Topic 8 Financial Statements

Hi @Trephena

Thank you again.

I’m so sorry I keep coming back with my doubts but please bear with me these few days. You’re a knowledgeable source and at the moment I don’t have peers to turn to plus my mentor is not experienced so I come here. Trust me, where I live, acca people are a rare breed.

I’d appreciate if you can offer your suggestions for this:

1. I did a segment analysis for my target company as it has operations in different countries. I analysed on the basis of its revenue/trading profit margins and compared performance in all the regions over the years. Now my question is am I expected to do some sort of segment analysis for the comparator too?

The comparator company however does not have international businesses like the target company. They only compete in the home market. So analysis of their segment gets difficult. However, I had the idea of analyzing their profits at the same home market but target company provides only trading profit figure for market each regional market segment (op profit, profit for year are at group level) while comparator does not provide a figure for trading profit and segmented its markets based on its various services provided. Therefore I am not able to find like-to-like info on the two in their reports, notes or website.

So can I just analyse segment profit change over the ears of the target company and leave out the comparator in this case? Or is the comparator bit a must? 🙁

2. About interest coverage: Interesting point you make about the finance cost. Yes I looked through the notes already. But If the income (PBIT in this case) I am taking in the numerator excludes finance income; then taking the net interest expense (finance cost-finance income) makes sense doesn’t it? Please correct me if I’m wrong.

@awais21 – If you are already comparing your main company with its competitor then I do not think you would “need” industry average. Basically, the whole purpose of this comparison is to determine the ‘strategic position’ of your main company. And to give meaning to your analysis. For example; if a company has 55% GP margin, you cant tell if its good or bad until you compare it with a similar company. In my opinion, your analysis will be much better if the competitor are similar in terms of market, operations, products etc. For instance, Apple and Microsoft are generally seen as competitors but if you were to do your analysis on these two companies, you will notice that the differences in their products make them very different. Microsoft has a big portion of revenue coming in from their licensing fees and thats how they generate “recurring” revenue. Its more focused on software compared to Apple, which believes in integrating both. This is just to give you an example that if you ever doubt your analysis, just step back and look at the bigger picture and “why” are you doing something.

I also want to add that if you are using the above mentioned format in your RAP analysis then in my opinion, you are wasting valuable words. For example, you can combine step 1, 2 and 5 in one single graph. In excel you need to choose the format of the graph that shows your figures at the bottom and prepare the graph for both the main company and the competitor.

@awais21 – I was going to reply to i@sookvi to thank him (? or her) for their excellent advice and was going to say there was nothing further I could add! – So thank you isookvi for the clear and really good post 😀

Back to you awais21 – I think it sounds a good idea now you have explained it in better detail but be careful that you do not over-complicate things. I would still be inclined to go for one main comparator Comp Y and only bring in Comp Z to back up the situation where there is a significant difference between A & Y. Your mission is to do a good financial & business analysis of company A in 7,500 words and not financial & business analyses of companies A, Z & Y – So some use of Z to support your Findings could strengthen your analysis if used wisely but otherwise using it for every ratio may not add much and start to be a disadvantage in terms of word count.

In respect of graphs as isookvi suggests bring in the comparator(s) at graph step 2. There is no need to keep repeating things so let the graphs ‘do the talking’ and use your words for those all important explanations as those are what will make the difference between passing and failing.

(Please everyone – I give of my time voluntarily and am not an OT employee: although I try to answer promptly, I do have my own life outside of these forums so I am delighted when our former students who have passed, return to make good contributions based on their own experience 😀 ).

@isookvi
THANKS ALOT for your help and time, your suggestion was good it looks pretty good now,my RAP.

@trephena
thanx for your help , i know its difficult to be present all the time, but thanks for your time.

so i have done some changes in graphs
the ratios are evident through table and graphs as foolowing

table
Graph
graph content in bars: my company ratio, compet-1 ratio, compet-2 ratio, Industry average
is is good to show like that?
looking forward
Regards

@Trephena

Hi,

It dawned on me that I did not put any tables in my RAP showing the absolute numbers for gross profit, net profit… I have graphs showing the profit margins is % and have not used the absolute numbers to do any explaining. So is it recommended to still show tables with those figures? or the graphs with the margin percentages is enough?

