Financial Statements: Analysis,

Reporting and Valuation 2nd Edition

Felix I. Lessambo
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Felix I. Lessambo

Financial Statements
Analysis, Reporting
and Valuation
Second Edition
Financial Statements
 Felix I. Lessambo

Financial Statements
Analysis, Reporting and Valuation

Second Edition
Felix I. Lessambo
Fordham University
New York, NY, USA

ISBN 978-3-031-15662-5 ISBN 978-3-031-15663-2 (eBook)

https://doi.org/10.1007/978-3-031-15663-2

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer
Nature Switzerland AG 2018, 2022
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 Acknowledgments

Writing a book is always a challenge. Nevertheless, writing a book on

“Financial Statements: Analysis, Reporting and Valuation” geared to
M.B.A. students, a more daring intellectual exercise for two-fold reasons:
(i) because of the hard choice of topics to cover, and (ii) financial analysis
is part science and part art.
I would like to express my gratitude to those who motivated me all
along the project, knowing my dedication to the subject, and thought
I am more than able to complete this project: Dr. Gordon Marsha, Dr.
Linda Sama, Dr. Lester Reid, Dr. Lavern Wright, Jordan Romine, Yanick
Gil, and Jerry Izouele.
Several good friends provided me with needed guidance and materials
to complete this book, while others took from their busiest time to review
and comb the manuscripts: Reverend Pastor Roland Dalo and Yanick Gil.

v
 Disclaimer

While the author has made every effort to ensure that the information in
this book is correct at the time of publication, he does not assume and
hereby disclaims any liability to any Party for any loss, damage, or disrup-
tion caused by errors or omissions, whether such errors or omissions result
from negligence, accident, or any other cause.
This publication is designed to provide accurate and authoritative
information in regard to the subject matter covered. It is sold on the
understanding that the publisher is not engaged in rendering professional
services. If professional advice or other expert assistance is needed, the
services of a competent professional should be sought.

vii
 Contents

Part I Overview of Financial Statements and the

Statement of Position
1 Overview of Financial Statements 3
1.1 General 3
1.2 The International Accounting Standard Board:
IFRS 4
1.3 European Financial Reporting Advisory Group
(EFRAG) 4
1.4 The United States: The FASB 5
1.5 The United Kingdom: Financial Reporting
Council (FRC) 9
1.6 Japan: The Accounting Standard Board of Japan 12
1.7 Australia: The Australian Accounting Standard
Board 13
1.8 New Zealand: The New Zealand Accounting
Standards Board (NZASB) 16
1.9 India: The Council of the Institute of Chartered
Accountants of India (ICAI) 16
1.10 China: Accounting Standard for Business
Enterprises 17
1.11 The Financial Statement Materials 18
1.11.1 The Proxy Statement 18

ix
x CONTENTS

1.11.2 The Management Discussion & Analysis

(MD&A) 19
1.12 Interim Statements and Subsequent & Adjusting
Events 19
1.12.1 Interim Financial Statements 19
1.12.2 Subsequent Events 19
1.12.3 Adjusting Events 20
1.13 Users of Financial Statements 22
References 24
2 Short-Term Assets: Cash and Cash Equivalents 25
2.1 General 25
2.2 Cash and Cash Equivalents 27
2.2.1 Bank Reconciliation 28
2.2.2 Bank Overdraft 30
2.2.3 Petty Cash 32
2.3 Marketable Equity Securities and Fair Value
Measurement 33
2.4 Accounting for Financial Instruments 35
2.5 Accounting for Derivatives 39
2.6 Accounting for Hedging 41
References 43
3 Short-Term Assets Inventories 45
3.1 General 45
3.2 Inventory Methods 46
3.2.1 The Perpetual Inventory System 46
3.2.2 The Periodic Inventory System 48
3.3 Ownership Issues 51
3.4 Valuation of Inventory 51
3.5 The LIFO Reserve 52
3.6 LIFO Liquidation 53
3.7 Comprehensive Example 54
3.7.1 Solutions 54
3.8 Restrictions on the Use of LIFO 57
References 57
4 Account Receivables 59
4.1 General 59
4.2 Cash Discount on Sales 60
 CONTENTS xi

4.2.1 The Gross Method 60

4.2.2 The Net Method 61
4.3 Bad Debts Concept 62
4.3.1 Rebates 63
4.3.2 Doubtful Accounts 63
4.3.3 Accounting for Bad Debts 63
4.4 Accounts Receivable Aging Method 64
4.5 Assignment of Accounts Receivable 66
4.6 Factoring of Accounts Receivable 67
4.6.1 Recourse vs Non-Recourse Factoring 68
4.6.2 Factoring V. Loan 68
4.6.3 Factoring vs Assignment of Receivables 70
4.7 Securitization of Receivables 70
4.7.1 Sale Accounting Criteria 71
4.7.2 Secured Borrowing 73
4.8 Receivables—Troubled Debt Restructurings
by Creditors 74
4.9 Non-Trade Receivables 75
References 76
5 Prepaid Expenses, Unearned Income, and Other
Current Assets 77
5.1 General 77
5.2 Prepaid Expenses 77
5.3 Unearned Income 80
5.4 Other Current Assets 81
References 82
6 Short-Term Liabilities & Working Capital 83
6.1 General 83
6.2 Accounts Payable 83
6.3 Notes Payable 84
6.4 Current Maturities of Long-Term Debt 85
6.5 Other Current Liabilities 85
6.6 Commercial Paper 86
6.7 Working Capital 87
6.7.1 Determinants of Working Capital 87
6.7.2 Financing of Working Capital 88
6.7.3 Computation of Working Capital:
Example 88
xii CONTENTS

7 Long-Term Assets: Plant, Property, and Equipment 89

7.1 General 89
7.2 Property, Plant, and Equipment 90
7.2.1 Acquisition of Property, Plant,
and Equipment 90
7.2.2 Cost of Land 91
7.2.3 Cost of Buildings 92
7.2.4 Cost of Equipment 93
7.3 Valuation of Property, Plant, and Equipment 94
7.4 Amortization, Depreciation, and Depletion 94
7.4.1 Straight-Line Method of Depreciation 95
7.4.2 Declining Balance Method
of Depreciation 96
7.4.3 Double Declining Balance Depreciation
Method 97
7.4.4 Units of Production Method
of Depreciation 99
7.4.5 Sum of the Years’ Digits Method
of Depreciation 100
7.5 Disposition of Property, Plant, and Equipment 101
7.5.1 Sale of Plant Assets 102
7.5.2 Involuntary Conversion 102
7.5.3 Miscellaneous Problems 103
References 103
8 Long-Term Assets: Intangibles 105
8.1 General 105
8.2 The Goodwill 106
8.2.1 Goodwill Impairment 107
8.3 Computer Software 111
8.3.1 Research and Development Costs
of Computer Software 112
8.3.2 Production Costs of Computer Software 112
8.3.3 Purchased Computer Software 112
8.3.4 Amortization of Capitalized Software
Costs 113
8.3.5 Presentation and Disclosure of Software
Costs 114
 CONTENTS xiii

8.3.6 Software Purchased Before Technological

Feasibility Established 114
8.3.7 Disclosure of Risks and Uncertainties
Related to Capitalized Software Costs 115
References 115
9 Long-Term Liabilities: Leases 117
9.1 General 117
9.2 Lease 117
9.2.1 Legal Definition of a Lease 117
9.2.2 Advantages and Disadvantages
of Leasing 119
9.3 Types of Leases 119
9.3.1 Finance Lease 120
9.3.2 Operating Lease 121
9.4 Sale-Leaseback 123
9.4.1 Sale-Leaseback Advantages 123
9.4.2 Accounting Analysis 123
9.5 Short-Term Lease 126
9.6 Lease Disclosure 127
9.6.1 In the Balance Sheet 127
9.6.2 In the Statement of Cash Flows 127
References 128
10 Long-Term Liabilities: Pension & Postretirement
Liabilities 129
10.1 General 129
10.2 Types of Pension Plans 130
10.2.1 Defined Contribution Plan 130
10.2.2 Defined Benefit Plan 132
10.3 Net Pension Asset/Liability 133
10.4 Projected Benefit Obligations 133
10.5 Plan Assets 134
10.6 Reporting Pensions Plans on Financial Statements 135
10.6.1 In the Statement of Income 135
10.6.2 In the Balance Sheet 137
10.7 Funded Status 137
10.8 Postretirement Benefits Other Than Pensions 139
References 140
xiv CONTENTS

11 Shareholders’ Equity 141

11.1 General 141
11.2 Common Stock 143
11.2.1 Par Value of Common Stock 144
11.2.2 Stated Value of a Common Stock 144
11.2.3 Authorized Capital 144
11.2.4 Issued Capital 145
11.2.5 Outstanding Capital 145
11.3 Issuance of Shares of Stock 146
11.3.1 Issuance of Par Value Stock 146
11.3.2 Issuance of no Par Stock 147
11.4 Issuance of Shares for Non-Cash Items 147
11.5 Lump Sum Stock Issuance 148
11.6 Treasury Stock—Cost Method 149
11.7 Treasury Stock—Par Value Method 151
11.8 Stock Dividends 152
11.8.1 Small Stock Dividend 153
11.8.2 Large Stock Dividend 153
11.9 Employee Stock Options 154
11.9.1 Legal Understanding 154
11.9.2 Statement of Financial Accounting
Standard No. 123 155
11.9.3 Illustration 156
11.9.4 Stock Splits 157
11.9.5 Retained Earnings 157
References 158

Part II The Statement of Income

12 Analysis of the Statement of Income 163
12.1 General 163
12.2 The Single-Step Income Statement 163
12.3 Multiple-Step Income Statement 165
12.3.1 Analysis of the Multiple-Step Components 166
12.3.2 Format and Example 169
12.4 Holding Equity 169
12.5 Income from Discontinued Operations 171
References 172
 CONTENTS xv

13 Other Comprehensive Income 173

13.1 General 173
13.2 Presentation of the OCI 174
13.3 Accumulated OCI 175
13.3.1 Foreign Currency Accounting 175
13.3.2 Discontinued Operations 176
13.4 Reclassification Out of Accumulated Other
Comprehensive Income 179
13.4.1 Presentation on the Face
of the statement—in Net Income 180
13.4.2 Presentation as a Separate Disclosure
in the Notes 181
13.5 Earnings Per Share 183
13.5.1 The Computation of the Simple EPS 183
13.5.2 The Computation of the Diluted EPS 186
References 188
14 The Sub-Statement of Retained Earnings 189
14.1 General 189
14.2 Steps in Preparing the Statement of Retained
Earnings 190
14.3 Retained Earnings Formula 190
14.4 Changes in Retained Earnings 191
14.4.1 Accounting Changes and Retained
Earnings 192
14.4.2 Accounting Errors and Retained
Earnings 195
References 196
15 The Computation of the Taxable Income 197
15.1 General 197
15.2 Differed Taxes & Assets 198
15.2.1 Temporary Differences for Revenue
and Expenses 198
15.2.2 Permanent Differences 201
15.3 Net Operating Losses 202
15.4 Undistributed Profits of Foreign Subsidiaries 203
15.5 APB 23 and Indefinitely Reinvested Earnings 205
15.6 ASC 740: Accounting for Uncertainty in Income
Taxes (Formerly FIN 48) 206
xvi CONTENTS

