REPARIS Workshop The Importance of ReliAble Financial Reports: A Banker‘ s Perspective Risk Control March 14-15, 2006 Vienna, Austria

2 Agenda 4./5. 8./ /7. 10./ Debt / Equity Classification Extraordinary Result Financial Analysis Process Evaluation Finished Goods Off Balance - Leasing Summary / Short Discussion Page 13. Definition of Ratios

3 Financial Analysis Process Fairness and Correctness Banks expect Financial Data Understandability Comparability Relevance Reliability Timeliness Transparency Financial Analysis System Ratios Bench- marking Rating (PD) Financial Reports are presented to the Bank Financial Data Balance Sheet Profit & Loss Account Cash Flow Statement Entry of financial data by an external company Reliable Financial Reports are the basis for a realistic evaluation of clients‘ business.

4 Criteria (Silent Partnership) Term > 7 Years Subordination Loss Participation Result – Related Dividends German Accounting Standard (HGB 266) IFRS (IAS 32) All Criteria met Treatment as Equity Treatment as Financial Debt Debt / Equity Classification - Theory Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement

5 Criteria German Accounting Standard IFRS All Criteria fulfilled Treatment as Equity Treatment as Debt Registered Capital 100 Silent Partnership 400 Other Financial Debt 500 EquityGross Debt CapitalizationExtended Tangible Net Worth 500 0, ,9 500 Debt / Equity Classification – Example Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement Different Treatment results in different RatiosBut: Transparency allows fair Analysis Different Treatment results in different RatiosBut: Transparency allows fair Analysis

6 German Accounting Standard IFRS Criteria (Cost of Goods - Finished Goods) Directly Attributable Costs Required General Costs General Overhead, Social, Pension Provision Costs Optional, as far as related to Production Required, as far As related to Production Debenture Capital Costs (Interest) As a rule not allowed, sometimes optional As a rule not allowed, sometimes optional (IAS 23.11) Costs of Distribution Not allowed Evaluation of Finished Goods - Theory Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement

7 Other ST Assets500 Total ST Liabilities800 German Accounting Standard IFRS Criteria Directly Attributable Costs 500 General Costs General Overhead, Social, Pension Provision Costs Debenture Capital Costs (Interest) Costs of Distribution 100 Many Options result in different RatiosBut: Transparency allows fair Analysis Many Options result in different RatiosBut: Transparency allows fair Analysis Finished GoodsTotal ST AssetsWorking Capital Evaluation Finished Goods – Example Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement

8 Extraordinary Result Criteria The Annual Result contains both, the Result of Ordinary and the Result of Extraordinary Business. German Accounting Standard (HGB 277,4) IFRS (IAS 8.10) Extraordinary Result - Theory Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement

9 No Information, Treatment as Extraordinary Income Total Sales1000 Cost of Sales 400 Other Oper. Expenses 100 Other (?) Income 200 Depreciation 100 Information are available - partial Treatment as Extraordinary Income only Total Sales1000 Cost of Sales 400 Other Oper. Expenses 100 Other Income 200 thereof Government Grant 50 thereof Rents 150 Depreciation 100 Extraordinary Result – Example Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement EBITDebt Capacity EBITDebt Capacity Adjustments result in different Ratios But: Transparency allows fair Analysis Adjustments result in different Ratios But: Transparency allows fair Analysis

10 Off Balance - Leasing German Accounting Standard IFRS (IAS 17) Alternatives  Operating Leases  Finance Leases  Sale-and-Leaseback Off Balance – Leasing - Theory Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement

11 Transparency results in exact Ratios and Fair Analysis. Transparency results in exact Ratios and Fair Analysis. Balance Sheet Total Financial Debt 500 Profit & Loss Account Total Sales1000 Cost of Sales 400 Leasing 100 Other Expenses 100 Off Balance – No Information 1,0 Balance Sheet Total Financial Debt 500 Profit & Loss Account Total Sales1000 Cost of Sales 400 Leasing 100 Other Expenses 100 Off Balance Leasing Obligations 500 Gross Debt+ Off Balance Leasing /EBITDAR 2,0 Gross Debt+ Off Balance Leasing /EBITDA + Leasing Off Balance – Leasing – Example Financial Reports are presented to the Bank Financial Analysis System Ratios Financial Data Rating (PD) Balance Sheet P & L Account Cash Flow Statement

12 Summary Banker‘ s Perspective: Transparent Financial Reports result in True and Fair Treatment !

13 Ratios – Definition Equity Gross Debt Capitalization Extended Tangible Net Worth Finished Goods Total ST Assets Working Capital EBIT Debt Capacity Gross Debt + Off Balance Leasing / EBITDA + Leasing Registered Capital as per Balance Sheet Other Financial Debt Other Financial Debt + Equity Registered Capital + Silent Partnership Sum of Costs – Costs of Distribution Other ST Assets + Finished Goods Total ST Assets – Total ST Liabilities Total Sales - Cost of Sales – Other Oper. Expenses + Other Oper. Income - Depreciation Present Value of Adjusted EBIT, 7 Years, Tax Rate 35 % Total Financial Debt + Off Balance Leasing EBITDA + Leasing (as per P&L)