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Understanding Financial Statements - Intermediate

Develop the technical skills and judgement to use accounting information according to the context and purpose of your analysis

Professional Conduct in Relation to Tax (PCRT) Training Course

A one-day course

  • The course tutor has over 30 years of experience as a professional tutor explaining financial statements to non-accountants working in many different environments. He also still provides technical updates to practising accountants and auditors to ensure that they are completely, technically up-to-date.
  • The course is highly practical and all the more challenging aspects will be introduced and explained
  • The course will include many current case studies and examples and will be highly interactive.
  • The course tutor will happily take questions on all aspects of the programme and will provide guidance with is unbiased and independent

The overall objective of the course is to help participants to develop the technical skills and the judgement 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.

Introduction

  • The mixed-valuation model and its problems:
    • Evolution from a backwards-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:
    • 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? (examples: Vodafone’s mobile phone pricing contracts, Upfront payments and agent v principal issues)
    • How significant are figures for the 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. like-for-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? (examples: Oil & Gas and environmental damage costs, financial sector and PPI settlements, COVID related costs)
    • 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?
    • What do the figures contain, other than interest on the conventional debt and financial investments, e.g. in relation to the 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? What is the effective tax rate and are there any uncertain tax positions (example: Mulberry PLC)
  • 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
    • Differences in accounting for historic mergers (example: the substantial difference between GSK’s IFRS and US GAAP balance sheets, and earnings following the merger)
    • What is the basis for Fair Value? Market value or value in use? And how is it measured?
    • Leased assets: how were they and how are they now reported on the balance sheet following the introduction of the new IFRS (example: Mulberry PLC from 2019 to 2020)
    • 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

The trainer qualified as a Chartered Accountant in 1987 with a six-partner firm, Gilberts, following completion of an accountancy foundation course. In the same year he joined Binder Hamlyn to work in their Business Development Group.

In 1990 he joined a major training company to work as a trainer on their accountancy exam courses. During the next four years he taught auditing, financial reporting and taxation for ACA, ACCA, CIMA and AAT exams, he also taught the ACA multi-disciplinary case study. He mainly taught on full-time courses organised for Deloitte, PWC and EY; he was also personally responsible for the ACA final level auditing paper.

In 1993 he became a director of post-examination CPD training for accountants. He was also responsible for financial training programmes for non-accountants especially solicitors. Around this time, he also started training in International Accounting Standards initially for Ernst & Young’s non-UK based professional staff in Europe.

Since 1998 he has been training on a freelance basis, concentrating on financial training for both accountants and non-accountants. The trainer also specialises in training on IFRS and US accounting standards and has presented on both subjects throughout Europe for the past 20 years. He has considerable experience in presenting training on the following topics:

  • Accounting for financial instruments and insurance contracts
  • IFRS reporting issues for energy and pharmaceutical businesses
  • Completion accounts and the role of financial standards in corporate finance transactions
  • Accounting for business combinations – mergers, acquisitions and all joint and special purpose arrangements.

The course begins with an overview of the fundamental accounting principles which, individually or in combination with each other, account for most problems of financial analysis. The course then discards the ‘logical’ order of a conventional accounting course in favour of a practice-driven approach, in which the 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.

Have this course presented In-House

  • On a date, time and in a location of your choice
  • Topics expanded or deleted to your bespoke requirements
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Have this course pre-recorded

  • Full course recording edited exclusively for your company
  • Files converted to enable housing on your LMS
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