15.7 Financial Statement Reporting 208

15.7.1 Statement Reporting 208
15.7.2 Presentation 209
15.7.3 Disclosure 209
References 211

Part III The Statement of Cash Flows & Financial

Ratios
16 Analysis of the Statements of Cash Flows 215
16.1 General 215
16.2 Classification of Cash Flows 216
16.2.1 Cash Flows from Operating Activities 217
16.2.2 Cash Flows from Investing Activities 218
16.2.3 Cash Flows from Financing Activities 218
16.3 Content and Form of the Statement of Cash Flows 219
16.3.1 Reporting Cash Flows from Operating
Activities 219
16.3.2 Quick Analysis of the Operating Cash
Flows 224
16.4 Examples 224
16.4.1 Example of Operating Cash Flows 224
16.4.2 Example with Investing Cash Flows 225
16.4.3 Example with Financing Cash Flow
Activities 227
16.5 Noncash Investing and Financing Activities 227
References 228
17 Financial Ratios Analysis 229
17.1 General 229
17.2 Liquidity Measurement Ratios 229
17.3 Solvency Ratios 237
17.4 Profitability Indicator Ratios 240
17.5 Efficiency Ratios 247
17.6 Debt Ratios 251
17.7 Operating Performance Ratios 254
17.8 Cash Flow Indicator Ratios 257
17.9 Investment Valuation Ratios 259
17.10 Strategic Financial Ratios 264
17.11 Bankruptcy Ratios 271
 CONTENTS xvii

17.11.1 Working Capital/Total Assets 271

17.11.2 Retained Earnings/Total Assets 272
17.11.3 Earnings Before Interest and Taxes/Total
Assets 273
17.11.4 Market Value of Equity/Book Value
of Total Debt 273
17.11.5 Sales/Total Assets 274
17.12 Limitations 274
References 275

Part IV Pro-Forma Financial Statements

18 Forecasting Financial Statements’ Analysis 279
18.1 General 279
18.2 The Forecasted Statement of Income 279
18.2.1 Sales Forecasting 280
18.2.2 Production & COGS Forecasting 280
18.2.3 Expenses’ Forecasting 280
18.3 The Forecasted Statement of Position 280
18.3.1 Making Assumptions 281
18.4 The Forecasted Statements of Cash Flows 283
18.4.1 Forecasting Operating Cash Flows 283
18.4.2 Forecasting Financing Cash Flow 284
18.4.3 Forecasting Investing Cash Flow 286
References 287

Part V Consolidated Financial Statements

19 Foreign Currency Accounting 291
19.1 General 291
19.2 Determination of the Functional Currency
of the Foreign Entity 291
19.2.1 Factors to Be Considered 292
19.2.2 Changing the Functional Currency 294
19.3 Translation Methods 294
19.3.1 Current/Noncurrent Method 294
19.3.2 Monetary/Nonmonetary Method 295
19.3.3 Temporal Method 295
19.3.4 Current Rate Method 296
19.4 Re-Measurement into the Functional Currency 297
xviii CONTENTS

19.4.1 The Foreign Entity Does not Book

or Record in Functional Currency 297
19.4.2 Highly Inflationary Economies—US
GAAP 297
19.5 Hedging Balance Sheet & Forecasted Exposure 298
References 299
20 Consolidated Financial Statements 301
20.1 Overview 301
20.2 Purpose of Consolidation 302
20.3 Consolidation Methods 303
20.4 Consolidation Theories 304
20.4.1 Parent Company Theory 304
20.4.2 Contemporary/Entity Theory 304
20.4.3 Traditional /Hybrid Theory 305
20.5 The Consolidation Process 305
20.6 Pushdown Accounting 306
References 309
21 Segment and Intermediary Financial Statements 311
21.1 General 311
21.2 Segment Statements 311
21.2.1 Reportable Segments 312
21.2.2 Identification of Additional Segment 315
21.2.3 Disclosure Requirements 316
21.2.4 Measurement 318
21.2.5 Entity-Wide Information 320
21.2.6 Goodwill Considerations 323
21.3 Intermediary Statements 324
References 332
22 IFRS and GAAP 333
22.1 General 333
22.2 Principles Based vs. Rules Based 334
22.3 Selected International Accounting Standards 335
22.3.1 IAS 1—Presentation of Financial
Statement 335
22.3.2 IAS 2—Inventories 337
22.3.3 IAS 5—Non-Current Assets Held
for Sale and Discontinued Operations 338
 CONTENTS xix

22.3.4 IAS 7—Statements of Cash Flows 339

22.3.5 IAS16—Leases 342
22.3.6 IAS 24—Related Disclosures 344
22.3.7 IAS 27—Consolidated Financial
Statements 346
22.3.8 IAS 32—Financial
Instrument—Presentation 351
22.3.9 IAS 33—Earnings Per Shares 354
22.3.10 IAS 34—Interim Financial Reporting 355
References 360

Part VI Case Study

23 Apple and Microsoft 369
23.1 Industry Analysis 369
23.2 Apple 370
23.2.1 Overview 371
23.2.2 Competition 372
23.2.3 Business Strategy 373
23.2.4 Financial Statements 373
23.3 Microsoft 376
23.3.1 Overview 376
23.3.2 Competition 379
23.3.3 Business Strategy 380
23.3.4 Financial Statements 380
23.4 Financial Analysis 382
23.4.1 Industry Analysis—Porter Five Forces 382
23.4.2 Common-Size Balance Sheet Analysis 384
23.4.3 Common-Size Income Statement Analysis 385
23.4.4 Comparative Financial Statements
Analysis 385
23.4.5 Financial Ratio Analysis 392
23.4.6 Comparative Financial Ratio Analysis 398
References 399

Part VII Non-GAAP Reporting & Earnings

Management
24 Non-GAAP Reporting 403
24.1 General 403
xx CONTENTS

24.2 Non-GAAP Metrics’ Concerns 404

24.3 Perceived Advantages and Fears 405
24.3.1 Advantages of Non-GAAP Metrics 405
24.3.2 Perceived Disadvantages 406
24.4 Illustration of Non-GAAP Reporting 408
24.5 Identification of Risk-Accounts’ Tools 410
24.6 The Disaggregation of the Statement of Income 410
24.7 Improving the Intermediary Measurements
of Profits 411
24.8 Concluding Remarks 418
References 418
25 Earnings Management Through Excessive Reserves
and Provisions 421
25.1 General 421
25.2 Creation of Reserves 422
25.3 Accounting for Provision 422
25.3.1 Creation of a Provision 423
25.3.2 Use of a Provision 424
25.3.3 Reversal of a Provision 425
25.4 Earnings Management Cases in the United States 425
25.4.1 Cookie Jar Reserves 425
25.4.2 Use of Hidden Reserves 427
25.4.3 Undisclosed Changes in Accounting
Methods 429
25.5 Detecting Earnings Manipulations 430
References 431

Part VIII Valuation

26 Valuation Accounting 435
26.1 General 435
26.2 Importance of Asset Valuation 435
26.3 Valuation Principles 436
26.3.1 Historical Cost Method of Valuation 436
26.3.2 Current Cost Method of Valuation 439
26.3.3 Realizable Value 440
26.3.4 Present Value 441
26.4 Valuation Methods 443
 CONTENTS xxi

26.4.1 Method 1: Comparable Analysis

(“Comps”) 443
26.4.2 Method 2: Precedent Transactions 446
26.4.3 Method 3: DCF Analysis 448
26.4.4 Book Value 453
26.4.5 Liquidation Value 454

Glossary of the Terms 457

Index 469
 Abbreviations

ABS Asset Backed Security

AIA American Institute of Accountants
AICPA American Institute of Certified Public Accountants
ARM Accrual Reversal Method
ASC Accounting Standard Committee
ASU Accounting Standard Update
COGS Cost of Goods Sold
EBIT Earnings before Interest and Tax
EBITDA Earnings before Interest Tax Depreciation and Amortization
EFRAG European Financial Reporting Advisory Group
EITF Emerging Issues Task Force
EPS Earnings per Share
ESOs Employee Stock Options
FASB Financial Accounting Standard Board
FIFO First-In, First-Out
FRC Financial Reporting Council
FS Financial Statements
GAAP Generally Accepted Accounting Principles
GASB Governmental Accounting Standards Board
IAS International Accounting Standard
IASB International Accounting Standard Board
ICAI Institute of Chartered Accountant of India
IFRS International Financial Reporting Standards
ISOs Incentive Stock Options
LIFO Last-In, First-Out
MBS Mortgage Backed Security

xxiii
xxiv ABBREVIATIONS

MD&A Management Discussion & Analysis

NZASB New Zealand Accounting Standards Board
OCI Other Comprehensive Income
PBO Projected Benefit Obligation
PCAOB Public Company Accounting Oversight Board
PPE Plants, Property, Equipment
ROA Return-on-Assets
ROI Return on Investment
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standard
 List of Tables

Table 8.1 Goodwill change 109

Table 13.1 Accumulated other comprehensive income 176
Table 13.2 Walmart diluted and basic income per share 188
Table 16.1 PepsiCo consolidated statement of cash flows 220
Table 23.1 Apple consolidated balance sheet 374
Table 23.2 Apple consolidated statement of income 375
Table 23.3 Apple consolidated statement of comprehensive income 376
Table 23.4 Apple consolidated statement of shareholders’ equity 377
Table 23.5 Apple consolidated statement of cash flows 378
Table 23.6 Microsoft consolidated balance sheet 381
Table 23.7 Microsoft consolidated statement of income 381
Table 23.8 Micorsoft consolidated statement of comprehensive
income 382
Table 23.9 Microsoft consolidated statement of shareholders’
equity 382
Table 23.10 Microsoft consolidated statement of cash flows 383
Table 23.11 Apple common-size balance sheet 386
Table 23.12 Microsoft common-size balance sheet 387
Table 23.13 Apple common-size income statement 388
Table 23.14 Microsoft common-size income statement 389

xxv
 PART I

Overview of Financial Statements

and the Statement of Position

In the US, Financial statements are prepared and presented in accordance

with the GAAP. However, correspondence between accounting numbers
and the events/transactions those numbers purport to represent is far
from giving the real picture.1 Despite, these inherent flaws, the statements
as delivered to its readers still deserve a considerable amount of scrutiny
and analysis.
ASC 210-10 provides a general overview of the aspects of the balance
sheet, which is also commonly referred to as a statement of financial
position. The balance sheets of most entities show separate classifications
of
• Current assets and current liabilities;
• Long-term assets and long-term;
• Shareholders’ equity.
ASC 210-20 describes the concept of offsetting assets and liabilities in
the balance sheet and notes the limited circumstances when it is allowed.
ASC 210-20 includes the overview of the Subtopic.
This Subtopic provides criteria for offsetting amounts related to certain
contracts and provides guidance on presentation. It is a general principle
of accounting that the offsetting of assets and liabilities in the balance
sheet is improper except if a right of setoff exists. The general principle
that the offsetting of assets and liabilities is improper except where a

1 Lawrence Revsine (1991): The Selective Financial Misrepresentation Hypothesis,

Accounting Horizons, pp. 16–27.
2 PART I: OVERVIEW OF FINANCIAL STATEMENTS …

right of setoff exists is usually thought of in the context of unconditional

receivables from and payables to another party. That general principle also
applies to conditional amounts recognized for contracts under which the
amounts to be received or paid or items to be exchanged in the future
depend on future interest rates, future exchange rates, future commodity
prices, or other factors.

