Topic 8: Financial Statement Problems – Dates, whether they can be compared etc.

@ Fatema you should do everything possible to present your work clearly and in a manner that will engage the reader so using colour is a good way of doing this (you will submit online microsoft Word or similar softcopy documents so there is no problem with colour printing).

I always advise that students use as many graphs and charts as possible rather than trying to talk about differences – this is in line with marker feedback that constantly tells students NOT to describe movements in trends and increases / decreases (Topic 8). The graphs and charts should be inserted into your text at the appropriate point where you are explaining and comparing your company’s results and the comparator’s . Some tables may be used but they are never as effective as graphs and charts as movements and differences are not so easy to see from a table.

The financial period of the company I’ve been working for is from 1 Jan to 31 Dec. As required, we have to use the most updated financial statements for analysis and research. What I want to know is providing the interim results of the company will be on public on 27 Aug, 2014, how can I choose the three-year period? (say 2011, 2012, 2013 or 201206, 201306, 201406?)

@will1982 If submitting in P29 then your reference period is the 3 years to Dec 2013 ( Jan 2011 to Dec 2013). You should choose the most appropriate relevant period for your comparator company (see the discussions above on this). You may refer to the unaudited quarterly accounts for your main company but this is not necessary and I suggest you only do so if something particularly significant has happened since the year end.

@shangrila26 There should not be a problem using the Mar 2014 for main company and Dec 2013 for the comparator as long as you state this in the Limitations (which you intended to do anyway). I would probably also include a note with the first graph (I trust you have read my posts and appreciate the importance of graphs and charts! 🙂 ) – maybe use the designations ‘Year 1, Year 2 etc and explain that Year I refers to year end Dec 2011 for the comparator and Mar 2012 for the main company and Year 2 is … and so on and that this convention will be used through out your analysis section – then everything should be clear. 🙂

@awais21 Well as your main company’s financial statements are not available before the 90 period up to 1 November then you are not expected to use them. So you would have to go with June 2013. Regarding your comparator then I suggest that you choose the nearest reporting date to this so that the time difference between them is minimised. I would suggest mentioning this as a limitation in Part 2 as markers are quite strict in applying the 90 day rule and so you need to remind them that with the best will in the world you could not comply and produce an analysis that included 2014 🙂

You could however perhaps mention anything significant (if applicable) that has happened since year end 2013 (that you have discovered in the quarterly accounts or from business articles) e.g. if there has been a major interruption in production / closure of a plant / material government contract but re-iterate and say that as the financial information for 2014 was only made available DATE (it will no doubt be available by the time you submit so use the auditors’ report date) you were not apply to analyse the full impact on the company performance.

@silunjilicrayno This depends whether they are operating in a similar market and have similar customers and are subjected to similar operating conditions. The whole idea of a comparator is to put your company into a relevant and appropriate context. Personally I think you should attempt to find two companies that are better matched if you are doing T8 as you are expected to make meaningful and reasoned comparisons between the two companies’ performances not just state that one’s GP is greaterr than the other or that it’s liquidity is better -you have to state WHY this is so. (Such explanations need to look beyond just the annual reports and bring in SWOT & PESTLE factors)

If you cannot do appropriate analysis like this then you will be failed on Evaluation. Markers tend to take the view that as a student has a complete choice of companies it is the student’s responsibility to choose two well matched companies. The Evaluation and! analysis is critical for a pass – so don’t make life harder for yourself

Your question should have been posted to the more relevant Forum we have called ‘Comparator company’ and will be moved together with is answer in 48 hrs.

@jancoolleeteng – Thank you for this post, I have found it most interesting. In my opinion if you used the latest Financial Statements available for both companies at the time you submitted, then you should not be failed on these grounds alone. 🙁

I suggest that you contact OBU with your query above and ask for further information on what they expect for this ‘pro-rating’. If you do it NOW you should get a reasonably prompt reply. If this was the only cause of failure point it out too.

It says nothing in the Info Pack about apportionment and adjusting the financial statements for a comparator and so I think to be failed solely on this would be grounds for an appeal. It is fine for it to be recommended but in my opinion it is not mandatory. Please seek further clarification from OBU (the contact details are in the Info Pack) and tell us all how you got on

@wajiman this should be fine.

I want to see the reply from OBU to jancoolleeteng as I think the marker was wrong. I have known students to be failed for out of date statements (and I think it is one of the most frequent grounds for an appeal as it is not academic judgment here, the date of publication is an issue of fact)! Page 39 of the Information Pack sets out the ground rules for which statements to use. I can understand OBU for querying any statements that have a date that is more than 6 months different between the 2 companies as normally 6 months is the maximum gap there can be.

