company, prepared for external reporting purposes natural capital within Sanford Limited Annual Report 2015 the New Zealand Equivalent to the IASB Framework for Financial Reporting 2010 (NZ Framework) the analysis and interpretation of financial information (Note: Formulae will not be provided). 3

4 Introduction The context Accounting (bookkeeping, accounting cycle) Financial Accounting Generally Accepted Accounting Principles (GAAP) Financial Reporting (reporting entities, FRA) Accounting standards and financial reporting standards Financial Statements Statement of financial position Statement of profit or loss and other comprehensive income Statement of changes in equity Statement of cash flows Notes to the financial statements New Developments/current issues 4

5 Topic 1 The New Zealand Framework (2010) 5

6 Basic Assumptions Accrual basis Going Concern Accounting Entity Periodicity Measurement - Monetary unit - Cost-based - Value-based - Present value Constraints 1. Cost and benefit 2. trade-off Qualitative characteristics: Relevance Faithful representation Verifiability Timeliness Understandability Comparability Elements: Assets Liabilities Equity Income Expenses The Building Blocks of a Conceptual Framework Objective: to provide information about the financial position and financial performance of the reporting entity that is useful to present and potential equity investors, lenders and other creditors in the capacity as capital providers.

7 Definition of elements (1) fill in the blanks The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows: a) An asset is a resource by the entity as a result of and from which are expected to flow to the entity. b) A liability is a of the entity arising from past events, the of which is expected to result in an outflow from the entity of resources embodying. c) Equity is the in the assets of the entity after deducting all its liabilities. 7

8 Recognition Criteria for the Elements (Fill in the blanks) In order to recognise an item in the financial statements it must be that any associated with the item will flow to or from the enterprise AND the item has a that can be 8

9 Definition of elements (2) The elements of income and expenses are defined as follows: Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. 9

10 Application Explaining the nature of accounts See question one of 2012 scholarship exam. 10

11 Accounting for liabilities NZ IAS 37 Examples Based on past events/transactions? Established legal obligation? Payable Accrual Provision Contingent Liability Trades payables Accrued salaries and wages Provision for warranty Yes Yes Yes No Yes Yes Yes (contractual) Settlement probable? Yes Yes Yes No Measured reliably? Accounting Yes invoice based Recognised as liability Yes based on agreement Recognised as liability Yes estimated through past experience. Recognised as liability, usually accompanied by notes Pending lawsuit (high uncertainty) No No Only disclose if material 11

12 Application Evaluate the accounting treatment See question three of 2014 scholarship exam. 12

13 Summary/Reflection Read the question carefully and answer what is required. Your conclusion is important! Citing the definitions and recognition criteria is not sufficient. Give relevant examples. Consider the implications of double entry system. Common areas of discussion: Liabilities: accruals, provisions and contingent liabilities Assets: intangible assets (including research and development cost) capital and revenue expenditures Equity: revaluation surplus (or reserve) Expense: depreciation, amortisation Income: revenue recognition/timing issue: goods in transit, percentage of completion Other issues: prepayment (payments and receipts) and subsequent adjustments 13

14 Topic 2 Transactions, events and adjustments 14

15 Accounting equation Basic Accounting Equation Asset = Liabilities + Equity Expanded Accounting Equation Assets + Expenses + Distributions = Liabilities + Capital + Retained Earnings + Income Debit (Dr) Credit (Cr) Debit (Dr) Credit (Cr) 15

16 Journalising Transactions Daily operations Based on source documents Examples: sales, purchases, payments, receipts Events Incidental Evidence based Examples: impairment of assets, acquisition and disposal of assets Adjustments For the purpose of financial reporting Reliance on professional judgement Examples: depreciation, accruals, provisions Other: closing entries, reversing entries, consolidation Group activity 1 16

17 Topic 3 Preparation of Financial Statements 17

18 Statement of comprehensive income Income Expenses Profit/loss Statement of Changes in Equity Opening balance Changes in equity Additional investment? Profit/loss [Distributions] Closing balance Statement of Financial Position Assets Current cash Non-current Liabilities Current Non-current Equity Statement of Cash Flows 18

19 Classify expenses by nature Statement of comprehensive income Revenue Other income Less expenses Cost of sales Depreciation Amortisation Employee expenses Other expenses Profit before tax $ xxx,xxx xxx,xxx xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx xx,xxx Income tax Xx,xxx Profit after tax Xx,xxx Comprehensive income Xx,xxx Total comprehensive income Xx,xxx Classify expenses by function Statement of comprehensive income Revenue Less: cost of goods sold Gross profit Less: operating expenses Sales and distribution Administrative expenses Finance expenses Other income/expense Profit before tax Income tax Profit after tax Comprehensive income Total comprehensive income $xx,xxx x,xxx xx,xxx xx,xxx xxx,xxx x,xxx xx,xxx Xx,xxx Xx,xxx Xx,xxx Xx,xxx 19

20 Notes to the financial statements Components: I. Statement of Accounting Policies Reporting entities Articulation of how relevant legislation and accounting standards are applied in the financial statements II. Notes to the financial statement Referring to particular accounts or balances Breakdowns Reconciliations Qualitative disclosure Methodologies of measurements Other information that will assist users understanding of financial statements at entirety or any particular account(s)/balance(s) 20

21 Notes to the financial statements How to prepare? Follow the instructions Based on the available information Consider the users perspective Reference numbers Concise and consistent layout Professional representation for qualitative information 21

22 Topic 4 Integrated Reporting, the natural capital of Sanford Limited 22

23 Background Integrated Reporting 23 A new form of corporate reporting aimed primarily at providers of capital It tells an organisation s value creation story It is much more than bringing together financial and sustainability reporting It does not replace either financial or sustainability reporting both need to be in place for integrated reporting