Reference
Lawrence Revsine (1991): The Selective Financial Misrepresentation Hypothesis,
Accounting Horizons, pp. 16–27.
 CHAPTER 1

Overview of Financial Statements

1.1 General
Financial reporting is essentially a way of following standard practices to
give to the readers of the financial statements an accurate depiction of a
firm’s finances, including its revenues, expenses, profits, capital, and Cash
flows. Financial reporting is also a building block of market-based moni-
toring of companies, which allows shareholders and the public at large to
assess management performance.1 In the wake of the international finan-
cial crisis of the 1990s, the international community embarked on a range
of initiatives to strengthen the international financial architecture.2 Finan-
cial reporting plays a crucial role in supporting the efficient functioning
of the capital markets. Robust financial reporting increases investors’
confidence, which in tum leads to better capital allocation decisions and
economic growth.

1 UNCTD (2004): International Accounting Reporting Issues, chapter 3, p. 54, par. 2.

2 UNCTD (2004): International Accounting Reporting Issues, chapter 3, p. 59.

© The Author(s), under exclusive license to Springer Nature 3

Switzerland AG 2022
F. I. Lessambo, Financial Statements,
https://doi.org/10.1007/978-3-031-15663-2_1
4 F. I. LESSAMBO

1.2 The International

Accounting Standard Board: IFRS
The concept of convergence first arose in the late 1950s in response to
post-World War II economic integration and related increases in cross-
border capital flows. Initially, the focus was put on harmonization. That
is, reducing differences among the accounting principles used in major
capital markets around the world. By the 1990s, the notion of harmo-
nization was replaced by the concept of convergence. The International
Accounting Standards Committee, formed in 1973, was the first interna-
tional standards-setting body. It was reorganized in 2001 and became an
independent international standard-setter, the International Accounting
Standards Board (IASB). As of 2013, the European Union and more than
100 other countries either require or permit the use of international finan-
cial reporting standards (IFRSs) issued by the IASB or a local variant of
them. By 2016, approximately 120 countries and jurisdictions, including
Hong Kong, Egypt, Canada, Australia, and the countries in the European
Union, require or permit the use of IFRS or a local variant of IFRS.
The FASB and the IASB have been working together since 2002
to improve and converge US generally accepted accounting principles
(GAAP) and IFRS. As of 2013, Japan and China were also working
to converge their standards with IFRSs. The Securities and Exchange
Commission (SEC) consistently has supported the convergence of global
accounting standards. However, the Commission has not yet decided
whether to incorporate International Financial Reporting Standards
(IFRS) into the US financial reporting system. The Commission staff
issued its final report on the issue in July 2012 without making a
recommendation.

1.3 European Financial

Reporting Advisory Group (EFRAG)
EFRAG is an advisory body that participates in the European endorse-
ment process of IFRS Standards.3 The European Union (EU) is not
a single jurisdiction but, rather, an economic and political partner-
ship between 28 European countries that together cover much of the

3 https://effas.com/international-relations/the-european-financial-reporting-advisory-
group-efrag/.
 1 OVERVIEW OF FINANCIAL STATEMENTS 5

continent of Europe. With respect to accounting, the European Union

has enacted some laws, known as (“Directives”) that all EU and EEA
members must comply with. Some of those Directives address accounting
issues. The most notable is Directive 2013/34/EU of the European
Parliament and of the Council of 26 June 2013 on the annual financial
statements, consolidated financial statements, and related reports. EU and
EEA member states may enact additional accounting laws and regulations
that add to the requirements of the Directives, but they cannot override
the requirements of the Directives.
EFRAG serves the European public interest by developing and
promoting European views in the field of financial reporting and ensuring
these views are properly considered in the IASB standard-setting process
and in related international debates.4 EFRAG ultimately provides advice
to the European Commission on whether newly issued or revised IFRS
meet the criteria in the IAS Regulation for endorsement for use in
the EU, including whether endorsement would be conducive to the
European public good. EFRAG seeks input from all stakeholders, and
obtains evidence about specific European circumstances, throughout the
standard-setting process and in providing our endorsement advice. The
EFRAG is recognized as the European Voice in financial reporting.

1.4 The United States: The FASB

The FASB is an independent, private sector organization that oper-
ates under the oversight of the Financial Accounting Foundation (FAF)
and the US Securities and Exchange Commission (“SEC” or “Commis-
sion”).5 For nearly 40 years, the FASB has established standards of finan-
cial accounting and reporting for nongovernmental entities, including
both businesses (public and private) and not-for-profit organizations.
Those standards—US GAAP—are recognized as authoritative by the SEC
for public companies and by the American Institute of Certified Public
Accountants (AICPA) for other nongovernmental entities.
US GAAP is essential to the efficient functioning of the US economy
because investors, creditors, donors, and other users of financial reports
rely heavily on credible, transparent, comparable, and unbiased financial

4 https://www.efrag.org/About/Facts.
5 https://asc.fasb.org/.
6 F. I. LESSAMBO

information. In today’s dynamic financial markets, the need for integrity,

transparency, and objectivity in financial reporting is increasingly critical
to ensure the strength of US capital markets and provide investors with
accurate and timely information.
In 2002, the US Congress enacted the Sarbanes-Oxley Act, which
included provisions protecting the integrity of the FASB’s accounting
standards-setting process. The legislation provided the FASB with an
independent, stable source of funding. The legislation established an
ongoing source of funding for the FASB from annual accounting support
fees collected from issuers of securities, as those issuers are defined in the
Sarbanes-Oxley Act.
It is important to note that although the FASB has the responsibility to
set accounting standards, it does not have the authority to enforce them.
Officers and directors of a company are responsible for preparing finan-
cial reports in accordance with accounting standards. Auditors provide an
opinion about whether those officers and directors appropriately applied
accounting standards. The Public Company Accounting Oversight Board
(“PCAOB”) is charged with ensuring that auditors of public companies
have performed an audit in accordance with the auditing standards of
the PCAOB, which includes an auditor’s analysis of whether a public
company has complied with appropriate accounting standards. The SEC
has the ultimate authority to determine whether public companies have
complied with accounting standards.

• The Mission of the FASB

The FASB’s mission is to establish and improve standards of financial

accounting and reporting that foster financial reporting by nongovern-
mental entities that provides useful decision-making information to
investors and other users of financial reports. The FAF’s Board of Trustees
accomplishes that mission through a comprehensive and independent
process that encourages broad participation, objectively considers all
stakeholders’ views, and is subject to oversight. To accomplish its mission,
the FASB acts to6 :

6 https://www.fasb.org/info/facts.
 1 OVERVIEW OF FINANCIAL STATEMENTS 7

1. Improve the usefulness of financial reporting by focusing on the

primary characteristics of relevance and reliability and on the quali-
ties of comparability and consistency.
2. Keep standards current to reflect changes in methods of doing
business and changes in the economic environment.
3. Consider promptly any significant areas of deficiency in financial
reporting that might be addressed through the standards-setting
process.
4. Improve the common understanding of the nature and purpose of
the information contained in financial reports.

As it works to develop accounting standards for financial reporting, the

FASB is committed to following an open, orderly process that considers
the interests of the many who rely on financial information.

• The Standards-Setting Process

An independent standards-setting process is paramount to producing

high-quality accounting standards because it relies on the collective
judgment of experts who are informed by the input of all interested
parties through a deliberate process. The FASB sets accounting standards
through processes that are thorough and open, accord due process to
all interested parties, and allow for extensive input from all stakeholders.
Such extensive due process is required by the Rules of Procedure, set by
the Board within the parameters of the FAF’s bylaws. The FASB process is
similar to the Administrative Procedure Act process used by federal agen-
cies for rulemaking but provides far more opportunities for interaction
with all interested parties.
In short, the FASB actively seeks input from all of its stakeholders on
proposals and processes. Wide consultation provides the opportunity for
all stakeholders to be heard and considered, the identification of unin-
tended consequences, and, ultimately, broad acceptance of the standards
that are adopted. The Board’s wide consultation also helps it to assess
whether the benefits to users of improved information from proposed
changes outweigh the costs of the changes to preparers and others.
The FASB meets regularly with the staff of the SEC and the PCAOB.
Additionally, because banking regulators have a keen interest in US GAAP
8 F. I. LESSAMBO

financial statements as a starting point in assessing the safety and sound-

ness of financial institutions, the Board meets with them on a quarterly
basis and otherwise, as appropriate. The FASB conducts outreach on a
frequent and regular basis with the FASB’s various advisory groups. The
primary role of advisory group members is to share their views and expe-
rience with the Board on matters related to practice and implementation
of new standards, projects on the Board’s agenda, possible new agenda
items, and strategic and other matters.
In addition to the FASB’s various advisory groups, the Emerging Issues
Task Force (“EITF”) assists the FASB in improving financial reporting
through the timely identification, discussion, and resolution of finan-
cial accounting issues relating to US GAAP. The EITF was designed to
promulgate implementation guidance for accounting standards to reduce
diversity in accounting practice on a timely basis. The EITF assists the
FASB in addressing implementation, application, or other emerging issues
that can be analyzed within existing US GAAP. Task Force members are
drawn from a cross-section of the FASB’s stakeholders, including audi-
tors, preparers, and users of financial statements. The chief accountant
or the deputy chief accountant of the SEC attends Task Force meetings
regularly as an observer with the privilege of the floor. The member-
ship of the EITF is designed to include persons who are in a position
to project emerging issues before they become widespread and before
divergent practices become entrenched.

