Slide 7.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 7 Published financial statements

Slide 7.2 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 International influences Impact of the European Union. The IAS Regulation. Harmonisation through Directives. International Accounting Standards Board.

Slide 7.3 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Accounting framework Primary financial statements. Notes to financial statements. Accompanying information.

Slide 7.4 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Contents of annual reports Primary financial statements. –Statement of financial position (balance sheet). –Income statement (profit and loss account). –Statement of changes in equity. –Statement of cash flows. Notes to financial statements. Accompanying information.

Slide 7.5 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Contents of annual report (Continued) Notes to financial statements. –Required by Companies Act 2006 and accounting standards. –Accounting policies. –Detailed analysis of some numbers. –Information about uncertainties. Accompanying information. –Operating and financial review. –Chairman’s statement. –Directors’ report. –Non-financial information.

Slide 7.6 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Formats Statement of financial position, Income statement, Statement of changes in equity. –No standard format under IFRS –Basic lists of items specified but expect variation in method of presentation. –For non-IFRS companies, formats based on Fourth Directive and included in Companies Act –[See examples in chapter 7] Statement of cash flows –Format indicated in IAS 7

Slide 7.7 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Beyond the annual report What do you want to know about company? what drives cash flow and profit? quality of management? forward-looking information?

Slide 7.8 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Beyond the annual report (Continued) Where do you find information about a company? One-to-one meetings with directors. Company briefings to analysts. Brokers’ reports. Press releases. Letters to shareholders. Preliminary announcement of results. Half-yearly (interim) reports. Prospectus. Chairman’s statement in annual report. Financial statements in annual report.

Slide 7.9 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Group accounting Define group. The importance of control. The parent company’s statement of financial position (balance sheet).

Slide 7.10 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Acquiring a subsidiary for cash Assets  –Liabilities=Ownership Interest Decrease in asset of cash Increase in asset of investment in subsidiary Group financial statements

Slide 7.11 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Acquiring a subsidiary by exchange of shares Assets  –Liabilities=Ownership interest Increase in asset of investment in subsidiary Increase in new shares issued Group financial statements (Continued) 

Slide 7.12 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Net assets of P plcNet assets of S plc Investment inAssets Sminus liabilities of S Other assets minus liabilities of P Consolidation Cost of investment in S equals net assets of S   Figure 7.2 Separate net assets of parent and subsidiary

Slide 7.13 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 (a) Bringing together all assets and liabilities (b) Group’s consolidated balance sheet AssetsFixed assets of P+S minusplus liabilitiesCurrent assets of P+S of Sminus Other assetsre-arrangedCurrent liabilities of P+S minus liabilities of PLong-term liabilities of P+S equals Consolidation (Continued) Next page  Figure 7.3 Completing the process of consolidation

Slide 7.14 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 equals Ownership interest for shareholders of parent Consolidation (Continued) Figure 7.3 Completing the process of consolidation (Continued)

Slide 7.15 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Consolidation (Continued) Cost of investment in S greater than net assets of S (See next page)

Slide 7.16 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Net assets of P plcNet assets of S plc Investment inAssets Sminus liabilities of S Other assets minus liabilities of P Consolidation (Continued)   Figure 7.4 Net assets of the separate companies P plc and S plc

Slide 7.17 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Group net assets Assets minus liabilities of S Difference on consolidation Other assets minus liabilities of P Figure 7.5 Group net assets of the P group Consolidation (Continued)

Slide 7.18 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Goodwill Difference on consolidation is called Goodwill. It is shown in the Group balance sheet with the Intangible non-current (fixed) assets at the start of the balance sheet. Negative difference on consolidation is called ‘Negative goodwill’.

Slide 7.19 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Definition and recognition Goodwill is defined as future economic benefits arising from assets that are not capable of being individually identified and separately recognised. Goodwill is recognised in the balance sheet as an asset and is measured as the excess of the cost of the business combination over the fair value of the net assets acquired.

Slide 7.20 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Loss of value – impairment Impairment means ‘damaged’ or ‘spoiled’. When the carrying value of goodwill cannot be recovered through sale or use, it is said to be ‘impaired’. The asset value in the balance sheet must be reduced.