BUS360 Advanced Corporate Reporting

Week 1 – Lecture1

Introduction to Published
Accounts
Dr Mohammed S H Kasbar
m.s.h.Kasbar@qmul.ac.uk
Surgery Hours: Tuesdays 3-4 PM
BUS360: Advanced Corporate Reporting
First Glance
12 weeks comprising:
- 11 lectures (On campus).
- Reading week (week 7 commencing 4 March
Revision lecture will be in the last
2024). week(Monday 8 April 24).
- 10 seminars (commencing in week 2 next
Monday 29 Jan 24).

In-class test (30%)

Assessment comprises 2 elements:
- In-class test 30% weighting (in week 6).
- Exam 70% weighting - May 24 (TBC)
- Overall/composite pass mark of 40%
Short answer questions (T or F, MCQs, short
essays, etc).
In-class test support:
- During the office hours.
- Revision materials to be released in due time.
BUS360: Advanced Corporate Reporting
First Glance In The BUS360Module outline (Under
Essential module information Tab):
- Weekly schedule of lectures and
topics.
- Required weekly pre-lectures
readings.
For Seminars:
There is pre-seminar work to
prepare.
All of you should do it.
BUS360: Advanced Corporate Reporting
Textbooks
Alexander et al. (2023), ‘International
Financial Reporting and Analysis: 9th
ed.’, Cengage.

Financial Accounting reporting

and analysis [Second Ed 2017]
by Jennifer Maynard published
by Oxford University Press
BUS360: Advanced Corporate Reporting
Contact details
q Email: m.s.h.Kasbar@qmul.ac.uk
Ø Normal quires: within 48 hours
Ø Urgent: Please specify that it is URGENT.
q F2F office hours: FB 4.32 on Tuesdays from
03:00-04:00 PM (just pop in J) excluding the
reading week (no office hours).
q Virtual office hours (in extra-ordinary cases):
By Appointment
q After the lecture/seminar.
BUS360: Advanced Corporate Reporting
Topics covered Today’s topic

Weeks Topic Area(s)

1 Introduction to published accounts
2 Liabilities and treatment of leases
3 Accounting for tax
4 Accounting for financial instruments
5 Revenue from contracts with customers
6. Events after the reporting period + CA, CL & Provisions
7 Reading Week
8 Accounting for groups: Consolidated BS
9 Accounting for groups: Consolidated I/S
10 Accounting for groups: Associates
11 Interpretation of financial statements
12 Revision & Review
BUS360: Advanced Corporate Reporting
Lecture & Seminar weekly schedule

Module Outline
q See QMPlus module page, essential
module information, module outline
BUS360: Advanced Corporate Reporting
Assessment 1: In-class test
q 30% weighting
q Time: Week 6 (not during the lecture time).
Ø Online, open book, unseen exam
Ø Short answer questions such as:
ü True or false
ü Multiple choice questions.
ü Calculations
ü Interpretations
ü Short essays
q Mock questions to be published In week 5.
q Admin colleague will provide more information about the time
allocation.
BUS360: Advanced Corporate Reporting
Assessment 2: Final exam
q 70% weighting
Ø Exam paper
Ø May 2024 exam period
Ø Numeric + theory questions.
Ø On campus exam
Ø Exam date to be confirmed later.
BUS360: Advanced Corporate Reporting
Aim of the module
This module aims to develop students’ knowledge and
skills in understanding accounting concepts and
policies, and applying the theoretical framework and
the International Financial Reporting Standards in
contingent assets & liabilities, financial instruments,
leases, deferred tax and in the preparation of financial
statements for groups of entities.
BUS360: Advanced Corporate Reporting
Learning outcomes
üPrepare basic accounts following IFRS
from simple information.
üManipulate accounting data in accordance
with selected IASs.
üCritically evaluate selected standards.
 Studying Hints
üModule outline, lecture slides, seminar questions and
answers, revision materials, assessments details, and extra
useful resources are provided on QMPlus module page. Keep
an eye on the module announcements, there is always
something useful there J
üYou MUST read the module outline and materials for
lectures and seminars.
üMy suggestion on studying is,
qPowerPoint (lecture) slides → seminar questions &
answers → Textbook → Academic papers/reports.
qInteraction and engagement.
 BUS360 Advanced Financial Reporting
Lecture 1
Introduction to Published Accounts
Mohammed Kasbar
 BUS360: Advanced Corporate Reporting
Introduction to Published Accounts: Learning outcomes
By the end of this lecture, you will be able to:
q Getting to know the financial statements.
q The conceptual framework.
q Accrual accounting.
q The recognition principle (Revenues and expenses).
q Types of businesses (limited liability Vs. unlimited liability).
BUS360: Advanced Corporate Reporting
Introduction to Published Accounts: Suggested reading
q Maynard (2017) Chaps 1, 2, 4 and 10
q IAS1
q IAS 7
 Why do we need financial reporting?
Agency Theory
qBusinesses need to be directed and controlled
qIn early (C18/C19) companies, the directors were part-
time, and major shareholders
qLater, directors became professional managers who
ran the business on behalf of shareholders – with the
objective of Shareholder Wealth Maximisation (SWM)
qThe managers are Agents of the Principals, the
shareholders
 Agency Theory
employs
Principal Information
Agent
self-interest performs
self-interest