• Oversight of FASB

The FASB’s accountability derives from oversight at two levels. First,

the independent Board of Trustees of the FAF oversees the Board. Orga-
nized in 1972, the FAF is an independent, private sector, not-for-profit
organization. The FAF exercises its authority by having responsibility for
oversight, administration, and finances of the FASB and its sister orga-
nization the Governmental Accounting Standards Board (“GASB”). The
FAF’s responsibilities consist of:

1. Selecting the members of the FASB, the GASB, and their respective
Advisory Councils.
2. Overseeing the FASB’s and the GASB’s Advisory Councils
(including their administration and finances).
 1 OVERVIEW OF FINANCIAL STATEMENTS 9

3. Overseeing the effectiveness of the FASB’s and the GASB’s stan-

dards setting processes and hold the Boards accountable for those
processes.
4. Protecting the independence and integrity of the standards-setting
process.
5. Educating stakeholders about those standards.

Second, the FASB is subject to oversight by the SEC with respect

to standards setting for public companies. The SEC has the statu-
tory authority to establish financial accounting and reporting standards
for public entities. At the time of FASB’s formation in 1973, the
SEC formally recognized the FASB’s pronouncements that establish and
amend accounting principles and standards as “authoritative” in the
absence of any contrary determination by the Commission. In 2003,
the SEC issued a Policy Statement that affirms the FASB’s status as a
designated, private sector standards setter.

1.5 The United Kingdom:

Financial Reporting Council (FRC)
In the United Kingdom, Accounting standards derive from a number
of sources. The chief standard-setter is the Accounting Standards Board
(ASB), which issues standards called Financial Reporting Standards
(FRS).7 The ASB is part of the Financial Reporting Council, an indepen-
dent regulator funded by a levy on listed companies, and it replaced the
Accounting Standards Committee (ASC), which was disbanded in 1990
following a number of criticisms of its work. To the extent that FRS has
not replaced the ASC’s pronouncements, known as Statements of Stan-
dard Accounting Practice (SSAPs), they remain in force. In 2015, the
UK’s Financial Reporting Council (FRC) published a set of new reporting
standards collectively known as the New UK GAAP. These new standards
applied to all accounting periods starting on or after January 1, 2016. The
Board comprises the Chairman, the Deputy Chairman, the Chief Execu-
tive, the Chair of the Codes and Standards Committee, the Chair of the
Conduct Committee, and other non-executive directors (including the

7 https://www.gov.uk/government/organisations/financial-reporting-council.
10 F. I. LESSAMBO

Chairs of the Corporate Reporting and Actuarial Councils). The Secre-

tary of State for Business, Energy & Industrial Strategy (BEIS), appoints
the Chairman and Deputy Chairman.
The UK’s Financial Reporting Council (FRC) published five standards,
which together form the basis of the new UK regime. The Financial
Reporting Standard for Smaller Entities will continue to be available for
those that qualify to use it and will remain fundamentally unaltered for
the time being. In March 2013, the FRC (now responsible for issuing
accounting standards in the United Kingdom) issued FRS 102, The
Financial Reporting Standard Applicable in the United Kingdom and the
Republic of Ireland. This followed the issue of FRS 100 Application of
Financial Reporting Requirements and FRS 101—The Reduced Disclo-
sure Framework in November 2012. Together these standards make up
what is commonly referred to by accountants as the new UK GAAP,
which takes mandatory effect for accounting periods commencing on or
after January 1, 2015. The introduction of the New UK GAAP aimed to
make financial reporting both easier and cheaper, while creating a more
unified, coherent, and succinct set of standards. Compared to the old
standards, the New UK GAAP:

– Expands its definition of a “financial institution”;

– Enables more organizations to apply for the UK GAAP, including a
wider range of SMEs and micro-businesses;
– Creates new rules for some certain assets and sources of income,
including biological assets and government grants;
– Assumes all intangible assets have finite lives and must be amortized.

• UK GAAP for micro-entities

Under the New UK GAAP, a simpler accounting standard has been

developed for “micro-entities.” To be classified as a micro-entity, a
company must meet at least two of the following requirements:

– An annual turnover of less than £632,000.

– A balance sheet total of less than £316,000.
– No more than 10 employees.
 1 OVERVIEW OF FINANCIAL STATEMENTS 11

In 2016, the micro-entities regime was extended to include qualifying

partnerships but some organizations, such as charities, still cannot qualify
as micro-entities. The micro-entities standard is optional, and qualifying
companies can follow the rules for larger organizations if they choose to
do so.
According to this standard, micro-entity:

– Can produce a more simple balance sheet and profit & loss account;
– Are exempt from having to produce a directors’ report;
– Are required to include less information and notes on their
accounts—this is known as “minimum accounting items”;
– Do not need to file their profit and loss account Companies House,
only their balance sheet.

The Board is supported by three governance committees: (i)

Audit Committee; (ii) Nominations Committee; and (iii) Remuneration
Committee and by two business committees: (i) Codes & Standards
Committee, and (ii) Conduct Committee.
The Codes & Standards Committee is supported by three Councils,
which advice on Corporate Reporting, Audit & Assurance, and Actuarial
matters. The CRR Committee, AQR Committee, and the Case Manage-
ment Committee support the Conduct Committee and have specific
responsibilities as set out in the FRC’s monitoring, review and disciplinary
procedures. The Financial Reporting Review Panel and the disciplinary
Tribunal Panel are maintained pursuant to the Conduct Committee
Operating procedures and the FRC’s Disciplinary Schemes.

• UK GAAP Standard Process

The ASB has a formal exposure process for proposed standards. Early
concepts are issued as Discussion Papers. These are released to the public
and comments invited. Where a new standard is to be proposed, a Finan-
cial Reporting Exposure Draft (FRED) is released for comments. The
standard in final form is only issued when comments have been incorpo-
rated or addressed. This aims to address the criticisms leveled at the ASC,
whose comment process was less rigorous. The Urgent Issues Task Force
(UITF) considers issues that require an immediate solution. The UITF
comprises a number of senior figures from industry and accounting firms.
12 F. I. LESSAMBO

It meets as necessary to consider pressing issues and issues Abstracts,

which become binding immediately.

1.6 Japan: The Accounting

Standard Board of Japan
Japanese generally accepted accounting principles (GAAP) are developed
by the Accounting Standard Board of Japan (ASBJ) established in 2001.8
The ASBJ develops Accounting Standards in accordance with the “Rules
on the Due Process for the Development of Japanese GAAP and Japan’s
Modified International Standards” (“Due Process Rules”) set out by the
Financial Accounting Standards Foundation (FASF). Japanese GAAP is
one of the four sets of accounting standards listed companies in Japan
can currently choose to use to file their consolidated financial statements.
The other three sets of accounting standards are the IFRS, US GAAP,
and Japan’s Modified International Standards (JMIS). IFRS Standards
have been permitted since 2010. Since then, a large number of Japanese
companies have decided to use IFRS Standards for their financial state-
ments; 164 listed companies have either already adopted or announced
plans to adopt IFRS Standards, representing approximately 30 percent of
the total market capitalization of all listed companies in Japan. The ASBJ
holds Board meetings at least once a month. The discussions of the Board
meetings are generally open to the public unless, under limited circum-
stances, the Chairman of the ASBJ decides to make the meeting private.
The video recordings of Board meetings are made available for a certain
period of time on the FASF website. Furthermore, papers used for discus-
sions at Board meetings are generally made available on the FASF website
unless they relate to drafts of Exposure Drafts and accounting standards.

• Due Process

The Due Process Oversight Committee, set up by the Financial

Accounting Standards Foundation (FASF), ensures that the due process
that the ASBJ must follow when developing Accounting Standards is
followed indeed. The ASBJ is required to report to the Due Process

8 https://www.asb.or.jp/en/.
 1 OVERVIEW OF FINANCIAL STATEMENTS 13

Oversight Committee its compliance with the Due Process Rules when-
ever the ASBJ issues a new Accounting Standard or amends an existing
Accounting Standard that is considered material, or whenever the ASBJ
plans or conducts a post-implementation review. Furthermore, the ASBJ
is required to report annually to the Due Process Oversight Committee a
summary of its compliance with the Due Process Rules for the specific
year. When developing accounting standards, the ASBJ is required to
solicit the views of constituents in a sufficient and appropriate manner.
When the ASBJ develops a new Accounting Standard or amends an
existing Accounting Standard, the ASBJ generally issues an Exposure
Draft and solicits comments from the general public. However, in rare
cases such as when the proposal is immaterial, the Chairman of the ASBJ
may decide to ask the ASBJ to vote for not issuing an Exposure Draft.
Furthermore, when considered necessary, the ASBJ may issue a Discus-
sion Paper prior to the issuance of an Exposure Draft and solicit the
views of constituents. Exposure Drafts and Discussion Papers generally
have a comment period of two months or longer. However, considering
the significance or urgency of the proposals, the ASBJ may vote to have
a shorter comment period. Responses received on Exposure Drafts and
Discussion Papers, together with the name of the respondents, will be
made available on the FASF website. Responses received are considered by
the ASBJ in a timely manner and the results of the ASBJ’s considerations
will be made available on the FASF website. Before an Accounting Stan-
dard is issued, the ASBJ considers whether there is a need to re-expose its
proposals.

1.7 Australia: The Australian

Accounting Standard Board
The Australian Accounting Standard Board (AASB) is an agency of the
Australian government under the Australian Securities and Investment
Commission Act of 2001.9 The AASB provides and updates standards
for public and private sector financial reporting for organizations in
Australia. The Board comprises 11 members including the Chair. The
Minister appoints the Chair for Superannuation and Corporate Law and
the Financial Reporting Council (FRC) appoints members, from a variety

9 https://aasb.gov.au/.
14 F. I. LESSAMBO

of backgrounds. The Chair of the AASB reports to the Minister regarding

the organization’s operations.

• The functions of the AASB are to:

– develop a conceptual framework for evaluating proposed accounting

standards and international standards;
– make accounting standards under section 334 of the Corporations
Act 2001 for the purposes of the corporations’ legislation;
– formulate accounting standards for other purposes;
– participate in and contribute to the development of a single set of
accounting standards for worldwide use; and
– facilitate the Australian economy by reducing the cost of capital,
enabling Australian entities to compete effectively overseas, leaving
accounting standards that are clearly stated and easily to under-
stand, and to maintain investor confidence in the Australian economy
(including its capital markets).

