Module 11: Understanding and Analyzing ICT Firms’ Annual Reports Carlo M. Rossotto, MNA Regional Coordinator, Global ICT Department, Policy Division March 11, 2009

2 Module Outline 1.Introduction to Accounting 2.Special Issues in Accounting and Technology 3.Analyzing Annual Reports for Economic Analysis: Cases

3 Introduction to Accounting 1.Basic Accounting Principles and International Standards 2.Islamic Finance and AAOIFI Standards 3.What is a Balance Sheet 4.What is an Income Statement 5.What is a Cash Flow Statement 6.Financial Ratios 7.Financial Disclosure

4 Introduction to Accounting Basic Accounting Principles and International Standards –The International Accounting Standards Board (IASB) is responsible for the development of International Financial and Reporting Standards (IFRS). –A large number of countries, including Egypt, adopts IFRS or a modified version of IFRS –Which countries are adopting IFRS: –Egypt adopts IFRS for all companies, domestic and foreign –European Union. Adoption of virtually all IFRS, with a time lag, and certain exceptions –United States. US SEC registrants are required to use US GAAP and are not permitted to use IFRSs. However, on 14 November 2008, the US SEC published for comment a proposed “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards” by US Issuers

5 Introduction to Accounting Islamic Finance and AAOIFI Accounting Standards –Islamic finance is finance in according with Islamic law and jurisprudence. London, Dubai, Kuala Lumpur emerging as global hubs for Islamic finance and banking –Islamic finance is a growing phenomenon with over US$500billion of assets (Source: Forbes). Highest growth among all managed assets –Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) –London, Dubai, Kuala Lumpur: global hubs for Islamic finance and banking –Coordination efforts between AAOIFI and IFRS. Professional certifications (example, Islamic Finance Qualification)

6 Introduction to Accounting What is a Balance Sheet –Balance sheet summarizes the position or balance of a firm at a certain point in time. –It is divided in three parts: assets, liabilities and equity Assets Current Long-term

7 Introduction to Accounting Current Assets –Cash and cash equivalents –Inventories –Accounts receivable –Prepaid Expenses Long-term assets –Property, plant and equipment –Investment Property –Intangible assets –Investment assets

8 Introduction to Accounting Liabilities Accounts payable Provisions for warranties or court decisions Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds Liabilities and assets for current tax Deferred tax liabilities and deferred tax assets Minority interest in equity Issued capital and reserves attributable to equity holders of the parent company Unearned revenue

9 Introduction to Accounting Equity –Share capital –Capital reserves –Revaluation reserve –Translation reserve –Retained earnings

10 Introduction to Accounting Example of a balance sheet: Google

11 Introduction to Accounting Statement that reports revenues and expenses over a certain period of time What is an income statement Revenues – Cost of Revenue = Gross Profit – - General and Administrative - R&D - Depreciation - Interest expense (revenue) - Unusual expense Total Revenues – Total Operating Expenses = Operating Income Operating Income +/- Interest = Income before Tax Income before tax – tax = Income after tax Income after tax – extraordinary items = Net income

12 Introduction to Accounting Earning per share (EPS) = What is an income statement EPS Net income – preferred stock dividend Weighted average opf common stock outstanding Basic Diluted

13 Introduction to Accounting Let’s go back to the Google example - Income statement

14 Introduction to Accounting Statement that shows a company’s flow of cash over a certain period of time (IAS 7) What is a cash flow statement Operating activities receipts from the sale of goods or services receipts for the sale of loans, debt or equity instruments in a trading portfolio interest received on loans dividends received on equity securities payments to suppliers for goods and services payments to employees or on behalf of employees tax payments interest payments payments for the sale of loans, debt or equity instruments in a trading portfolio Items which are added back to [or subtracted from, as appropriate] the net income figure to arrive at cash flows from operations: Depreciation (loss of tangible asset value over time) Deferred tax Amortization (loss of intangible asset value over time) Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement)

15 Introduction to Accounting Statement that shows a company’s flow of cash over a certain period of time (IAS 7) What is a cash flow statement Investing activities Purchase of an asset Assets can be land, building, equipment marketable securities, Loans made to suppliers or customers Financing activities proceeds from issuing shares proceeds from issuing short-term or long-term debt payments of dividends payments for repurchase of company shares repayment of debt principal, including capital leases for non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes Items under the financing activities section include: Dividends paid Sale or repurchase of the company's stock Net borrowings

16 Introduction to Accounting Let’s go back to the Google example - Cash flow

17 Introduction to Accounting Financial Ratios Profitability Ratios - Examples Return on Equity (ROE) = Net Income Average Sharehold. Equity

18 Introduction to Accounting Financial Ratios Liquidity Ratios - Examples Current Ratio = Current Assets Current Liabilities

19 Introduction to Accounting Financial Ratios Activity Ratios - Examples Asset Turnover = Total Sales Total Assets

20 Introduction to Accounting Financial Ratios Debt Ratios - Examples Debt Ratio = Total Liabilities Total Assets

21 Introduction to Accounting Financial Ratios Market Ratios - Examples P/E Ratio = Market Price Diluted EPS

22 Introduction to Accounting Financial Disclosure Obligations Financial Disclosure Local securities laws and regulations Compliance with international accounting standards Local Stock exchange regulations Foreign Stock exchange regulations Statute of the corporation

23 Accounting and Technology Research and Development - Capitalisation Approach IFRS and Technology Firms Revenue Recognition IFRS requires recognition of revenue on an element of a transaction, if that elements has commercial substance on its own

24 Accounting and Technology Research and Development R&D expense is capitalised once technical and commercial feasibility established IFRS and Technology Firms: Affected Areas Marketing Recognition of customer incentives Sales Different revenue recognition methods Taxation, Legal, Communications IFRS as an opportunity to reshape business

25 Accounting and ICT Analysis How to Use Balance Sheet of Technology Firms for Economic Analysis CASE I – BRITISH TELECOM, TELEKOM MALAYSIA AND INTERNATIONAL COMMUNICATIONS REVENUES

26 Accounting and ICT Analysis How to Use Balance Sheet of Technology Firms for Economic Analysis CASE II – TELECOM EGYPT

27 Accounting and ICT Analysis How to Use Balance Sheet of Technology Firms for Economic Analysis CASE III – Mobinil