qIn finance theory, it is assumed that shareholder wealth

maximisation is the key objective of a firm
qBut is this the actual objective of the directors/managers?
qAgency theory focuses on markets & contracts as a source
of corporate control.
 Moral Hazard
qAll agency relationships involve moral hazard
qPrincipal and Agent may have different objectives
qAgent’s reports and actions may be self-interested behaviour,
rather than being taken in pursuit of the Principal’s goals
qPrincipal needs to monitor Agent’s behaviour but lacks Agent’s
knowledge (Asymmetric Information)
 Monitoring the Agent
qPrincipal needs to monitor the behaviour of the Agent, to
minimise Agency Costs
qDifficult to monitor Agent due to Asymmetric Information
(Agent has far more information than the Principal)
qMonitoring is costly
qFinancial Reporting is major part of monitoring
 FINANCIAL REPORTING
Members/ appoint ‘Independent’
Shareholders report Auditors

report
delegate monitor

Board of
Directors
REGULATING FINANCIAL REPORTING
qDIRECTORS’ ACCOUNTABILITY
qFORMAT OF REPORTING
qLEVEL OF DISCLOSURE
qACCOUNTING POLICIES
 REGULATING FR
1- DIRECT STATE INTERVENTION:
INCLUDE
üREGULATIONS IN COMPANIES ACTS

2- SELF-REGULATION
üFOR EXAMPLE ACCOUNTING
PROFESSION OR STOCK EXCHANGE
How Financial Reporting is regulated in the UK
qCompany law and European Directives
ü Companies Act 2006 (‘True and Fair’)
ü 4th Directive and 7th Directive
qStock Exchange Rules (in the ‘Yellow Book’)
qInternational Financial Reporting Standards – Listed firms
must follow these. Other UK Cos may choose to do so –
otherwise follow UK Financial Reporting Standards of ASB
 IASB Standards
üThe module will now follow IASB Standards.
üUK standards of ASB will exist for some time to
come
qSpecial rules for smaller entities [Small and
Medium Entities ‘SMEs’]
 Accounting Standards
Accounting standards usually contain:
qA description of a problem (e.g. how to account for
leases)
qA reasoned discussion
qA prescribed solution (in bold – the ‘statement of
accounting practice’)
 IASB STATEMENTS (I)
q‘Framework for the Preparation and Presentation of
Financial Statements’
(The Framework Document)
qIAS 1 Presentation of Financial Statements
qVarious statements of policy
NB IASC → IAS Have equal status
IASB → IFRS
 IASB STATEMENTS (II)
IASs (of old IASC) 26
IFRSs (of IASB) 17
IFRICs & SICs 17
50
q IFRICs & SICs – interpretive statements
q IFRICs from IFRS Interpretations Committee
q SICs equivalent body of old IASC
 IASs and IFRSs
üIAS 12 - Income Taxes
üIAS 10 – Events after the reporting period
üIFRS 9 – Financial Instruments
üIFRS 16 - Leases
 SICs and IFRICs
qSIC Interpretation 32 issued 2001 ‘Intangible
Assets - Web Site Costs’

qIFRIC Interpretation 17 issued 2008

‘Distributions of Non-cash Assets to Owners’
The ‘Red Book’ 2022 (I)

About 5,000 pages!