Australia has adopted International Financial Reporting Standards

(IFRSs) since January 1, 2005, in line with a strategic direction from
the Financial Reporting Council. Therefore, issues on the IASB work
program and the IFRIC work program are also included in the AASB
work program, although the degree of involvement by the AASB varies
issue by issue and may be substantive or non-substantive.

• The Due Process

– AASB standard-setting process starts with identifying the tech-

nical issue. The technical issue can be identified by international
organizations (including the International Accounting Standards
Board (IASB), IFRS Interpretations Committee and International
Public Sector Accounting Standards Board (IPSASB), the Australian
Accounting Standard Board (AASB) itself and the Australian organi-
zation/individual.
 1 OVERVIEW OF FINANCIAL STATEMENTS 15

– AASB will develop a project proposal on the technical issue iden-

tified. The decision on whether to place the issue on its agenda is
based on the assessment of the project. Some considerations involved
include the benefit and cost consideration (which is the cost of not
undertaking it), availability of resources, and likely timing.
– Discussion on the agenda papers is then developed and presented by
AASB on the research and consider issue stage. The agenda papers
consider relevant material from other standard-setters and address
the scope of the issue, alternative approaches, and timing of outputs.
– On the consultation with stakeholders stage, the AASB involves
various stakeholders to make comments and discussion via one of
the following documents: —Exposure Drafts (EDs) is a draft of a
proposed (or amendment) standard. Invitations to Comment (ITCs)
aim to seek feedback on broad proposals. Draft Interpretations is a
draft of a proposed interpretation of a standard.
– Discussion Papers (DPs) outline wide range of possible accounting
policies on the issue. Roundtable discussions are the formal discus-
sions for the proposals issued for comment with a range of stake-
holders. Focus Groups consist of two groups, the User Focus
Group and the Not-For-Profit Focus Group. The User Focus Group
represents the financial statement users and NFP Focus Group
comprises a representative of NFP sector. Project Advisory Panels
provides advises and comments on the agenda papers and this group
members are the expertise in that topic. Interpretation Advisory
Panels comprise preparers, users, auditors, and regulators preparing
alternative views on an issue and recommendations for consideration
by the AASB.
– The document issued for comment will be formally submitted to the
IASB an IPSASB to achieve the objective of high-quality interna-
tional accounting standards. The issuance of a pronouncement may
include a standard, an interpretation, or a conceptual framework
document. The pronouncement to be applied to for-profit entities
will be made consistent with International Financial Reporting Stan-
dards (IFRSs). One of the main roles of AASB is placed at the
final stage of the standard-setting process, which is the implemen-
tation and compliance of accounting standards and interpretations
in Australia.
16 F. I. LESSAMBO

– If the standards are deemed inappropriate to be implemented in

Australia, AASB will lead the revision or submission to propose
changes to IASB or IPSASB.

1.8 New Zealand: The New Zealand

Accounting Standards Board (NZASB)
In New Zealand, the New Zealand Accounting Standards Board
(NZASB), a Committee of the External Reporting Board (XRB), issues
accounting standards.10 The XRB is an independent “Crown Entity”
established under New Zealand law, particularly the Financial Reporting
Act 2013 (and its precursor, the Financial Reporting Act 1993).
Compliance with Accounting Standards developed by the New Zealand
Accounting Standards Board (NZASB) and approved by the External
Reporting Board (XRB) is mandated under the Financial Reporting Act
2013. The NZASB has up to 10 members with a focus on the diver-
sity of experience and perspective. Members of the NZASB are appointed
by the External Reporting Board (XRB) and are all part time. New
Zealand has adopted New Zealand equivalents to IFRS Standards (NZ-
IFRS) for all public companies. NZ-IFRS are substantively identical to
IFRS Standards as issued by the IASB Board with three additional New
Zealand-specific standards. Foreign companies are required to use NZ-
IFRS unless a specific exemption is granted allowing them to use another
financial reporting framework including IFRS Standards as issued by the
IASB.

1.9 India: The Council of the Institute

of Chartered Accountants of India (ICAI)
In India, Accounting Standards are formulated by the Council of
the Institute of Chartered Accountants of India (ICAI) through
its Accounting Standards Board, created in 1977.11 Thereafter,
those Accounting Standards are considered by the National Advisory

10 https://www.xrb.govt.nz/standards/accounting-standards/nzasb/.
11 https://charteredaccountantsworldwide.com/institute/the-institute-of-chartered-acc
ountants-of-india-icai/.
 1 OVERVIEW OF FINANCIAL STATEMENTS 17

Committee on Accounting Standards (NACAS) of the Ministry of Corpo-

rate Affairs, which recommends the Standards to the Central Government
for notification under the Companies Act. The Government, on accepting
the recommendation of the Committee, notifies the Standards under the
Companies Act by publishing them in the Gazette of India. Notified
standards are authoritative under the law. In January 2015, the Indian
Ministry of Corporate Affairs (MCA) released a revised roadmap that
reflects that, in essence, companies with a net worth of Rs. 500 crores or
more will have to mandatorily follow Indian Accounting Standards (Ind
AS), which are largely converged with International Financial Reporting
Standards (IFRSs), from 1 April 2016. Corporates having a net worth
of less than Rs. 500 crores but are listed, or in the process of being
listed, and companies with a net worth of Rs. 250 crores or more will
have to follow the new norms from April 1, 2017. For banking, insur-
ance, and non-banking finance companies, which were exempt from the
general roadmap, a separate one was drawn up in January 2016 that will
see a phased approach with Ind AS adoption beginning from April 1,
2018. This was later deferred to April 1, 2019.

1.10 China: Accounting

Standard for Business Enterprises
The Ministry of Finances (MOF) put the accountancy standards for
companies into effect. China established its first complete standards
specific to accountancy in 1997 and the Ministry of Finance (MOF)
promulgated an additional 13 standards more specific to accountancy
since then.12 Chinese Accounting Standards for Business Enterprises
(ASBEs) are mandatory for listed Chinese enterprises. Other Chinese
enterprises are encouraged to apply the ASBEs, which are substan-
tially in line with IFRS, except for certain modifications that reflect
China’s circumstances and environment. China is committed to converge
with IFRS. Foreign Invested Enterprises (FIE) may prepare financial
statements in accordance with other accounting standards or in other
languages for global consolidation purposes. However, the Chinese
authorities will only recognize and accept accounts in Chinese that are

12 Lorenzo Riccardi (2016): China Accounting Standards -Introduction and Effects of

New Chinese Accounting Standards for Business Enterprises, Springer.
18 F. I. LESSAMBO

prepared based on Chinese accounting standards. Chinese companies

whose securities trade on the Stock Exchange of Hong Kong may choose
among IFRS, Hong Kong Financial Reporting Standards (HKFRS), and
Chinese Accounting Standards (ASBE) for purposes of financial reporting
to Hong Kong investors. However, those financial reports are in addition
to the ASBE financial reports that the Chinese companies issue within
mainland China.

1.11 The Financial Statement Materials

The main purpose of financial accounting is to prepare financial reports
that provide information about a firm’s financial position to external
parties such as investors and creditors. Such information is intended to
be useful in making economic decisions by providing information that
reflects the underlying economics of a firm’s transactions. Public compa-
nies must follow the rules and provide financial statements required by
their regulators. Financial statements refer to a set of four core statements:
the balance sheet, the statement of income (or the statement of compre-
hensive income), the statement of changes in equity, the statement of cash
flows as well as the notes thereto. In a broader sense, financial statements
include the four aforementioned plus a series of other materials, including
the proxy statement, the management discussion and analysis (MD&A).

1.11.1 The Proxy Statement

A proxy is a voting ballot sent by a corporation to its stockholders.
As it is almost impossible for all shareholders of a corporation to
physically attend annual meetings, most corporations anticipate the “unat-
tendance” by sending out proxy statement to those shareholders who
could not make it. A company is required to file its annual proxy state-
ment with the SEC no later than the date proxy materials are first
sent or given to shareholders. The SEC requires that shareholders of a
company whose securities are registered under Section 12 of the Securities
Exchange Act of 1934 receive a proxy statement prior to a share-
holder meeting, whether an annual or special meeting. The information
contained in the statement must be filed with the SEC before soliciting
a shareholder vote on the election of directors and the approval of other
corporate actions. Solicitations, whether by management or shareholders,
 1 OVERVIEW OF FINANCIAL STATEMENTS 19

must disclose all-important facts about the issues on which shareholders

are asked to vote.

1.11.2 The Management Discussion & Analysis (MD&A)

MD&A is a narrative explanation of the financial statements and other
statistical data that the registrant believes will enhance a readers’ under-
standing of its financial condition, changes in financial condition, and
results of operation.
The objectives of MD&A are:

a. To provide a narrative explanation of a company’s financial state-

ments that enables investors to see the company through the eyes of
management;
b. To enhance the overall financial disclosure and provide the context
within which financial information should be analyzed; and
c. To provide information about the quality of, and the potential vari-
ability of, a company’s earnings and cash flow so that investors can
ascertain the likelihood that past performance is indicative of future
performance.

1.12 Interim Statements

and Subsequent & Adjusting Events
1.12.1 Interim Financial Statements
Quarterly and semiannual financial statements are called interim finan-
cial statements and are normally prepared in a condensed form. It means
that the disclosures required in them are far less than those required in
annual financial statements. Quarterly financial statements are normally
unaudited but semiannual reports need to be at least reviewed by an
auditor who is a qualified professional accountant authorized to attest
to the authenticity of financial statements.

1.12.2 Subsequent Events

Subsequent events (also called events after balance sheet date) can be
defined as the events that occur after the balance sheet date but before
the authorization of financial statements for issue. Under IFRS they are
20 F. I. LESSAMBO

termed as “events after the reporting period” and are commonly called
“events after the balance sheet date” and the accounting IAS 10 Events
prescribe treatment after the Reporting Period.

• Date of Financial Statements

The date of the financial statements is the balance sheet’s date (i.e.,
it is the point of time to which a balance sheet relates. For example, if
a balance sheet is prepared to show the assets, liabilities, and equity of a
company as of December 31, 2014, then December 31, 2014, is the date
of the financial statements.

