Section 4. Analytical income statement and balance sheet

Transcription

1 Section 4 Analytical income statement and balance sheet 1

2 Learning objectives After studying this chapter, you will understand Elements of the published financial reports How published financial reports confuse core activities with financial activities How to adjust published financial reports so that core activities can be isolated from financial activities How to create analytical income statement and balance sheet 2

3 Elements of financial reports Beginning stocks Flows Statement of Cash Flows Ending stocks Beginning Balance Sheet Cash + Other Assets Total Assets - Liabilities = Equity Cash from operations Cash from investing Cash from financing = Net change in cash Statement of Shareholders Equity + Investments by owners - Dividends + Earnings = Net change in Equity Ending Balance Sheet Cash + Other Assets Total Assets - Liabilities = Equity Income Statement Revenues - Expenses = Net income 3

4 Understanding accrual accounting Accrual accounting decouples measured earnings (net income) from the amount of cash generated from operations Accrual accounting revenues generally do not correspond to cash receipts for the period, nor do accrual expenses always correspond to cash outlays for the period Accrual accounting can produce large discrepancies between measured earnings and the amount of cash generated from operations Accrual earnings is a more accurate measure of the value creation during the period than is operating cash flow 4

5 Income statement Income statement reports the accumulation of costs and revenues during the fiscal year Must contain as minimum information (IAS 1.82) Revenues (Sales) Finance costs Share of the profit or loss of associates and joint ventures Tax expense Total of discontinuing operations Statement of profit or loss and other comprehensive income Income attributable to controlling and non-controlling owners 5

6 Case (cont.): Statement of income, Kone 2013

7 Case (cont.): Statement of comprehensive income, Kone 2013

8 Some firms report IFRS and non-ifrs numbers: Nokia 2015/Q2

9 Some firms report IFRS and non-ifrs numbers: Nokia 2015/Q2 2. Non-IFRS to reported reconciliation (unaudited) In addition to information on our reported IFRS results, we provide certain information on a non-ifrs, or underlying business performance, basis. Non-IFRS results exclude certain non-recurring items (special items) for all periods. In addition, non-ifrs results exclude intangible asset amortization and other purchase price accounting related items arising from business acquisitions. We believe that our non-ifrs results provide meaningful supplemental information to both management and investors regarding Nokia s underlying business performance by excluding the above-described items that may not be indicative of Nokia s business operating results. These non-ifrs financial measures should not be viewed in isolation or as substitutes to the equivalent IFRS measure(s), but should be used in conjunction with the most directly comparable IFRS measure(s) in the reported results.

10 Some firms report IFRS and non-ifrs numbers: Nokia 2015/Q = 13

11 Balance sheet information Rates of return ROA and ROCE ASSETS Capital structure Debt vs. Equity LIABILITIES + EQUITY Helps assess Liquidity Solvency Cash conversion Ability to pay debt Balance Sheet Working capital Efficiency 11

12 Case: Balance sheet of Kone (Consolidated statement of financial position) 12

15 Statement of cash flows Operating Activities Cash inflows and outflows from transactions and events that affect operating income Investing Activities Cash inflows and outflows from loaning money to others, investing in securities, or in assets (e.g., equipment) used to produce goods and services. Financing Activities Cash inflows and outflows from borrowing money, selling stock, and paying dividends Δ Cash 15

16 Case: Statement of cash flows of Kone 16

17 Case: Statement of cash flows of Kone 873,4-774,6 = 98,8 These two numbers must be the same. 17

18 Case: Statement of cash flows of Kone 18

19 Statement of the changes in equity Describes how equity and its component have changed during the fiscal year These changes occur e.g. due to Earnings generated during the fiscal year Profit distribution (dividends) Purchases of own shares Option-based compensation 19

20 Case: Statement of the changes in equity of Kone 20

21 Footnotes and other small-printed facts Footnotes are an integral part of companies financial reports. These notes help users better understand and interpret the numbers presented in the body of the financial statements. Important notes include: 1. Summary of significant accounting policies 2. Subsequent event disclosures 3. Related party transactions 21

22 Analytical income statement and balance sheet Ability of the firm to generate value is the main issue We need to reformat balance sheet and income statement to highlight the distinction between Operating items Financial items For non-financial companies, operating activities are the source of value, not financial activities! That is, ordinary firms do not create value from financial activities We need to focus on operating activities, because they create value 22

23 Analytical income statement and balance sheet We need to reformate I/S and B/S to separate operating activities from financing activities This distinction is not always easy to make due to several factors The definition of operations is not clear-cut The specifications in the income statement and the balance sheet do not clearly distinguish between operating and financing activities The notes are not sufficiently informative Reformation depends on the business model and the characteristics of the firm Items that are sometimes categorised as belonging to operations may at other times be classified as belonging to financing 23

24 Analytical income statement Adjust non-operating items, if needed Do these adjustements consistenty for all firms you are analyzing Focus on Net Operating Profit After Taxes (NOPAT) Distinguish between profit from operations and financial income Taxes are deducted from EBIT Taxes are calculated using the corporate tax rate or the effective tax rate of a given company 24

25 Reported vs. analytical income statement Reported I/S Sales (Revenues) Cost of sales = EBITDA Depreciations and amortizations = EBIT Financial expenses, net = Earnings before taxes Taxes = Net earnings Reformatted I/S Sales (Revenues) Cost of sales = EBITDA Depreciations and amortizations = EBIT Operating taxes = NOPAT Financial expenses, net Operating taxes: - Effective tax rate? - Corporate tax rate? + Tax savings from debt financing = Net earnings 25

