Financial statement analysis and security valuation
1a introduction
Consolidated financial The financial statements of a group in which the
statements assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
IAS 10: establishes principles for presenting &
preparing consolidated financial statements
Separate financial “Those presented by an entity” with the focus on
statements how investments in subsidiaries, joint ventures and
associates (financial fixed assets under Belgian
GAAP) are to be measured “when an entity
prepares separate financial statements”
Corporate reporting Corporate reporting is a much more broader term
than financial reporting although both are used
interchangeably. Financial reporting is a part of
corporate reporting. Corporate reporting includes
reporting on risk management, sustainability,
corporate governance, corporate responsibility,
executive remuneration, …
(they both add value for stakeholders)
Corporate reporting is a moving target
focus used to be on financial reporting, now
companies report on much more issues
impact from (European) legislation
FEE (Federation of European Accountants)
presented its CORE & MORE model for the future of
Corporate reporting
Financial reporting The process of identifying (=recognition) measuring
(=measurement) and communicating
(=presentation and disclosure) financial information
to others (which can then make [economic]
decisions on the basis of that information and
assess the stewardship of the entity’s
management).
Objective: to provide financial information about
the reporting entity that is useful to present and
potential equity investors, lenders and other
creditors (users of the financial statements) in
making decision about providing resources to the
entity. However, financial statements could also be
useful to employees, competitors, academics…
‘society in general’
Financial reporting (recognition and measurement
in particular) is based on GAAP
stewardship How efficiently and effectively has the management
1
, Financial statement analysis and security valuation
discharged its responsibility to use the entity’s
resources?
Recognition The process of formally incorporating an item into
the financial statements of an entity as an asset,
liability, revenue, expense, …
=identifying
Involves depicting the item in words and by a
monetary amount.
Item can only be recognized if it provides users of
the financial statements with
relevant information
a faithful representation (what if the amount
cannot be measured reliably)
Measurement The process of determining the monetary amounts
at which elements (assets, liabilities, income,
expenses, and equity) are recognised and carried in
the balance sheet and income statement (financial
statements). This involves the selection of a
particular basis of measurement
-> in what amount you recognize assets, liabilities,
piece of equity, income or expense in your financial
statements.
Measurement basis The basis of measurement. In IFRS we measure
certain items on historical cost or at current value.
Accounting directive The rules the companies have to follow when
preparing financial statements. Aim: harmonize
national requirements about presentation and
content of annual/consolidated financial
statements.
GAAP Generally Accepted Accounting Principles: a
common set of accounting principles, standards
and procedures that entities must follow when they
compile their financial statements. A combination
of authoritative standards (set by a policy board-
e.g. the IASB) and the commonly accepted ways of
recording and reporting accounting information
(bookkeeping).
Says when something is an asset or liability
(recognition)
Determines what the amount is that needs to
be recognized (measurement)
2
, Financial statement analysis and security valuation
GAAP aims to improve/standarise… clarity of the
communication of financial information.
The language a company uses when compiling its
financial statements.
Two most important: IFRS and US GAAP
It is crucial to understand the gaap that has been
applied in financial statement analysis. GAAP “A”
could be allowing one thing while GAAP “B” is not.
Accounting policies (IAS8) The specific principles, bases, conventions, rules
and practices applied by an entity in preparing and
presenting financial statements.
-> GAAP is the language a company uses when
compiling its financial statements
-> Company is obliged to disclose accounting
policies (disclosure requirements are set out in IAS
1)
-> crucial for the entity itself and users of financial
statements
Change in accounting policy
Required by an IFRS
Other policy is more useful, reliable and
relevant
IAS 8 Accounting policies, changes in accounting
Estimates and errors is intended to enhance the
relevance and reliability of an entity’s financial
statements, and the comparability of those financial
statements over time and with the financial
statements of other entities.
IAS 8 prescribes the criteria for selecting and the
accounting treatment of changes in accounting
policies.
Accounting estimates When it is very unpractical or impossible to provide
exact numbers on the amount of certain assets,
liabilities,… , accountants use reasonable
estimates. The use of reasonable estimates is an
essential part of the preparation of financial
statements.
Examples: fair value of financial assets/financial
liabilities, warranty obligations, bad debts,
inventory obsolescence, …
3
, Financial statement analysis and security valuation
Change in accounting estimates -> result from new
information or new developments (recognized
prospectively in p&l)
Errors Prior period errors are omissions from, and
misstatements in, the entity’s financial statements
arising from a failure to use, or misuse of, reliable
information that was
Available when financial statements for those
periods where authorized for use
Could reasonably be expected to have been
obtained and taken into account in
preparation and presentation of those
financial statements
(mathematical mistakes, mistakes in applying
accounting policies, oversights, misinterpretations
of facts, fraud)
Retrospective application Applying the new accounting policy as if the policy
has always been applied
Retrospective restatement Correcting the recognition, measurement and
disclosure of amounts, as if the prior period error
had never occurred.
Prospective application Applying the new accounting policy or recognizing
the effect of the change in accounting estimates in
the current and future period affected by the
change
IFRS International Financial Reporting Standards: the
conceptual framework for financial reporting
developed/issued by the IASB (IFRS is a principles-
based framework).
It is the language spoken by the listed entities
when they draft their financial statements.
They specify how companies must maintain and
report their accounts, defining types of transactions
and other events with financial impact. IFRS were
established to create a common accounting
language, so that businesses and their financial
statements can be consistent and reliable from
company to company and country to country.