1.12.3 Adjusting Events

IAS 10 Events after the Reporting Period (Balance Sheet Date) Adjusting
Events Non-Adjusting Events Going Concern Exception Introduction
Events may occur between the end of the reporting period and the date
when financial statements are authorized for issue, which may present
information that, should be considered in the preparation of financial
statements. IAS 10 Events after the Reporting Period provide guidance
as to which events should lead to adjustments in the financial statements
and which events shall be disclosed in the notes to financial statements.
Date of Authorization for Issue Events after reporting period are those
that occur between the end of the reporting period and when the finan-
cial statements are authorized for issue. The date of authorization for the
issue is usually taken to be the date when the board of directors autho-
rizes the issue of financial statements. Where management is required
to issue its financial statements to a supervisory board or shareholders
for approval, the authorization is considered complete upon the manage-
ment’s authorization for the issue of financial statements rather than when
the supervisory board or shareholders give their approval. Events after
the Reporting Period Events after the end of reporting period may be
classified into two types: Adjusting Events—Those events that provide
further evidence about conditions that existed at the end of reporting
period. Non-Adjusting Events—Those events that reflect conditions that
arose after the end of the reporting period. Adjusting Events if any events
occur after the end of the reporting period that provide further evidence
 1 OVERVIEW OF FINANCIAL STATEMENTS 21

of conditions that existed at the end of reporting period (i.e., Adjusting

Events), then the financial statements must be adjusted accordingly.

• Example

Detection of fraud or errors after the reporting period may indicate

that the financial statements are misstated. Financial statements may be
adjusted to reflect accounting for those errors or frauds that relate to the
present or prior reporting periods in accordance with IAS 8 Accounting
Policies, Changes in Accounting Estimates, and Errors.
Non-Adjusting Events Entity shall not adjust the financial statements
in respect of those events after the end of the reporting period that reflect
conditions that arose after the end of the reporting period (i.e., Non-
Adjusting Events).

Examples of Non-Adjusting Events

– Declaration of dividends after the reporting date does not indi-

cate the existence of liability to pay dividends at the reporting
date and shall not therefore trigger the recognition of liability
in financial statements in accordance with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
– Destruction of assets of the entity by floods occurring after
the reporting period does not indicate that the assets of the
entity were impaired at the end of the reporting period. Hence,
the financial statements should not be adjusted to account for
the impairment loss that arose after the end of the reporting
period.
– Initiation of litigation against the company arising out of events
that occurred after the reporting period does not indicate
the existence of liability at the reporting date and shall not,
therefore, trigger the recognition of liability in the financial
statements in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets.
22 F. I. LESSAMBO

The nature and estimate of the financial impact of material non-

adjusting events shall be disclosed in the financial statements. Non-
Adjusting Events are considered material if they could influence the
economic and financial decisions of the users of financial statements.

Examples of material non-adjusting events

– Management’s plan to discontinue or significantly curtail its

activities in major geographic segments.
– Initiation of a major litigation against the company arising out
of events that occurred after the reporting period.
– Major losses suffered because of a natural disaster occurring
after the end of reporting period.

Going Concern Exception Entity shall not prepare financial statements

on the going concern basis if events after the reporting period indicate
that the entity shall not be able to continue as a going concern irrespec-
tive of whether such events are indicative of conditions that arose after
the end of the reporting period or not. If financial statements are not
prepared on a going concern basis, it shall disclose this fact in the financial
statements along with any major uncertainties that may cast considerable
doubt regarding the entity’s ability to operate as a going concern.

1.13 Users of Financial Statements

The same financial statements prepared and released by a corporation
would be of particular interest to several groups:

– Investors and Financial Analysts: Investors need the information to

estimate the intrinsic value of the entity and to decide whether to
buy, hold, or sell the entity’s shares. Equity research analysts use
financial statements to conduct their research on earnings expecta-
tions and price targets.
 1 OVERVIEW OF FINANCIAL STATEMENTS 23

– Employee groups: Employees and their representative groups are

interested in information about the solvency and profitability of
their employers to decide about their careers, assess their bargaining
power, and set a target wage for themselves.
– Lenders: Lenders are interested in information that enables them to
determine whether their loans and the interest earned on them will
be paid when due.
– Suppliers and other trade creditors: Suppliers and other creditors are
interested in information that enables them to determine whether
amounts owing to them will be paid when due and whether the
demand from the company is going to increase, decrease or stay
constant.
– Customers: Customers want to know whether their supplier is going
to continue as an entity, especially when they have a long-term
involvement with that supplier. For example, Apple is interested in
the long-term viability of Intel because Apple uses Intel processors
in its computers and if Intel ceases operations at once, Apple will
suffer difficulties in meeting its own demand and will lose revenue.
– Governments and their agencies: Governments and their agencies
are interested in financial accounting information for a range of
purposes. For example, the tax collecting authorities, such as IRS in
the United States, are interested in calculating taxable income of the
tax-paying entities and finding their tax payable. Antitrust author-
ities, such as Federal Trade Commission, are interested in finding
out whether an entity is engaged in monopolization. The govern-
ments themselves are interested in efficient allocation of resources
and they need financial accounting information of different sectors
and industries to decide on federal and state budget allocation,
etc. The bureaus of statistics are interested in calculating national
income, employment, and other measures.
– Public: the public is interested in an entity’s contribution toward the
communities in which it operates, its corporate social responsibility
updates, its environmental record of accomplishment, etc.
Another random document with
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him, evidently intending to try and pacify him, but the old fellow
persisted in screaming and threatening. Again I put my hand in my
pocket, with as good a result as before.
The Khalifa and the Sheikh awaited me in their dwelling, and after
a little conversation with them, and a stroll in their company through
the lanes, and to visit some of the dwellings, I ordered the horses to
be saddled.
As I set foot in the stirrup, the Khalifa came forward with a
mouflon horn, which he begged me to accept. It was the same that I
had seen in the mosque. My guide had evidently told tales out of
school.

A HALT IN THE DESERT—TENT OF A TRIBAL CHIEF.

When we had descended into the valley I turned and looked up.
Near the Khalifa’s house stood some white burnous-clad figures. I
waved a farewell, and saw a couple of arms flourished in reply.
So, by the same path, we rode back to Tatuin. The goats on the
mountains were now grazing amongst the rocks.
My horse was fidgety, and the flies worrying him made him
constantly toss his head. I was careless, and he struck me a blow on
the right hand, causing it to swell, and compelling me to carry it in a
sling; and thus I had to ride for several days.
After riding hard for full five hours, we reached Tatuin a little
before sunset. Lieutenant Adam had arrived there with his company,
and a great surprise also awaited me.
 CHAPTER XV

The Tuareg

I dismounted at the office of the Intelligence Department. In the

archway a number of burnous-clad men waited to be admitted into
the office, where the interpreter, M. Grosset-Grange, and Lieutenant
Donau were at work.
My eyes roved over the crowd of waiting men, who hailed from far
and near. They were fine types, all wrapped in white or grey cloaks.
Then I started, for on the stone bench sat—yes, by Jove!—two
stalwart figures, with black kerchiefs wound round about their faces,
so that only their fine eyes were visible, most of the nose and a little
of the forehead being covered. Their light brown complexions
surprised me.
Below their white garments appeared bare legs and sandalled
feet, and, if I am not mistaken, they wore light blue trousers. A tuft of
black hair protruded above the dark head-covering. They were
evidently Tuareg.
Lieutenant Donau came out to receive me. Pointing to the two
men, I ejaculated, “Tuareg?”
“Yes, certainly,” he said with a smile.
I seated myself on a bench opposite to them, while Donau fetched
the interpreter, so that between them they might interrogate the
Tuareg. At first I could not realise that I indeed sat peacefully face to
face with the dreaded sons of the desert, and that I should have the
luck to take home for our National Museum their costume and
equipment. It seemed too good to be true.
 A TUAREG.