 The Accounting Period
üBy convention – a year.
üCan be any period
qLife of firm? – cash to cash
qProblems arise with imposition of arbitrary
reporting periods [say one year] on long-life
entity
 Cash & Profit Distinction
qTransactions on Day 1 were:
Ø Buy one table for £50 cash, then
Ø Buy another identical table for £60 cash, then
Ø Sell one table for £100 on credit
• [Note – the other table is sold for £105 on Day 2 on credit]

vLooking at Day 1 transactions only, what is

a) the impact on cash;
b) the profit or loss for Day 1; and
c) the unsold table is on the balance sheet at end of Day 1 – at what
value?
 Impact on Cash

£
Purchase of Table 1 50 out
Purchase of Table 2 60 out
Sale of Table 0
Overall 110 (cash outflows)
 Profit or Loss Account – Day 1
FIFO LIFO AVCO
£ £ £
Selling price 100 100 100
Cost of table sold (50) (60) (55)
Profit 50 40 45
 Profit and Inventory
FIFO LIFO AVCO
£ £ £
Selling price 100 100 100

Cost of table sold (50) (60) (55)

Profit 50 40 45

Inventory (Stock) 60 50 55
(Unsold table)
 Profit on Days 1 and 2
FIFO LIFO AVCO
£ £ £
Day 1 Profit 50 40 45

Day 2 Selling Price 105 105 105

Cost 60 50 55
Profit 45 55 50

Profit Day 1 + Day 2 95 95 95

 Conceptual Framework
qSets out broad principles underlying what IASB is doing,
and basic definitions such as
ü Objectives of Financial Reporting
ü Definitions (What is an Asset? What is Equity?)
ü Characteristics of Financial Information, such as
‘Relevance’, and ‘Faithful Representation’
IAS 1: Presentation of Financial Statements
qFirst issued as ‘Disclosure of Accounting
Policies’ in 1974. Revised in 1997.

qSets out what is required in a set of Financial

Statements
 IAS 1: Underlying Assumptions
qGoing Concern basis
qAccrual basis (except for cash flow information).
qConsistency (i.e. the presentation and classification of items in the
financial statements are usually retained from one period to the next)
qEach material class of similar items is presented separately. Dissimilar
items are presented separately unless they are immaterial.
qAssets and liabilities, and income and expenses, are not offset unless
required or permitted by an IFRS.
qComparative information is required for all amounts reported in the
financial statements
qFinancial statements are presented at least annually
 The Financial Statements
1 Statement of Financial Position (Bal Sheet)
2 Income Statement (Profit and Loss Account)
3 Statement of Comprehensive Income
4 Statement of Changes in Equity
5 Cash Flow Statement
6 Notes:
(a) significant accounting policies
(b) other explanatory notes
 The Financial Statements

The Income Statement

 INCOME STATEMENT FORMATS
qFormat 1: Vertical with costs analysed according to type of
operation (or function)
qFormat 2: Vertical with costs analysed according to type of
expenditure (or nature)
qUK PLCs tend to use Format 1
üMust disclose alternative figures in notes
üBasically – ignore Format 2
 Format 1
£m
Turnover XXX
Cost of sales (XXX)
Gross profit XXX

Distribution costs (XX)

Administrative expenses (XX)

Profit from operations [PBIT] XX

Net interest cost (XX)
Profit before tax XX
Income tax expense (XX)

Net profit for the period XXX

[Shareholders’ Earnings]
 Format 2
£m £m
Revenue XXX
Changes in inventories of
finished goods and WIP XX
Raw materials and
consumables used XX
Staff costs XX
Depreciation & amortisation XX
Other operating expenses XX
(XX)
Profit from operations [ = F1] XX
Net interest cost (XX)

Profit before tax XX

Income tax expense (XX)

Net profit for the period XXX

 Accrual in the Income Statement

qThe Income Statement is (usually) for a year:

