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

@trephena
First of all, thank you for your response.

Is not sale of a subsidiary but a sale of a segment of the subsidiary.
The sale was made in order for the organization to focus on its remaining activities.
My company’s year end is 31 March.

1)Correct me if I am wrong, but the analysis i have to do is 31/3/2013-31/3/2014 and 31/3/2014-31/3/2015 and also analyse the overall trend from 31/3/2013 to 31/3/2015.

2) Year ended 31/3/2013 has not been adjusted and is impossible for me to restate it.
So I will not be comparing like for like when making the comparison with 31/3/2014 and the same applies when analyzing the movement up to 31/3/2015.
i.e Lets say for example that revenue is:
2013 =2m
2014 =3m
restated-2014 =1.9m
2015= 2.2m

Should i use restated-2014 and say that there was a decrease in revenues due to the sale of some operations but the real movement was an increase in revenue….?

@savvas

1. Your 3 year study is from 1/4/12 – 31/3/15

2. As I have already tried to emphasise is NOT the figures themselves that are critical but the factors that lie behind them – so please re-read my answer above and try to see the problem in this light

So the company sold a segment because it did not fit their core business portfolio. Move on – has this sale proved to be strategically sensible? What have the directors themselves said about the sale? Are they ‘consolidating the business’? Have profits increased much subsequently or has there been little impact? Have the funds received been reinvested in the business (further expansion in the core activities, modernisation of plant etc?) or used to inflate dividend payouts to shareholders? (Bear in mind it might take a few years for investment to really impact so you may need to do further research -analyst / business reports).

If you can, use broken lines in your graphs for 2012/13 figures to indicate the figures have not been restated, if you can’t do that then put an asterisk after the year on the x axis and write “unrestated figures” underneath.

My main concern is that you are making the common mistake of students of focusing on figures for the sake of it so please read my article on Evaluation on our homepage http://www.opentuition.com/obu so that you do not fall into that trap. And remember the words of the marker above where they directed the failed student to the importance and effect of management decisions on performance. (So stop worrying about this issue 🙂 )

In a word @linda you can’t do this company for T8. There is no way that you can make any suitable and meaningful comparisons with another company so your evaluation would be pointless.

That means that you either choose a different company if you want to do T8 or you keep the company and change the topic. You might be able to use the scenario you describe for T14 ‘An appraisal of the business and financial objectives of a strategic investment decision made by an organisation and its impact on key stakeholders’. Selling off a core business to focus on another activity would fall within this as no doubt there has been a significant amount of investment in new plant and equipment (or re-investment of the proceeds from the sale). Possibly though (unless this has been immediately successful in the first year) you might really need at least 2 years of accounts post sell-off to be able to assess the full impact of this radical management decision. Were all the proceeds of the sale re-invested in this new business or some distributed to shareholders? Did the directors have to raise more capital/ secure more finance? What was the reaction of shareholders then and since? Can you assess yet whether this was a good or disastrous decision by the management.

It might otherwise be possible to do T7 which is about restructuring. It depends on the circumstances of whether manufacturing locations were changed, staff laid off and whether new marketing strategies and approaches were needed to sell the new product(s) as its customer target market has also changed.

With these topics you have to assess the impact of the changed position of the company and its stakeholders rather than just describe what happened.

@liinda – sorry liinda – having re-read your original problem as the latest accounts would be up to Dec 2014 I realise that you could use this company for P31 as the figures would be still relate to the original business 😀

Check though when they normally release their annual report – if you are lucky and this normally is after Feb each year which would mean that if you failed and had to resubmit in P32 the latest accounts would still be Dec 2014. Your problem would be that from P33 (potentially your 3rd attempt – worst case scenario) you would be into year end Dec 2015 and that would start to throw everything out and make your comparisons meaningless.

Apologies about the confusion.

It’s fine, don’t worry Trephena 🙂

I have re-read their FS about the specific time of selling off decision of original company. It said that “in 1 Dec 2014, the company’s shareholders approved a plan to transfer 80% equity interests.” Otherwise, the online articles say the selling proceeds is completed on July.2015
I’m confused with these timeline, so I think I may go on with a new company 🙁

Hello all,

My question is about ratios. If the company has provided the ratios in thier website, can we use it or we should recalculate them?

Hello I hv a problem the main company am using its financial year end is may 2015 but the comparator company end Dec 2015. so do I use 2012 -2014 since the annual reports is available. How ever I just discovered that the main company as just published its audited statement for 2015 which is the latest. But the comparator as not issued its annual account for the year

Thanks ma u are good

@kellann

1. Yes but you only need to analyse 3 years and produce graphs for those 3 years. However it would be useful to look at the management reports for the earlier year to pick up any strategies that may influence the subsequent periods.