“Do you think I shall be able to buy their clothes?” I asked the
interpreter.
“It will be very difficult to manage,” he replied. “The Tuareg are
suspicious, and will not understand that anyone would sooner buy
their old rags than fine clothes, such as you wear. Besides, similar
costumes are not to be had here, and they will not like to return
home in ordinary Arab dress.”
“Very well, tell them I am a stranger from a distant country, who
has come here to see whether my people may not be of the same
origin as theirs. Tell them I should be glad if I could take their
costume with me to show to my countrymen. I will pay for them more
than their value, or, if they will not take money for them, I will
undertake to send them corn by caravan from Gabés, for I know that
they have been unable to buy any here.”
The interpreter then began the lengthy and tough transaction.
It then transpired that one of the two, Akhemed-uld-Bai, spoke
Arabic, but not so his compatriot, Mohammed-ben-Mohammed. The
conversation therefore took time.
First I addressed the interpreter in French, he then translated
what I had said into Arabic for Akhemed, who again repeated it in the
Berber language to Mohammed.
After the matter had been thoroughly discussed by the pair, the
reply was returned in the same way.
They informed us that they belonged to the “Foghass” section of
the Azgu tribe of Tuareg. But though the name of Akhemed-uld-Bai
had the true Tuareg ring, as much could hardly be said for his
companion’s patronymic. Their proper home was on the farther side
of Rhadamés.
When they learnt that I was anxious to become the possessor of
their property, both of them stared at me long and fixedly, after which
they consulted together for a while. Then Akhemed began to divest
himself of his white “Tuat” burnous, for which we bargained. As I
gave him what he asked, his other garments soon followed, and bit
by bit he stripped himself, until he was actually clothed in nothing but
a scanty shirt, or under-tunic, and the black veil, of which the lower
part concealed his mouth.
A Tuareg never exposes his mouth before others so long as he
can avoid doing so; it would be a breach of propriety.
But in the presence of foreigners they had evidently less regard
for decorum than they would have had before their own people. Now
and then Akhemed, as he talked, dragged the kerchief away from
the lower part of his face, and I saw the handsome well-formed
beardless mouth and white teeth. Whether he were shaved I know
not; but it is said that the Tuareg do not care for beards, and
therefore shave.
 When he rose to take off his clothes, his fine muscular form
towered above all those present; a truly herculean specimen, he was
some six feet high, sparely but splendidly built.
His costume was as follows:—
A shirt-like under-tunic (akhebaïl), above it a grey patterned tunic
with short white sleeves that came from the Sudan (taiden).
Trousers, which were wide at the top and narrow below; they
reached half-way down the calf (kortebba).
Sandals (ghetimèn) of tooled leather, with crossed latchets that
passed between the toes and fastened round the ankle.
A long, narrow black veil, used to enwrap the head. This veil is
furnished in two places with a broad flap; one serves to cover the
forehead, the other the lower part of the face. The crown of the head
is left bare, and shows above the veil a black tuft of hair (tadilmus).
Outside the veil a long piece of white material is rolled turban-wise,
but so arranged that the veil shows both above and beneath it (ash
shash).
Over this dress is worn an ordinary light wrap, a “haik” from Tuat
(kheiki).
The costume was completed by three square amulet cases (tira)
made of tin, and apparently fashioned out of old sardine boxes. They
hung by leathern strings on the man’s breast and outside his clothes.
Supposing that these cases contained inscriptions in the Berber
language, I was very anxious to get possession of them. But all my
endeavours in this respect were unsuccessful. Akhemed would not
part with them. He declared that to him they were worth more than
the value of a camel. He had bought them from a Marabout, they
protected him from danger and misfortune, and since he had
possessed them no ill had befallen him.
“Then sell me the cord and the cases and keep your amulet.”
For a high price he agreed to this, but I could not get permission
to see the contents. Next morning he brought and handed over to
me an unsoldered case.
 When there was no more to be bought from this man, I turned to
his companion.
His costume differed little from the other, so I did not trouble about
it, but on the wrist of his left hand was an embroidered leather ring,
and the same hand grasped the hilt of a dagger (tilek).
The Tuareg always carry one of these in the left sleeve, so
disposed that the point is turned up the sleeve, whilst the sheath lies
along under the forearm, and is secured by a sewn band which is
slipped over the wrist. The handle of the dagger is cross-shaped and
bound with brass wire. The dagger is therefore, very evidently and
literally, handy.
I bought it and a large leather bag (agherid), made apparently of
antelope or gazelle hide. Through holes on the edges of the bag
were drawn leather thongs, which again were made fast with a very
peculiar iron lock. This is the only lockfast receptacle owned by the
Tuareg, for they rarely possess even a chest (senduk), as do the
Arabs.
Of other weapons they had none, though the Tuareg generally
carry spears, but rarely swords, bows and arrows, or shields.
Next I bought one of their light smart saddles for riding the
dromedary (mehari). The saddle has a broad cantle at the back, and
that in front, though narrower, is also high and terminates in a cross.
The cross is often found in Tuareg ornaments, and, as I show by
an illustration in my book called Algiers and the Sahara, is supposed
to be a relic of the time when this people were Christians and
inhabited the more northern regions whence they were driven by the
Arabs.
All the wearing apparel that I purchased was, according to the
vendors’ account, manufactured by Tuareg or brought from the
Sudan.
The price of each article was named in piastres, and the
interpreter having added up the total, I paid in francs, without the
Tuareg overlooking the account, their trust in the interpreter being so
entire. A sign of their confidence in the French.
 M. Grosset-Grange told me that these two Tuareg examined all
that was novel to them just like children. That when they entered his
room they at first stood dumfoundered, then touched and examined
everything. The system by which the window was closed and bolted
was carefully investigated, and pleased them much. The handle of
the bolt chanced to be decorated with the representation of a man’s
head, and the Tuareg naïvely asked, “Is that your father?”
Commandant Billet told me many amusing anecdotes of these
children of nature, who are so sober and abstemious in their daily
life, and who can subsist for days in the desert almost without food.
Once a “Targui” (the singular of Tuareg) happened to come to him
at one of the stations. “Are you hungry?” asked the commandant.
Yes, it was long since he had tasted food; so an enormous
quantity was set before him, enough to have satisfied six or seven
ordinary folk. When he had consumed all this he went to see a
captain, by whom he was as generously treated. One might have
supposed that he would then be satisfied; but no, half an hour later
the insatiable son of the desert called on a third official, and again
complained bitterly of hunger, and was fed with a couple of dishes of
“kus-kus.”
It is inconceivable how any one man could swallow so much food,
but probably it had never before fallen to his lot to fully satisfy his
appetite.
Apparently the Tuareg are at present anxious to keep on friendly
terms with the French. On several occasions small caravans have
travelled as far as the southern stations of Tunisia, most of them
certainly with a view to trade, mais enfin, it is always a move in the
right direction, which, prudently encouraged, may lead farther.
It would be to the signal advantage of the French that the old
caravan road to the Sahara should be reopened, so that traffic from
Rhadamés could proceed direct to Gabés or other towns of Tunisia,
instead of, as now, viâ Tripoli. The chief impediment at present lies in
the fact that the caravans, not being permitted to carry slaves, are
not profitable. The baskets, leather goods, weapons, etc., which the
last caravans brought with them—though in small quantities—were
disposed of with difficulty in Tatuin and Medinin, which will not tend
to induce them to make another trial.
No; that traffic through the Sahara may be remunerative, slavery
is essential. In fact, so long as slavery continues to flourish in Tripoli,
so long will the stream of trade flow that way.

A TUAREG.

Neither does slavery appear so terrible at close quarters as it

does when read of in heartrending romances in the style of Uncle
Tom’s Cabin. The truth is, that slaves are well treated everywhere in
the East, so well that even if given their freedom, as they were by
decree in Tunisia, they, as a rule, remain in their master’s house.
The transport across the desert is, indeed, full of horrors, but
when once arrived at their destination the slaves do not suffer from
want—quite otherwise.
Amongst the caravans that came to Tatuin in 1893 was one in
charge of two nephews of Aissa, the Tuareg Sheikh who rules over
the tribe of “Imaughasat.”[4]
The elder of these, named Uan Titi, brought a letter to the officer
in command of the military station at Tatuin, in which he reclaimed
several camels and a negress robbed from the Tuareg by the tribe of
Uderma.
As it was politic to show a friendly disposition, the camels were
forthcoming at once, though they were probably bought; but it was
otherwise with regard to the negress, who was a cause of great
perplexity.
According to law, every slave is free who sets foot on territory
under French control, consequently nothing could be done.
That the Tuareg were afraid of again coming to blows with the
tribe of Uderma, is evident from the fact that the Tuareg Sheikh had
written to the Khalifa of Duirat to beg him to take care that the
emissaries went no farther north than Tatuin, and had also taken the
precaution of ascertaining whether absolute peace prevailed in
Uderma.
Uan Titi spoke of the latest French explorers, Foureau and Méry,
who travelled last winter in the Sahara. He had conducted the first
named, who, however, had not reached Rhadamés. Méry had spent
some time with the Azgu tribe from whom the Imaughasat had then
separated themselves. They now camp together and are fairly united
under their Sheikh Aissa, but they still have some “duars” near
“Rhat.”
According to Uan Titi’s account, the highroads in the Sahara pass
Fezzan, Rhadamés, and Tuat. That by Rhadamés may be
considered the most important.
The Tuareg, amongst whom perfect peace reigns at present,
come to Rhadamés from the southern regions to escort the caravans
and to supply camels for hire.
 It is rare, however, for them to go farther than Tripoli or than
Southern Tunisia.
The Turks in Tripoli refuse, of course, to acknowledge French rule
in Tunisia; and as the people of Rhadamés are mainly Berbers under
Turkish administration, these do all in their power to destroy the little
trade there is with the French territories of Duirat, Tatuin, Medinin,
and beyond them to Gabés.
For the moment the Tuareg place no obstacles in the way of
persons who venture to travel from the Duirat mountains through the
desert to Rhadamés; so the route is open, but no one who is
supposed to have the slightest relations with the French is allowed to
enter the oasis.
The traveller who desires to visit this town, which in the time of the
Romans had constant intercourse with the coast, must start from
Tripoli; if he has letters of recommendation from the authorities there,
he is sure to be admitted; the journey on camel back is wearisome
and even distressing through the heat and lack of water, but of
danger there is none—for the present—the Tuareg not being
camped by the roads in any appreciable numbers.
The French authorities have done all they could to establish
peaceful relations with Rhadamés and to explore the southern
frontier. Officers have reconnoitered the country from the southern
mountains to far into the desert. Commandant Billet in person has
ridden through the mountains as far as the Tunisian frontier. On one
of these expeditions he visited the ruins of a very ancient village in
the mountains, known as “Ksar Uni,” which lies eighty miles south of
Tatuin.
An interpreter who spoke Arabic like a native, and who was,
further, a Mohammedan, was sent to the desert not long since to
endeavour to penetrate as far as Rhadamés. His mission failed
entirely. He was robbed, imprisoned in Rhadamés, and sent to
Tripoli, from whence, after much difficult negotiation, his release was
obtained.
 West of the Matmata mountains and south of the belt of shotts is
a steppe where are found a number of small wells, but south again
of this and as far as Rhadamés is an almost waterless desert, barren
and waste and very dangerous to cross. A few earlier travellers may
possibly have passed through it, but in March and February of this
year the desert was traversed by two French officers, under such
marvellous conditions that I cannot refrain from giving an account of
their journey, exactly as I heard it related by Major Gausset in
Gabés.
Lieutenant Dumas of the Spahis (now captain of the 6th
Chasseurs at Oran), and Lieutenant Cazemajou of the Engineers,
both courageous and determined men, who feared neither exposure
to the elements nor the sufferings of hunger and thirst, determined
on trying to make their way secretly from Nafta, by the shott and
through the desert, to Rhadamés. Well aware that a request for
permission to travel during the difficulties in connection with the
frontier would be refused by their superiors, they only asked for
leave to take a trip to Algiers. This was granted without suspicion
being aroused, and, accompanied by a guide, they disappeared in
the desert, both in Arab dress and mounted on camels.
After a dangerous and fatiguing ride they drew near to Rhadamés,
and were already rejoicing over the happy termination of their
journey; but no sooner had they reached the gates than they were
driven off like dogs, their lives were menaced, and they were
compelled to retreat.
Their coming had been announced by some Marabout whose
kubba they had passed shortly before arriving at the town.
There was nothing to be done but to return as quickly as possible,
which they did; but as they thought it possible that they might be
pursued and attacked on their homeward way, they took another
route, where water was very scarce, and with which none of them
were acquainted.
After incredible exertions and having suffered much from hunger
and thirst—they were reduced at the last to a little chocolate with
which to allay the pangs of hunger—they succeeded in reaching
home.
Their journey was, of course, to a great extent a failure, but they
had reconnoitered an unknown country and proved themselves to be
a couple of exceptionally energetic, brave men. They resumed their
duty in silence, but a rumour of their exploit leaked out and reached
the ear of the General. He demanded an explanation, with the result
that they received a slight official reprimand—soon shaken off.
Since Duveyrier undertook his memorable journey, of which the
brilliant results are related in his book, Les Touaregs du Nord, no
one probably has dedicated himself so entirely to a desert life as
Cornitz, a young Swiss, of whom the officers in the south spoke in
the highest terms.
This man, who appears to be a thinker and philosopher of no
mean order, came for the first time to Southern Tunisia some years
ago, in order to study the mode of life and opinions of the Bedouins.
He was so charmed with their nomad existence that he returned
every year for three years. He dressed as they did, and lived
amongst them in the desert, and, under equal conditions, shared in
the joys and sorrows of their tent life, their hunts and their boundless
horizon. But the time came when even this did not satisfy him, so he
purchased palm trees, a house and a herd, and settled down in the
town of Duz to the west of the Matmata and south of the shotts.
To enable him to take long journeys to the south, he bought two
“mehari” (chameaux coureurs) and practised the difficult art of riding
them. After eight days’ hard exertion he could ride as well as any
“Targui.”
He then travelled with his flocks, or alone, in the south as far as
Rhadamés, but neither was he able to gain admittance to that town.
While on this journey he completed the French map.
Each year, after a visit home, he returned. The last time, in May
1893, that he travelled home he passed through Gabés, where he
was struck down with fever and was very ill. The French officers
begged him to go into the military hospital, but he declined their
offers and started for the north. During my stay in the south I was
told that he had written to one of the Khalifas that he would soon
return to visit his herds, left in charge of an Arab, and to again
resume his life in the desert.
“Il est un peu original, mais très intelligent,” the officers at Gabés
said of him.
In truth, there are many who are attracted by the free life that is
led under tents, where no one need fear troubling his neighbour,
since space is unlimited.
If one place is unpleasing, you move to another—laying your tents
on camels and vaulting into the saddle, you drive your flocks and
herds onwards, ever onwards, for the horizon has no limit.
Whilst dwelling on the men who rove in the alluring, mysterious
desert, which has engulfed so many in its deadly embrace, my
thoughts turn to an evening at Gabés, when, after my return from the
south I sat in the guest-room of the “Hotel de l’Oasis” and refreshed
myself after my exhausting ride.
The landlord, M. Saissy, a man of about fifty, was setting in order
the tables, after the guests, who were mostly officers, had left. I was
the only one who remained and trifled with a cigar and a glass of
beer to pass away the time before retiring to bed.
I was absorbed in thought and long remained so—so long,
indeed, that M. Saissy probably concluded it was time to turn in, for
he approached me and began a conversation by way of rousing me
from my reverie, with, “Have you had a pleasant journey, sir?”
I replied in the affirmative, and gave him a sketch of my travels
and described the Matmata mountains—not a little vain, I confess, of
my expedition. “Have you ever been there?” I asked in conclusion.
“No, I have not,” he replied. “I came here some years ago with the
regiment which I followed as sutler, and, as the officers could not find
a place where they could dine, they proposed that I should cater for
them. This my wife and I agreed to do. By degrees we organised this
hotel, but to make it pay we have to be careful, and we cannot leave
it; since our arrival at Gabés I have positively only been twice
absent.”
Good heavens! thought I, how dull never to have a change and
look about one a bit; but I said, “You ought some day to go south; it
would interest you, for instance, to meet the Tuareg of the west at
Tatuin. I had the luck to be there just when two arrived, whose
equipments I bought.”
“Ah, those may be the same that I once saw.”
“Indeed, and when?”
“Ah, yes—it was a long time ago; I was quite young then, and the
love of travel drew me away from home. I do not remember how it
came about, but eventually I started with two companions to shoot
ostriches in the Sahara—in those days it was not so difficult to
penetrate there. We hunted with the Tuareg.”
“Did you venture far?”
“Yes, I do not exactly know how far, but certainly to the other side
of Tuat. The natives were a peaceful people, and we were never at
enmity with them. Our hunting was successful, and we made money
for our employer.
“Once I was on the point of going there again with Dr. Nachtigall,
but something intervened, and to my bitter regret I could not leave—
for I have always had a longing for that sort of life. It was very
different from slaving as we do now, my wife and I; for it is not easy
to please everyone—no, indeed! But to return to those days. You
see, I have been acquainted with many of the well-known travellers.
Most of them behave badly—for they do not respect the natives.
Some rely on force—which is a mistake—it is always best to be
unarmed. If ever I should venture there again, I would take a stick in
my hand and naught else.
“Miss Tinné I knew well. She would not listen to good advice and
was murdered. Good heavens! she needed only to ask the chief of
the Tuareg for a safe conduct and all would have been well, but she
would not wait till the matter could be arranged, believing that she
could safely penetrate farther with the protection she had.
 “No—believe me; it is easy enough to push one’s way forward,
but one must avoid offending the natives.
“There was another traveller who deserved to have been slain
also—but escaped. He simply stole cattle when he required them.”
We conversed long, and I gathered much information with many
interesting details, as old recollections were recounted by him as
they came back to his mind.
Saissy’s wife joined us, and we sat together and discussed a
glass of wine. Saissy promised me then to note down his
recollections, which are to be forwarded to me, and I hope to be able
to publish them later; for the present I confine myself to what I have
already mentioned.
On my referring to the great desire I had to visit Rhadamés some
future year—“Take me with you,” burst from M. Saissy. “I am in
earnest; pay me only sufficient to enable my wife to live in comfort in
my absence, and I will accompany you. You may be assured that I
should be of use to you.”
“From Tripoli?” I asked.
“Of course from Tripoli.”
“Nous verrons, M. Saissy.” And so we went to bed.
When I left, a couple of days later, Saissy came to me and gave
me his portrait, saying—
“You will let me know when you have come to a decision.”
 CHAPTER XVI