Ø1 January to 31 December 2023, or
Ø1 April 2023 to 31 March 2024 or whatever.
üWe identify Sales/Turnover in the Year
üThen identify matching costs – the cost of
these sales.
Identifying Sales for the Income Statement
(Revenue recognition)
qBasic question:
üHave the goods/services been delivered? NOT – has the
customer paid?
üSimple if firm is selling discrete things – cars or television sets
üMore difficult if firm is supplying, say a railway line or a
tunnel, which takes several years to construct (and is paid for
in stages).
Identifying Costs
(Expense recognition)
qBasic question – what did it cost the firm to provide the sales
we have identified?
üAgain – not whether firm has paid for its components/
materials/ electricity etc.
üWe are interested in consumption Either directly – raw
materials used Or on time basis – electricity consumed
between 1 January and 31 December
 The Financial Statements

The Statement of
Comprehensive Income
 Comprehensive Income
qTotal comprehensive income [CI] is
"the change in equity during a period resulting from
transactions and other events, other than those changes
resulting from transactions with owners in their capacity
as owners" [IAS 1.7]

CI = Profit + Other comp income

Statement of Comp Income (SCI)
£m
Net profit for the period XXX
Exchange Differences XXX
Gains on Property Revaluation XXX
Income Tax relating to CI
components (XXX)

Comp Income for the period XXX

 Presentation of SCI
Entities may present two separate statements
or a single statement, with profit or loss and
other comprehensive income presented in two
sections.
The Financial Statements

Change in Equity
Statement
 Changes in Equity
1 Cos make profit/loss from transaction – creates
increase/decrease in assets – and of equity. See Income
Statement
2 Changes in equity excluded from Income Statement eg
resulting from revaluation of property – are ‘Other
Comprehensive Income’ and appear in St of Comprehensive
Income
3 Firm has ‘transactions with owners in their capacity as
owners’ – Divis/share issue
See Statement of Changes in Equity
 Equity Dividends
qEquity dividends are distribution of profit, not an expense.
So Income Statement ‘stops’ with Earnings.
qEquity dividends are not a contractual commitment by the
company. So only recognised in accounts when declared.
qSuppose Z plc prepares accounts for the year to December
2023. The directors declare dividend in January 2024. The
2023 accounts (SCE) do not show the dividend.
 Statement of Changes in Equity
Share Other Ret’d Total
Cap Res Earn Equity
Bal 1 Jan 2020 X X X XX
Comprehensive Inc* X X X X
Dividends (X) (X)
Issue of share capital X X
Bal 31 Dec 2020 X X X XX

*for our purposes this will usually be

Earnings/Net Profit from the Income Statement
 SCE shows
(a) CI (for our purposes profit or loss) for the period
(b) Capital transactions with owners eg share issue, dividends
(c)Movements in accumulated profits (reserves) – for
example company makes bonus share issue by capitalising
reserves.
Note that the Closing Figures are the ‘Equity’ figures for the
Statement of Financial Position or Balance Sheet
 The Financial Statements

Statement of Financial
Position
STATEMENT OF FINANCIAL POSITION
qIAS 1 does not provide a format
qDoes provide headings – categories of asset
qDraws distinction between ‘current’ and ‘non- current’
assets and liabilities
qSo 5 main categories of assets/liabilities:
ü C and N-C Assets
ü C and N-C Liabilities
ü Capital and Reserves (=Equity)
 ‘Horizontal’ SFP
Non-current Assets XX Non-current Liabs XX
(Non-equity)
Current Assets XX Current Liabilities XX

Equity XX

Total Assets XX Total Liabilities XX

STATEMENT of FINANCIAL POSITION £m £m
Assets:
Non current assets:
Property, plant and equipment x
Intangibles (eg Goodwill) x
Investments x x
Current assets:
Inventories x
Trade and other receivables x
Cash x x
Current liabilities:
Trade and other payables x
Provisions x
Other Financial Liabilities x
Liability for Current Tax x (x)
Net current assets x
Non current liabilities:
Long-term Borrowings x
Deferred Tax provision x
(x)
Net Assets x