24 A paradigm shift? Distinguishing characteristics Longer-term strategic planning Focus on the six capitals Value creation integrated thinking, integrated reporting, integrated report 24

25 Some examples EXAMPLES? Capital? Capital? Capital? Capital Private Ownership - Factories - Buildings - Securities - Cash - Health & safety - Training - Job Skills - Reputation - Value chain - Gardens - Plantations - Forests Community Ownership * - Community Centres - Community Schools - Traditional knowledge - Communal education - Community Norms and Customs - Culture - Community reserves - Greenbelts Public Ownership * - Infrastructure - Public facilities - Public databases - Non-patent knowledge - Law & Order - Taxation - Social Equity & Inclusion - High Seas fisheries - National Parks/ Forests 25

26 Natural Capital in Sanford Limited (1) (Group Activity 2) 1. Explain the concept of Natural Capital. 2. Explain why reporting on (accounting for) Natural Capital is important. 3. Explain what is regarded as Natural Capital by Sanford Limited in the company s 2015 annual report. 4. Explain how Sanford Limited addresses the importance of Natural Capital in the company s 2015 annual report. 26

27 Natural Capital in Sanford Limited (2) Critically evaluate the reporting practice of Sanford Limited with regard to Natural Capital in the company s 2015 annual report. Your conclusions (overall evaluation) Your arguments (for, against or both) Considerations (not exclusive) Are the discussions/disclosures on natural capital aligned with the concept specified in integrated reporting model? Is the information sufficient for readers to understand the nature and importance of natural capital in the context of the company? Is the information sufficient for readers to understand how natural capital is related to the company s value creation process? i.e. reflecting the integrated thinking? Is the information presented in an integrated way across the integrated reporting model? 27

28 Topic 5 Analysis and Interpretation of Financial Statements 28

29 Financial Ratios - overview a simple approach for establishing relationships among items in the financial statements enables meaningful comparisons horizontal analysis vertical analysis trend analysis a starting point for further analysis depending on the user s information needs 29

30 Financial ratio classifications Operating success Utilisation of resource Profitability Efficiency Investment ratios (share performance) Liquidity Gearing Short term solvency & survivability Outlook of long term financial health 30

31 Analysis and Interpretation User s perspective (1) User / Angle Current and/or potential investors Expected decisionmaking Buy, sell, or hold shares Priority / Focus Profitability, share market performance, dividends 31

32 Analysis and Interpretation User s perspective (2) Year Scholarship exam question (extract) 2015 Critically evaluate the measures taken by management to stabilise Pumpkin Patch Limited s share price Critically evaluate Mighty River Power Limited s share price performance since the share float Your grandparent knows you are studying Scholarship Accounting, and has asked you to explain why a company reporting losses since 2008 could show a steadily increasing share price. (XERO Limited) 2012 Using the above information, as well as Resources One Eight in the resource booklet, critically evaluate Pumpkin Patch Limited as an equity investment. Your answer should include but not be limited to an evaluation of Pumpkin Patch Limited s operating, investing and financing activities, as well as relating to management strategies and operations Using the information in the table on page 10, and in Resources One to Four in Resource Booklet 93203R, evaluate Pumpkin Patch Limited as an equity investment Using the information in the above table and in the accompanying Resource Booklet, explain to your classmate why shareholders appear to have lost confidence in Allied Farmers Limited as an equity investment. 32

33 Analysis and Interpretation What is required? Year Scholarship exam question (extract) 2015 Critically evaluate the measures taken by management to stabilise Pumpkin Patch Limited s share price Critically evaluate Mighty River Power Limited s share price performance since the share float Your grandparent knows you are studying Scholarship Accounting, and has asked you to explain why a company reporting losses since 2008 could show a steadily increasing share price. (XERO Limited) 2012 Using the above information, as well as Resources One Eight in the resource booklet, critically evaluate Pumpkin Patch Limited as an equity investment. Your answer should include but not be limited to an evaluation of Pumpkin Patch Limited s operating, investing and financing activities, as well as relating to management strategies and operations Using the information in the table on page 10, and in Resources One to Four in Resource Booklet 93203R, evaluate Pumpkin Patch Limited as an equity investment Using the information in the above table and in the accompanying Resource Booklet, explain to your classmate why shareholders appear to have lost confidence in Allied Farmers Limited as an equity investment. 33

34 Analysis and Interpretation Structure your answer Critically evaluate Explain why Address both financial and non-financial information Create a mind map 34

35 Establishing the context for ratio analysis (1) The importance of non-financial information Economic environment Industry Entity specific conditions Financial information and ratios 35

36 Establishing the context for ratio analysis (2) Economic environment Economic environment Industry Entity specific conditions Political Economical Social Technological Financial information and ratios 36

37 Establishing the context for ratio analysis (3) Industry Economic environment Industry Entity specific conditions Competition Porter(1980) five forces analysis Threat of new entrants Threat of substitutes Bargaining power of buyers Bargaining power of suppliers Industry rivalry Financial information and ratios 37

38 Establishing the context for ratio analysis (4) Entity Specific Conditions (non-financial) Economic environment SWOT Analysis Internal Industry Entity specific conditions Financial information and ratios External 38

39 Establishing the context for ratio analysis (5) Entity Specific Conditions (internal) Economic environment Industry Entity specific conditions Financial information and ratios History Ownership structure Governance Public Relations and reputation Strategy Value creation (philosophy and approach) 39

40 Sources of information Government statistics Trade journals Financial press Financial analysts forum and databases Specialist agencies (industrial association) News articles Financial Statements, including cash flows, notes, accounting policies Integrated report Chairman s statement and directors report 40