Thanks!

Hi @Trephena @isookvi

In light of what you just said about comparators…

When I am explaining the differences between target and competitor company, is it enough to just explain the main reasons behind why target company’s results are so and so and just use the competitor’s figures to show how much worse/better target is doing? I mean do I have to go into deep reasons on why competitor’s results are what they are?

E.g. say I’m talking about their gearing levels and explained why target company’s gearing is increasing and then say it is geared at a higher level than competitor making it more exposed to risk. Now do I have to explain why the competitor’s gearing increased over the years too?

Thanks!

Hi Trephena

I am having really big problems choosing a company to base topic 8 on. I decided on Pak Suzuki and Honda as a comparison because the financial statements are on their websites. The problem I am having is finding sources of information outside of the information one their websites. For this reason I have decided that it maybe best to chose a different company. Please can you guide me on reliable places to find out business information like your example of Laura Ashley? I am hoping this may guide me in choosing the right company.
So far I am thinking possible one of the following: lloyds, hsbc, aldi, marks and Spencer’s, next, John Lewis, Ryan air, Apple. This is based on looking at the business section of the telegraph.
Many thanks
Jenny

I’m not sure how the appendices work.

1. I just cut the Financial Statements pages out of Annual Reports. They’re about 5 pages long for each company. Should I include the Notes pages as well, which are about 50 pages long for each company?

2. Can I use separate financial statement appendices for the two companies? eg. Appendix 1 for CompanyA and Appendix 2 for CompanyB.

3. And I will use Appendix 3 as formulas and calculations in an Excel spreadsheet. I wonder how many separate appendices can I upload? Or I just have to combine them as one.

Thanks.

hello @trephena i am doing topic 8 and the comparator company i have chosen is of different currency..which exchange rate sud i use to convert the currency?i used the exchange rates of 31st december 2013, 2012 and 2011 for the respective financial statements as the financial period ended in 31st december..or do i need to use an average rate??pls suggest thankyou..

@saananaani – Your ratio analysis should use per centages mostly so the forex rates are not really relevant. You should be comparing the GP % ratios of the companies and their EPS’s etc so actual currency amounts are not being compared.

Remember although you are not required to used the unaudited interim accounts as your financial statements will be nearly a year and a half old by P30 Submission you need to consider any potentiall more recent material developments that might have had a significant impact on the company e.g. sudden major drop in share price when looking at the investor ratios or restructuring announcements.

Ha – you go with the latest years as these are the more reliable figures. Any extraordinary circumstances surrounding your information gathering need to be stated in the Limitations section so explain there about the restatement. It may be appropriate to mention it again when discussing the revenue and selling expenses

@rs504 – It is the way you are reading it. For clarity:

1. You must use the lastest FS available for every submission
2. However if the latest published FS were only made available “(in any form) less than 90 days before the start of submission [they] do not have to be used”.
3. The submission period starts on 1 May and 90 days before that would be about 1 February
4. Your company’s 31 Dec 2014 FS will be published shortly i.e. end of April so this would be less than 90 days

Is that clear now to you that you go with 2013? Make sure you explain why in your Limitations section. I would say in bold something along the lines that one of the limitations of the data is that it is now fairly old as the 2014 FS were only released on XX date.

However as I have pointed out many times before if anything material or spectacular has happened to the company since Dec 2013 you would be expected to acknowledge this to show that you have researched well (this would include any scandal, takeover of the company, chairman stepping down, profit warnings or serious lowering of their credit risk score by Moody or Dun & Bradstreet etc.

@trephena

I failed on topic 8 at my first attempt and am now confused on whether the financial statements I used should be updated. According to p39 of the information pack, the results that are published less than 90 days before the start of submission do not have to be used.

Last time I used the financial statements of year ended 31 December 2011, 2012, 2013. According to the re-submission guide, it said that “for re-submission this can mean reworking all your figures”. However, the updated annual report of the company (annual report 2014) was released on 9 April 2015 which showed on its website.

I reviewed the contents of the annual report 2014, there is no information on its publication date except the signing date by the audited company (18 March 2015). So I wonder how the marker knows the exact publication date. Should I make an explanation about its publication date?