@wajiman – Thank you for this 🙂 I have read through the attached files – the most significant of which is the second one. They are not actually saying that you MUST do pro-rating it actually says:

“If students choose companies and comparators that do not have similar financial year ends, that is no problem and students will not be penalised for such a decision. However the process of comparing unlike time periods has to be addressed correctly.

Pro-rating is one technique for making accounting periods comparable. Students will need to consider the limitations of such techniques, of course, especially if the company’s activity is seasonal. For example: Were the additional months during a period of relatively high or low annual activity?”

What this means is that you must address the difference in your limitations section and also in your analysis. Somewhere on one of my posts I mentioned that it was important if using retail companies that the accounts should cover the same Christmas and New Year periods as that is the busiest period in terms of turnover.

With an airline again it may be relevant here. Probably not much of a problem if one has a year end in Sept and the other Dec for European airlines as they will both have covered the main holiday season from June through to September. However if one was July and the other Dec this again would have to be accounted for as in this case the first airline would only be including part of the most recent summer turnover in their results whereas the the second company would have included the whole season. (Not much of a problem either if one is Dec and the other March as again they would have both included the same Christmas period).

It is a case of thinking about whether the companies you use are affected by this or any other significant factors. Companies such as mobile phone operators would probably not be much affected by seasonal sales (normally there are no seasonal factors that make people change their tariff). However if you think rationally about these companies there could be other factors that would impact e.g. the latest iphone could see a jump in their revenue – but this will impact on their current year figures mainly so would not come into play until the year end 2014 FSs are released (so this will be a factor for anyone possibly submitting a RAP for a mobile operator in P30).

So do not panic everyone – just calmly consider whether there are these sorts of reasons that can account for some of the differences in the performances of the two companies and ensure that you cover this both in the limitations sections in Part 2 and when discussing performance in Part 3

However I would still be interested in hearing the response to any enquiry made by @jancoolleeteng to OBU because in view of the statement “If students choose companies and comparators that do not have similar financial year ends, that is no problem and students will not be penalised for such a decision” if @jancoolleeteng had adequately discussed the limitations then I still think any failure if it was for this alone, was wrong.

@pinkmonkey – I think you should use 2014 statements and base your RAP on those but mention this new fact (and reference it) in your analysis and say that this profit warning will impact on the next financial year statements. You may be able to access the actual share prices for example round when the time the announcement was made and see whether it affected the share price (did the price fall significantly when this was made?). Including little snippets like this (this one would go in the section where you look at Investor ratios) show that you are doing as full an analysis as possible and again you may bring up the profit warnings in your conclusion.

@redoy300. You need to choose the statements that are closest together so these will probably be March 2014 for main co and Dec 2013 for competitor. Do not fiddle dates – the marker if they discover would roast you – just mention the difference in your limitations section and at the start of your ratio and financial analysis section explain that there is a 3 month difference between the companies throughout because of their year ends.

If you use 2013 for both you would probably be failed as you MUST use the latest Financial statements. Markers are hot on this and usually automatically fail if you don’t. (Don’t know who your mentor is but hope you haven’t paid over the odds for their dud advice )

@redoy300

[ First can I ask that everyone uses the search facility or look at a few of our more recent pages before they open a new topic? I try to keep our Forums organised (please see HELP KEEP OUR FORUMS TIDY!!!) otherwise former really good advice (such as we already have on this particular topic) gets lost and then the same question gets asked again and again. (Also I have to confess it is one of my pet hates seeing an unnecessary ‘new’ topic has been opened simply because no one bothered to look!!! ) This being the case I want to have everything under ‘Different Financial Years – are they comparable?’ as we have already had a good long discussion there on the problems of different years.]

However back to your query: the way I would do this myself is by having a footnote. MS Word will allow you to insert one at the end of the graph title (if you do the title outside and above the graph) and in the footnote itself I would use bold type to point out that 2014 represented year end Mar 2014 for company A but Dec 2013 for company B but these are the closest latest accounts as in essence there is only a 3 month gap. This way you have (a) covered yourself (b) made life easier for yourself and (c) complied with the OBU requirements.

I suggest you now consult the Forum topic mentioned above (on page 2) and post any further queries on this topic there. (As moderator I am closing and will be merging the this topic you have opened with it in a couple of days) 🙂