Capital and reserves: x

Issued capital x
Reserves x
Accumulated profits x
x
 NON-CURRENT ASSETS
üNON-CURRENT ASSETS ARE THOSE ASSETS WHICH
ARE INTENDED FOR USE ON A CONTINUING BASIS
IN THE ENTERPRISE'S ACTIVITIES.
NOTE
qIT IS THE FUNCTION OF AN ASSET IN THE ENTITY
WHICH MATTERS, NOT THE NATURE OF THE ASSET
qASSETS CAN BE INTANGIBLE
 FUNCTION OF ASSETS
qA Vehicle manufacturer makes trucks
ücompleted trucks may be in inventory.
üOne is sold to a delivery firm, which uses it for
several years until it wears out, then scrapped.
The truck is a Non-current asset for the delivery
firm.
 CURRENT ASSETS
General rule: cash itself or consumed or turned
into cash within 12 months [before next SFP]
ü Inventory (Stock)
ü Receivables
ü Payments in Advance
ü Cash
 Test against market value
Impairment test
q Inventory
Lower of Cost or Net Realisable Value
q Receivables
Provision for doubtful debts

üTest: how much cash will you receive?

vCannot be > market value
 CURRENT LIABILITIES
General rule: liability has to be settled within
12 months [before next SFP]
ü Trade Creditors
ü Accruals [such as interest]
ü Tax
ü Provisions – such as for warranty claims
 NON-CURRENT LIABILITIES
qLiabilities falling due after 12 months (after
the next SFP)
ü L-T Debt – loans, bonds etc
ü Long-term provisions, such as warranties
ü Deferred Tax
 Structure of SoFP– Equity
Capital and Reserves
Issued Share Capital XX
Reserves XX
Accumulated Profits XX
XX
Accumulated Profits - can be distributed
Reserves - not distributable.
 Share Capital (I)
qShare Capital shown at nominal value say - 2.2m shares of
50p £1.1m
qFirst shares sold at nominal value - say 50p
qLater shares (2.2M) may be issued at higher price – say £1.
qPremium over nom value is placed in a reserve – the ‘Share
Premium’ Account
 Share Capital (II)
£m

Share Capital
4.4m shares of 50p 2.2
Share Premium 1.1

Share Premium included in ‘Reserves’

 Revaluation Reserve
qWhere firm revalues property upwards, there is an
equivalent increase in Equity.
qThis increase in Equity is not profit, is not distributable as
dividends.
qSo this increase is not included in ‘Accumulated Profits’,
but a separate ‘Revaluation Reserve’.
qInclude in ‘Reserves’
 The Financial Statements

The Cash Flow Statement

 Why a CF statement?
qIncome Statement shows profit/loss in
the year
qStatement of Financial Position shows
Assets and Liabilities
 Why a CF statement?
qPossible for firm to be profitable but be
insolvent, or be ‘Cash-rich’ but loss-making
üeg many start-up businesses collapse due to
CF problems
q‘Profit is a matter of opinion, cash is a fact’ .
q Cash ‘a very difficult figure to fiddle’
(Tweedie)
 Cash Flow helps Users
qAssess company’s ability to generate cash
qCompare performance of companies for cash
flows not affected by accounting policies
qExtrapolation of historic cash flows to future
periods
 What is Cash?
qCash at hand
qDemand bank deposits
q Cash Equivalents:
‘short-term, highly liquid investments … readily
convertible to known amounts of cash [with] insignificant
risk of changes in value [Maturity < 3months]
• Bank deposits at short notice
• Treasury Bills
• NB Not equity shares
 Cash Flow Statement
qGoverned by IAS 7
qDivides Cash Flows into those related to:
üOperating Activities
üInvesting Activities
üFinancing Activities
In a single vertical statement
 Cash Flow Statement
£m
Cash flows from operating activities xx
Cash flows from investing activities xx
Cash flows from financing activities xx
Net change in cash xxx