Back to Tunis

In the course of the night a telegram arrived, ordering Dr. Cultin to

return with me next day to Medinin, as his colleague had been
suddenly seized with fever and was very ill.
We were a little late in starting, and the sun was scorching hot.
Followed by our two Spahis and a led horse, which bore my
purchases from the Tuareg, we hurried homewards.
After a halt near Bir el Ahmer, where we breakfasted, and where a
fresh horse awaited me, our progress was rapid.
But it was after nightfall when we reached Medinin. Outside the
camp we met the lieutenant of the Spahis, who said that the doctor
was worse, and was about to be sent in a carriage to Gabés.
Dr. Cultin hurried away to his sick comrade, and I dismounted at
the quarters of the commandant, who came galloping in to receive
me, and invited me to a splendid dinner with some of the officers.
I need scarcely mention that I expressed my thanks in the
warmest terms for the brilliant reception I had received, and for my
memorable trip to the southernmost military stations.
I was offered a horse for an expedition to Zarsis and the island of
Jerba, but had to decline with many thanks, as my time was limited.
After a comfortable breakfast with the infantry officers, I bade my
friends farewell before the commandant’s house, and, waving my hat
in a final salute, rode off to Gabés.
Commandant Billet accompanied me nearly as far as Metamer,
where we parted.
 “Should you ever go to Rhadamés by way of Tripoli and return by
this route, you would be heartily welcome, and this would certainly
be your best way home,” said the commandant.
I replied that should the journey ever be attempted by me,
Medinin would have a great attraction for me, and thanked him
heartily for all his kindness.
Then I rode with my Spahi towards the camp at Metamer, where
the lieutenant on guard came out and invited me in.
After a short halt, I continued in a north-westerly direction along
the foot of the mountain of the signal station, and thence by a hilly
country north; the Matmata mountains lying to the west of us, and
the plain to the east.
On both the plain and the hills I saw ruined Roman remains. We
also passed a spot where a few soldiers were encamped for the
purpose of digging a well, and as we ascended a hill saw a vehicle
come swinging towards us. Before it rode a red Spahi, behind it
another. The carriage was a heavy box on four wheels, and had an
awning over it; it was drawn by four mules, and two soldiers acted as
postillions. From within peeped a woman’s face. It was a captain’s
wife who had taken advantage of the opportunity of going viâ
Medinin to visit her husband at Zarsis—the carriage being on its way
to fetch the sick doctor.
It was nearly sunset, and I urged on my horse to avoid arriving
late at the little caravansarai where we were to spend the night.
Soon it became so dark that the horses stumbled on the rough
road, and we had to slacken to a walk. For a long time we saw
nothing but each other’s dim figures and heard only the tramp of our
horses.
At last, at the village of Aram, lights shone and dogs barked as we
passed amongst its palms.
After riding in the still night about an hour longer, we again heard
dogs barking and saw lights. We were then near the oasis of Marath,
where, having ridden fully twenty miles, we were to rest some hours
and start again at sunrise for Gabés.
 In the caravansarai—which resembled that of Bir el Ahmer—a
Spahi from Gabés awaited me with a fresh horse.
The lights in the house streamed from the rooms into the
courtyard. Within were some soldiers, who had bivouacked round
about a candle placed on the floor. They came out, received our
horses and conducted me to an officer’s room. Four bare walls;
raised on masonry was a sloping plank-bed which extended along
the inner wall; besides this there was a table and a bench.
A native, who was in charge of the place, I sent to the oasis to buy
me some candles. The soldiers eagerly offered to lend me, till his
return, their little taper stuck in a bottle.
The Spahis then laid the table, and I dined, after first dividing with
them and the soldiers the eatables with which I had been so
sumptuously provided, for no one knows better than I do how a small
extra ration tends to put a soldier into good-humour. I have not
forgotten the old days in South Oran when I was myself a mere
private.
The Spahis and the four soldiers drew up in line at the table, and I
began the distribution—bread and dates to the Mohammedans, and
wine to the soldiers, which I poured into the tin mugs they held out to
me, and to whom I gave also bread and meat.
“Right about face, march!” I gave the order involuntarily, and the
troop at once vanished through the door.
Soon the sound of gay voices singing reached my ear from the
adjoining room.
When I had finished my repast I lit a cigarette and took a turn
through the courtyard to have a look at the horses, which still stood
saddled and had not yet been either fed or watered, they were so
overheated from their journey.
Having given orders that they were to be unsaddled, fed, and
watered, I returned, and, lying on the bed, listened to the singing.
I had rested but a short while when a smart soldier entered, and,
with his hand to his cap, asked if he and his comrades might enliven
the evening for me, as if so, they would come in.
I agreed willingly; so they came in, each carrying his mug, and sat
on the ground facing me.
After I had questioned them, asking each where he hailed from,
and had talked with them about a soldier’s life in the desert—a life I
also knew something of—I asked them to sing; then the usual
barrack ballads with comic choruses woke the still night. Afterwards I
chatted again a little with them, refilled their mugs which they
emptied, wishing me a happy journey, and then withdrew.
I wrapped myself in my burnous and slept, but was disturbed, first
by the stamping of the horses, and later by the noise of some carts
being yoked in the yard.
Before it was light next morning I was broad awake. The soldiers
made and brought me some coffee that I drank with relish, and it
was just daybreak when, wrapped in my burnous, I got into my
saddle, after having inscribed my name in the register. The soldiers
stood at attention and saluted as I bade them farewell and thanked
them for the songs they sang for me, while they, in return, wished me
a happy journey.
Our road was towards the north through the palm groves of the
lowland, where we now and again crossed the dry beds of torrents
that began in the mountains.
After a couple of hours we traversed the Ketena oasis, leaving
other palm groves on one side.
Here the level of the country rose a little, and far away on the
northern horizon we could see the palm forests that lie south of
Gabés, and now and again caught a glimpse in the east of the sunlit
surface of the Mediterranean.
Presently the temperature became very sultry, and a hot wind
rose, which whirled the sand in our eyes. This was the sirocco.
When we reached the high ground, where stands the Marabout’s
tomb of “Sid Hamed ben-Habib,” and had passed its palms, we saw,
through dust clouds and flying sand, Gabés, looking like a white