26 Case: Analytical income statement of Kone, 2013 SALES 6 932,6 + Other income of business 55,9 - Materials and services ,4 - Wages and salaries ,8 - Other expences -584,8 +Share of associated companies' income 1,1 +/- Increase / decrease of inventory 28,6 EBITDA 1 033,2 - Depreciation and amortization -78,5 EBIT (OPERATING PROFIT) 954,7 - Taxes on operating profit -233,9 NOPAT 720,8 -/+ Net financial costs/income 5,9 -/+ Taxes on net financial costs/income -1,5 -/+ Net financial costs/income after taxes 4,4 NET INCOME 725,2 See next slide See next slide: ,4 See next slide See next slide: 95, ,3 See I/S See next slide See next slide = ,7 See I/S: 36,8-42,7 = 5,9 = ,9 = 5,9-1,5 = 4,4 Note: corporate and effective tax rates are different 26

27 Case: Analytical income statement of Kone, 2013 This was reported in income statement 27

28 Reported balance sheet Assets Non-current (fixed) assets Intangible assets Tangible assets Financial assets, long maturity Current assets Inventories Receivables Financial assets, short maturity Cash, operating and excess Liabilities and Equity Equity Non-current liabilities Debt, interest-bearing Non-interest bearing Current liabilities Non-interest bearing Financial liabilities Accounts payable Tax liabilities Interest-bearing 28

29 Reported balance sheet 1st step: Remove non-operating items Assets Non-current (fixed) assets Intangible assets Tangible assets Financial assets, long maturity Current assets Inventories Receivables Financial assets, short maturity Cash, operating and excess Liabilities and Equity Equity Non-current liabilities Debt, interest-bearing Non-interest bearing Current liabilities Non-interest bearing Financial liabilities Accounts payable Tax liabilities Interest-bearing 29

30 Reformatted balance sheet 1st step: Remove non-operating items Assets Non-current (fixed) assets Intangible assets Tangible assets Current assets Inventories Receivables Cash, operating Liabilities and Equity Equity Non-current liabilities Debt, interest-bearing Non-interest bearing Current liabilities Interest-bearing Note: This balance sheet is NOT in balance!!! 30

31 Reformatted balance sheet 2nd step: Deduct items from the other side Net Operating Assets Invested Capital Non-current assets: Equity Tangible and intangible + Current assets: Inventories Receivables Cash, operating Current liabilities, non-interest bearing Non-current liabilities, noninterest-bearing = Net Operating Assets = Invested capital Working capital (net) Interesting bearing net debt: + Non-current liabilities, interestbearing + Current liabilities, interest-bearing Financial assets, all maturities Cash, excess = Invested capital = Net Operating Assets Note: This balance 31 sheet is (again) in balance!!!

32 Example: Outotec, Interim report Q2/

33 Case: Creating the analytical balance sheet of Kone Analytical Balance Sheet: Intangible assets 1332,5 Tangible assets 269,6 Investments in associated companies 4,3 Deferred tax asset 218,9 NON-CURRENT ASSETS 1825,2 Analytical Balance Sheet: Inventories 1103,9 Receivables 1410,6 CURRENT ASSETS 2514,5 FINANCIAL ASSETS 1003,7 33

34 Case: Creating the analytical balance sheet of Kone Analytical Balance Sheet: EQUITY 1724,6 34

35 Case: Creating the analytical balance sheet of Kone Analytical Balance Sheet: Deferred tax liabilities 191,3 Accounts payable 511,2 Provisions 139,4 Advanced payments 1397,5 Other non-interestbearing liabilities 1105,5 NON-INTEREST- BEARING DEBT 3344,9 Analytical Balance Sheet: Long-term liabilities 155,8 Current liabilities 118,1 INTEREST-BEARING DEBT 273,9 35

36 Case: Analytical balance sheet of Kone NET OPERATING ASSETS Intangible assets 1332,5 Tangible assets 269,5 Investments in associated companies 4,3 Deferred tax asset 218,9 (A), NON-CURRENT ASSETS 1825,2 Inventories 1103,9 Receivables 1410,6 (B), CURRENT ASSETS 2514,5 Deferred tax liabilities 191,3 Trade payables 511,2 Provisions 139,4 Advances received 1397,5 Other non-interest-bearing liabilities 1105,5 (C), NON-INTEREST-BEARING DEBT 3344,9 INVESTED CAPITAL (A), EQUITY 1724,6 Long-term liabilities 155,8 Current liabilities 118,1 (B), INTEREST-BEARING DEBT 273,9 (C), FINANCIAL ASSETS 1003,7 (B-C), INTEREST-BEARING NET DEBT -729,8 (A+B-C), INVESTED CAPITAL 994,6 (A+B-C), NET OPERATING ASSETS 994,6 36

37 Case: Analytical balance sheet of Kone SUMMARY Average (A), EQUITY 1833, ,6 1779,2 (B), INTEREST-BEARING DEBT 305,7 273,9 (C), FINANCIAL ASSETS 1019, ,7 (B-C), INTEREST-BEARING NET DEBT -713,7-729,8-721,8 (A+B-C), INVESTED CAPITAL 1120,0 994,6 1057,3 37

38 Summary Statement of cash flows links the cash in the opening balance sheet to the cash in the closing balance sheet Statement of the changes in equity links the equity in the opening balance sheet to the equity in the closing balance sheet Accrual accounting items generally do not correspond to cash receipts and outlays for the period Analytical income statement and balance sheet distinguishes operating and financial items in the reported income statement and balance sheet 38