2. You could show the revenue trends either on separate graphs side by side or by having one graph with € on the left (y axis) and £ on the right one as it is the slope of the line that is more important since the steeper the curve the greater the year on year increase. I don’t understand why debt to equity is a problem as this should be a ratio maybe I am missing something.

With bar charts explain up front that there is a 6 month difference but with line graphs I think you should be able to plot Ryanair as Mar 20xx and EJ as Sep 20xx and although the lines will be slightly offset as I have mentioned it is slope that is usually more significant

@kellann – As few tips for your specific Topic Kelly Anna and above all – DO NOT TAKE A TEXTBOOK APPROACH:

1. Try to do some ratios specific to airlines – the Quck Ratio is a total irrelevance but passenger load factors, revenue per passenger mile (kilometre) are the sort of KPIs used in the REAL world by airlines

2. Think about the actual business environment airlines operate in – their business models are in fact very complex (take a look at one of my posts on this in connection with T15 by searching using the key words Topic 15 airline). So debtor and supplier days etc take on a different dimension (in other words don’t try to explain them in the same way as you would a smaller less complicated business – rather tell the marker you are aware of the limitations in interpreting them because of the complexity of their operating environment (this is not a cop-out but shows your appreciation of the nature of their business).

3. Show in principle in your business analysis that you understand the importance of concepts such as currency hedging and fuel price hedging on the industry. Also why a major decision is whether to lease or buy new aircraft (or purchase older less fuel efficient planes secondhand). These decisions will impact significantly on operating costs and profit so may account for major apparent differences in performance.

What I am saying is, don’t miss the big picture by focusing on the routine at the expense of the commercial reality. Some students make the big mistake of thinking that T8 is about ratio analysis. No it isn’t! The brief for T8 is a BUSINESS and Financial Analysis and the role ratios play in this is (or should be) only about 20%.

A routine approach overall at best will get you a C but what they the markers really want is a sensible business analysis and a financial analysis (of which ratios is just a part) that links back to the business analysis. Students need to tell them what they can’t see or read for themselves if they look at the graphs or look at the notes to the accounts (markers aren’t blind or illiterate!!)

And finally ensure your graphs are clearly labelled – ensure units are correctly shown both in terms of m (millions) or 000’s and currency and colours for each company shown in a legend/ key. This is a semi professional report and the reader should be able to read it and KNOW what it means and not have to assume that revenue expressed as 25,000 something is meant to be USD 25,000 m !!!

Good luck!

Trephena

Hello ma I hv a question to ask the main company YE is 30 may 2014.
Now how do I make comparing should it be 2012 vs 2013 and 2013 vs 2014.
Because I hv 2012-2014 annual report do also need 2011 annua. report and I h v written almost written 4400 words thanks

Hello this my second time sending my questions pls help explain how I should pro rate the date between the main company and comparator.
Main company date is. 1 June – may 30
Comparator is 1jan – Dec 31
Do I porate it porate or use it like that that and if am not could u pls explain in detail thanks alot

@stevr

I am not sure why you feel you need to do this (read my further comments below). I am reproducing the discussion about the timing problem on this forum from a year or so back for your and other students’ benefit.

First though in direct answer to what you have asked: You could as you say, take 7 months + 5 months of the income statement but for assets and liabilities you would need to use the latest quarterly balance sheet which more than likely will be unaudited. So you would need to explain the limitations of your approach in Part 2 and again in Part 3 in any places relevant to your analysis.

This was a comment from OBU on the problem you are focusing on:

“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?” End of quote

So 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 just a bit of extra activity in handset sales leading up to Christmas perhaps). However if you think rationally about these companies there could be other factors that would impact e.g. the latest iphone could see a huge 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. (End of earlier discussion)

If you have been following my posts @stevr and reading my articles you may have noticed that I stress that to pass the RAP for T8 a student needs to focus on the business context and use this to guide their evaluation. I have also made the comment that most students who undertake T8 are under the misapprehensIon that this topic is about ratio analysis which it most certainly is not (which is why it only has an average pass rate and few students in recent periods ever got an A and why I would put a weighting of about 10 to 20% [max] on the actual ratios to the rest of the business and financial analysis). If however students looked at company strategies and the inter-relationships in the ratios (e.g. increased gearing may be part of a capital expansion strategy to actually bring future greater returns to shareholders) rather than just trotting out graphs, ratios and routine comments they would fare a lot better.

I end by re-iterating the OBU comment “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” – and I would add PROVIDED THEY DO A SENSIBLE EVALUATION BASED ON AVAILABLE INFORMATION