Financial Statement and Financial Analysis

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Financial Statement and Financial Analysis A 3 Day Course This in-house course can also be presented face to face in-house for your company or via live in-house webinar The Banking and Corporate Finance Training Specialist

Course Content Introduction The mixed-valuation model and its problems: Evolution from a backward-looking exercise in stewardship towards a support tool for forward-looking economic decision making; Why this makes life inherently and unavoidably difficult for analysts and investors Some core qualities of financial statements, with easily understood illustrations from real life: Course Overview Relevance and materiality (example: why inventory valuation is more critical in low margin businesses) Comparability (example: closely comparable competitors in an apparently homogeneous industry, but with different histories of organic growth versus external acquisition, leading to different bases of accounting for intangibles) Understandability (example: pharmaceuticals, hi-tech generally) Reliable measurement (example: intangible assets in knowledge-based support industries) Fair value, time value of money, and discounted present values Management discretion: the exercise of judgement, and the use of estimation techniques Introducing the three principal financial statements: their objectives, rationale and limitations The five elements of financial statements: assets, liabilities, equity, income and expense Accounting as a record of flows and stocks, of resources (assets) and obligations (liabilities) Focus on earnings-based metrics: unpacking EBITDA Revision of basic calculation, and any technical problems arising Questions about Earnings : The Big Question: how comparable are operating earnings (i) over time and (ii) vis-a-vis the competition? Specifically: Are the company s accounting policies for revenue and expense recognition appropriately selected, clearly described, and consistently applied? (example: Vodafone s use of proportionate consolidation for JVs) How significant are figures for capitalised expense, relative to operating profit? Does the company also use a non-gaap earnings measure, and if so what is its stated (and real) purpose? What are its merits and demerits? (many examples, but interesting to compare the non-gaap measures within an industry, e.g. likefor-like in food retailing) Are stated earnings normal - or have they been normalised by the exercise of management discretion? What about income/expense booked through OCI? Are exceptional income and expense separately identified, and are they really exceptional? (example: in the years 2007-2011, Misys plc reported exceptional income or expense every year, with an average absolute value of 40% of earnings before exceptionals) Do earnings include non-operating items such as gains/losses on non-current assets or on discontinued operations? Are there financing elements in some operating items, such as in the payment terms of trade suppliers? (example: supermarkets turning over inventory in 15 days, paying suppliers on 45 days, using the permanent float to finance a whole year s capex) Does a relatively smooth development at consolidated level mask significant (if mutually compensating) swings between operating segments?

Questions about Interest : If this is the net figure, what are the gross figures for income and expense, and are there one-off factors in either of them, e.g. interest received on temporary reinvestment of disposal proceeds? (Example: Boots 2006) What do the figures contain, other than interest on conventional debt and financial investments, e.g. in relation to unwinding of discounts on provisions, pension plans? Questions about Taxes : Does the overall tax charge, or the current/deferred split, vary significantly from year to year, and if so why? (example: Deutsche Telekom) Questions about Depreciation and Amortisation : Does the total include impairment charges (or reversals) or other indications of possible impending problems for future years EBITDA? What does EBITDA not tell us about cash generation? Working capital management Capex requirements for maintenance and expansion Focus on balance sheet metrics ( Return on... ) Key principles revisited: Valuation basis: historic cost or Fair Value Reliable measurement Specific problem areas, creating very different balance sheets for economically identical businesses: Organic growth versus external acquisition. Does it make sense to omit assets altogether just because their value cannot be reliably measured? (example: internally developed intangibles such as footballers brought up through the academy) Differences in accounting for development expenditure (example: Misys, Temenos, Amadeus) Differences in accounting for historic mergers (example: substantial difference between Diageo s IFRS and US GAAP balance sheets, arising from different accounting bases for GrandMet/Guinness merger but with no corresponding differences in the other two financial statements) What is the basis for Fair Value? Market value or value in use? And how is it measured? Leased assets: how the use of sale and leaseback change the operating ratios, even though they are a financing rather than an operating activity (example: differing levels of leasehold versus freehold estate among UK supermarket groups) Financial assets: introduction to main problem areas Different policies for depreciation, amortisation and impairment Accounting for liabilities: Current and non-current Provisions and contingent liabilities: problems of classification and measurement Financial liabilities Bringing it all together in Financial Analysis How to use the other sections of the annual report: chairman s and CEO s letters: business and financial reviews

Uses and abuses of financial ratio analysis: The key drivers of profitability The key drivers of cash generation Trends in profitability Management of working capital, liquidity and solvency The identification and management of financial and other risks and uncertainties The importance of knowing what to expect and knowing the industry Course Summary The overall objective of the course is to help participants to develop the technical skills and the judgment to use accounting information appropriately according to the context and the purpose of their analysis. The course takes its cue from the clear statement in the IASB s 2010 revised conceptual framework document: General purpose financial reports are not designed to show the value of a reporting entity; but they provide information to help existing and potential investors, lenders and other creditors to estimate the value of the reporting entity. The course begins with a selective examination of those fundamental accounting principles which, individually or in combination with each other, are responsible for the bulk of the problems of financial analysis. Following this introduction, the course discards the logical order of a conventional accounting course in favour of a practice-driven approach, in which the components of commonly used valuation metrics and performance measures (EBITDA, RoE, RoCE, RoNA, asset turnover, working capital and cash flow ratios etc.) are used as pegs on which to hang a more searching examination of the problems and uncertainties lurking behind the accounting figures. The course is based primarily on IFRS as in force at the time that the course is delivered, but reference to significant national GAAP is made as and when this sheds useful light on the topic under discussion. Redcliffe has provided in-house training for the following companies:

Tailored Learning All of our training courses can be tailored to suit your company s exact training needs. We will work closely with you to help develop a training programme with content that is unique for your organisation. Please email us on enquiries@redcliffetraining.co.uk for more information E-Learning This course can also be presented as a bespoke e-learning programme created by you to fit your exact requirements.