Opening cash balance [Last year’s SFP] xxx

Closing cash balance xxx

[This year’s SFP]
 Direct vs Indirect
qTwo methods of presenting CFs from
operating activities (other categories are the
same)
qIAS 7 permits either method.
qNearly all companies opt for Indirect
qSo we will use Indirect exclusively – just be
aware there is an alternative
 Operating CF: Direct Method
Reports cash inflows and cash outflows directly
£m
Cash receipts from customers xxx
Cash paid to suppliers xxx
Cash paid to employees xxx
Cash paid for other op exps xxx
Net cash from op’ing activities xxx
===
 Operating CF: Indirect Method
üThis reconciles Profit Before Tax with Net
Cash Flow, adjusting for non-cash items (so
avoids detail of operating CFs):
ü Accrued amounts (eg sales)
ü Non-cash amounts (eg depreciation)
ü Capital expenditures (eg purchase of fixed
assets)
 Operating CF: Indirect Method
£m
Profit before tax xxx
Add depreciation xxx
Add interest payable xxx
Subtract increase in inventory (xxx)
Add decrease in receivables xxx
Add increase in payables
Taxation paid xxx
Net cash from op’ing activities xxx
===
 Cash Flow Statement
£m
Cash flows from operating activities xx
Cash flows from investing activities xx
Cash flows from financing activities xx
Net change in cash xxx

Opening cash balance [Last year’s SFP] xxx

Closing cash balance xxx

[This year’s SFP]
 CFs of Investing Activity
£m
Acquisition of Subsidiary x
Purchase of prop, plant and equip x
Proceeds from sale of equipment x
Interest received x
Dividends received x

Net cash used in investing activities x

 CFs of Financing Activity
£m
Proceeds from issue of share capital x
Proceeds from long-term borrowings x
Payment of finance lease liabilities (x)
Repayment of loan (x)
Loan interest* (x)
Dividends paid* (x)
Net cash used in financing activities xx

*sometimes treated as operating cash flow

The non-cash changes
Statement of Changes in Equity (I)
Sh Ret’d Total
Cap Res Earn Equity
£m £m £m £m
Bal 1 Jan 20X2 12.0 2.0 11.0 25.0

Bal 31 Dec 20X2 24.0 9.0 4.7 37.7

Note – opening and closing figures per SFPs

Statement of Changes in Equity (II)
1. Bonus issue is one-for-one. So new share
capital of £12m. £2m from Reserves and
£10m from Retained Earnings.
2. Property is revalued from £9m to £18m. So
increase of £9m – Revaluation Reserve of
£9m. This is ‘Other Comprehensive Income’
3. Earnings from Inc St (£3.7m)
Statement of Changes in Equity (III)
Sh Ret’d Total
Cap Res Earn Equity
£m
Bal 1 Jan 20X2 12.0 2.0 11.0 25.0
Bonus shares 12.0 (2.0) (10.0)
Comp Inc 9.0 3.7 12.7

Bal 31 Dec 20X2 24.0 9.0 4.7 37.7

 The Financial Statements
1 Statement of Financial Position (Bal Sheet)
2 Income Statement (Profit and Loss Account)
3 Statement of Comprehensive Income
4 Statement of Changes in Equity
5 Cash Flow Statement
6 Notes:
(a) significant accounting policies
(b) other explanatory notes
 Notes to the Accounts
qDisclose significant Accounting Policies

qInformation not disclosed in main statements

qBasic statements kept relatively simple - detail

is in the Notes
 Annual Report for Year
to 31 March 2023
252 pages
~ 90 pages for accounts in IASB sense
11 pages for Audit Report
51 pages on ‘governance’ – including 14
pages on Directors’ remuneration
Vodafone (2023) Accounts
p.123 - Income Statement and SCI
p.124 - Statement of Fin Pos
p.125 - Statement of Changes in
Equity
p.126 - Statement of Cash Flows
Then ~85 pages of notes
Annual reports and level of disclosure
Annual reports and accounts have grown larger

q Example: Sainsbury’s PLC

ü 2023: 228 pages
ü 2015: 152 pages
ü 2010: 114 pages
 Activity
See Sainsbury’s annual reports for 2023, 2015
and 2010 (provided on QM+) and compare the
information provided historically.
 Limited Liability Companies
qPrincipals/Partners in Unincorporated business
usually have unlimited liability – so their
personal assets are at risk

qShareholders in limited companies have liability

limited to the shares they have subscribed for.
 Final word
qNo seminars this week
qSeminars start next week.
qMy office hours: FB 4.32 Tuesdays 3-4 PM
qNext week seminar is now available on QMPlus.
qStay safe J
m.s.h.Kasbar@qmul.ac.uk