Following their endorsement in the EU, issuers of
EU listed companies on regulated markets should
mandatorily make use of International Financial
Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB) for
their consolidated accounts
Financial statements Reports prepared by the companies’ management
to present the financial performance and position at
4
1a introduction
Consolidated financial The financial statements of a group in which the
statements assets, liabilities, equity, income, expenses and
cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
IAS 10: establishes principles for presenting &
preparing consolidated financial statements
Separate financial “Those presented by an entity” with the focus on
statements how investments in subsidiaries, joint ventures and
associates (financial fixed assets under Belgian
GAAP) are to be measured “when an entity
prepares separate financial statements”
Corporate reporting Corporate reporting is a much more broader term
than financial reporting although both are used
interchangeably. Financial reporting is a part of
corporate reporting. Corporate reporting includes
reporting on risk management, sustainability,
corporate governance, corporate responsibility,
executive remuneration, …
(they both add value for stakeholders)
Corporate reporting is a moving target
focus used to be on financial reporting, now
companies report on much more issues
impact from (European) legislation
FEE (Federation of European Accountants)
presented its CORE & MORE model for the future of
Corporate reporting
Financial reporting The process of identifying (=recognition) measuring
(=measurement) and communicating
(=presentation and disclosure) financial information
to others (which can then make [economic]
decisions on the basis of that information and
assess the stewardship of the entity’s
management).
Objective: to provide financial information about
the reporting entity that is useful to present and
potential equity investors, lenders and other
creditors (users of the financial statements) in
making decision about providing resources to the
entity. However, financial statements could also be
useful to employees, competitors, academics…
‘society in general’
Financial reporting (recognition and measurement
in particular) is based on GAAP
stewardship How efficiently and effectively has the management
1
, Financial statement analysis and security valuation
discharged its responsibility to use the entity’s
resources?
Recognition The process of formally incorporating an item into
the financial statements of an entity as an asset,
liability, revenue, expense, …
=identifying
Involves depicting the item in words and by a
monetary amount.
Item can only be recognized if it provides users of
the financial statements with
relevant information
a faithful representation (what if the amount
cannot be measured reliably)
Measurement The process of determining the monetary amounts
at which elements (assets, liabilities, income,
expenses, and equity) are recognised and carried in
the balance sheet and income statement (financial
statements). This involves the selection of a
particular basis of measurement
-> in what amount you recognize assets, liabilities,
piece of equity, income or expense in your financial
statements.
Measurement basis The basis of measurement. In IFRS we measure
certain items on historical cost or at current value.
Accounting directive The rules the companies have to follow when
preparing financial statements. Aim: harmonize
national requirements about presentation and
content of annual/consolidated financial
statements.
GAAP Generally Accepted Accounting Principles: a
common set of accounting principles, standards
and procedures that entities must follow when they
compile their financial statements. A combination
of authoritative standards (set by a policy board-
e.g. the IASB) and the commonly accepted ways of
recording and reporting accounting information
(bookkeeping).
Says when something is an asset or liability
(recognition)
Determines what the amount is that needs to
be recognized (measurement)
2
, Financial statement analysis and security valuation
GAAP aims to improve/standarise… clarity of the
communication of financial information.
The language a company uses when compiling its
financial statements.
Two most important: IFRS and US GAAP
It is crucial to understand the gaap that has been
applied in financial statement analysis. GAAP “A”
could be allowing one thing while GAAP “B” is not.
Accounting policies (IAS8) The specific principles, bases, conventions, rules
and practices applied by an entity in preparing and
presenting financial statements.
-> GAAP is the language a company uses when
compiling its financial statements
-> Company is obliged to disclose accounting
policies (disclosure requirements are set out in IAS
1)
-> crucial for the entity itself and users of financial
statements
Change in accounting policy
Required by an IFRS
Other policy is more useful, reliable and
relevant
IAS 8 Accounting policies, changes in accounting
Estimates and errors is intended to enhance the
relevance and reliability of an entity’s financial
statements, and the comparability of those financial
statements over time and with the financial
statements of other entities.
IAS 8 prescribes the criteria for selecting and the
accounting treatment of changes in accounting
policies.
Accounting estimates When it is very unpractical or impossible to provide
exact numbers on the amount of certain assets,
liabilities,… , accountants use reasonable
estimates. The use of reasonable estimates is an
essential part of the preparation of financial
statements.
Examples: fair value of financial assets/financial
liabilities, warranty obligations, bad debts,
inventory obsolescence, …
3
, Financial statement analysis and security valuation
Change in accounting estimates -> result from new
information or new developments (recognized
prospectively in p&l)
Errors Prior period errors are omissions from, and
misstatements in, the entity’s financial statements
arising from a failure to use, or misuse of, reliable
information that was
Available when financial statements for those
periods where authorized for use
Could reasonably be expected to have been
obtained and taken into account in
preparation and presentation of those
financial statements
(mathematical mistakes, mistakes in applying
accounting policies, oversights, misinterpretations
of facts, fraud)
Retrospective application Applying the new accounting policy as if the policy
has always been applied
Retrospective restatement Correcting the recognition, measurement and
disclosure of amounts, as if the prior period error
had never occurred.
Prospective application Applying the new accounting policy or recognizing
the effect of the change in accounting estimates in
the current and future period affected by the
change
IFRS International Financial Reporting Standards: the
conceptual framework for financial reporting
developed/issued by the IASB (IFRS is a principles-
based framework).
It is the language spoken by the listed entities
when they draft their financial statements.
They specify how companies must maintain and
report their accounts, defining types of transactions
and other events with financial impact. IFRS were
established to create a common accounting
language, so that businesses and their financial
statements can be consistent and reliable from
company to company and country to country.
Following their endorsement in the EU, issuers of
EU listed companies on regulated markets should
mandatorily make use of International Financial
Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB) for
their consolidated accounts
Financial statements Reports prepared by the companies’ management
to present the financial performance and position at
4
