Week 3a [4/24] PRIVATE STUDY: Getting financial information: an introduction to published financial statements
Company Reports – Case Study TESCO
Tesco Annual Report 2024
You can access and download the latest corporate report of Tesco from
https://www.tescoplc.com/investors/reports-results-and-presentations/annual-report-2024
The lecture/self study notes are at http://www.ecourse.co.uk/media/tesco/presentation.pdf
Course video: Getting information about a company from Companies House: Tesco plc [CORE]
NB: You may have to use this link: https://www.gov.uk/government/organisations/companies-house
Course video: Getting information about a company from its website: Tesco plc
Preparing for Seminar 1: Worksheet exercises – private study [CORE]
There is a worksheet with three exercises based on the material covered to date. The first two are similar to each other. There is an elearning presentation on solving the first exercise – click here to access.
In addition solutions are available for all three exercises.
Please do these exercises and revise Morag Shalini (week 1 & 2) before starting your Seminar 1 exercise.
Additional directed private study [ADD]
The following tasks are intended to get you more familiar with online sources of information which will need to use carefully and critically over the course. You’ll need to use all of these selectively withdrawing significant information and deriving a view of the company’s financial performance and position which is consistent and is justified by these information sources.
- Choose a company – any UK quoted company will do.
- Do a general web search on your company’s name. What sort of information do you get? Learn how to narrow your search to, say, information relating to the past month (or year). How can this information help you, if at all?
- Locate basic legal information about the company at Companies House. How useful is this going to be? What sort of additional information is available if you need it and cannot get it elsewhere. Will it cost, and, if so, how much?
- How is you company doing on the Stock Exchange. Google Finance will help you here. Learn the basics of using the graph of the share price. Explore how to change the time period and what the little capital letters tell you. Do you recognise any of the information shown above the graph. Are investors interested in the performance of the company? Why? What sort of decisions can an investor make? Do you think investors are interested in how the company will perform or how it has performed?
- Locate the company’s website. Have a browse around. Look for and access the investor relations section. Can you find and download the latest corporate/annual report containing the financial statements. If so, download and store the document.
- Browse [generally] through the annual report. Do this just generally at the moment. What sort of information is there there? How much of it is narrative. How much numerical? How much pictorial or graphical? Which kind of information do you think is the easiest to deal with.
Do you think like an accountant? Quiz [ADD]
Try out this quiz and see how you do. This quiz will help you understand accruals accounting and the matching concept.
Week 2c [CORE] Extra resource on depreciation
If you want some more information about depreciation try here.
Week 2b [5] [CORE]: Double Entry, the Primary Financial Statements and Financial Decisions
Luca Pacioli, a Venetian mathematician was the first to describe in print the double entry system used by Venetian merchants to record transactions. Click picture for more information.
Recording transations – double entry and the accounting system
Last week we looked at business transactions and how they affected the assets, liabilities and capital of a business. Businesses need a system for recording transactions as they occur. That system is based on double entry bookkeeping. Bookkeeping and the accounting system are introduced in this section.
Link to learning materials (pdf notes)
Financial reporting and decision making
The objective of financial reporting is to present information to users. Users include owners, creditors and other external users.
Users use this information to make decisions. Decisions can be:
a) stewardship decisions, e.g. is the business being run well, is everything above board, and are there systems in place to make sure that all money and transactions are properly recorded and accounted for, and
b) economic decisions, e.g. how well has the business performed, and what are its prospects.
The end result of financial reporting is three principal financial statements:
- The cash flow statement – basically a summary of the entity’s cash and bank accounts for a reporting period (usually a year)
- The statement of financial position [or balance sheet] – a summary of the assets, liabilities and equity of the business as at the end of the period.
- The income statement [or profit and loss account] – a performance statement summarising income, expenses and profit for the period.
We will look at the fundamental structure of these statements today. A lot of concepts will be covered, and we will need to cover things quite fast to get through everything. We’ll have a look at Tesco’s latest financial statements. At this stage focus on the ‘big picture’ and don’t get bogged down in the detail.
Link to learning materials (pdf notes)
Week 02a [5] [CORE]: The Accounting Equation & the Elements of Accounting
The Accounting Equation
The statement of financial position [i.e. balance sheet] reflects what is widely known as ‘the accounting equation‘.
The accounting equation states that, for an entity, its total assets of a business minus its total liabilities will equal its equity or capital
i.e. A – L = E.
This concept is essentially quite simple. If someone purchases a building costing £400,000 partly financed by a £320,000 mortgage, the owner’s equity in the building is £80,000. Equity is sometimes called capital. All statements of financial position will analyse and show totals for assets, liabilities and capital.
Like any equation, the accounting equation can be rearranged, for example:
- Assets = Liabilities + Equity
- Non current assets + Current Assets = Non current liabilities + Current Liabilities + Equity
- and so on
Follow the link below to access an elearning resource which will take you through the accounting equation and the elements of accounting.
Link to learning materials (elearning resource on the accounting equation).
There is addtional reference material on the International Accounting Standards Board website at https://www.iasplus.com/en-gb/standards/other/framework – scroll down to the section on ‘The elements of financial statements’. This is authoritative material.
CLASS EXERCISE
Ward Hadaway publishes an annual list of the top 50 companies in the North East based on growth. IFor 2023 the list was headed by RE:GEN North East Limited.
Things to do:
Task 1: What does the company do?
Task 2: Find its website and explore … Does the company publish its financial results on its website? Hint: it doesn’t … why do you think that is so?
Task 3: Locate the company’s record at Companies House. Explore the legal information available about the company.
Task 4: Explore the latest filed financial statements. Locate the balance sheet (statement of financial position) and explore how the statement reflects the accounting equation.
Task 5: Fastest growing? Locate some measures of size, which are the best?
Directed Private Study
- Start preparing for your first seminar session: see separate post. The seminar tasks are concerned with helping you deepen your understanding of the material covered in Lecture Two.
- Remember the purposes of the seminar sessions is to help you with any problems you are having with the lecture and directed private study sessions.
Week 1/ [4] [CORE]: Business transactions
close up hand of client hold smartphone paying coffee order by scanning, unrecognizable barista man preparing payment method technology contactless
Overview of material to be covered in Week One
This week we will start looking at the financial statements of a business, this week – transactions and the financial position of a business
Business transactions
As an introduction to financial statements we’ll start by looking at how some typical transactions entered into when setting up a small business. We’ll look at an imaginary business being set up in the UK by an individual entrepreneur – Morag Shalini. We’ll look at how transactions impact on the business’s financial position, performance and cash flows. These will demonstrate the duality of business transactions.
There are two elearning resources we’ll use.
Morag Shalini – elearning 1
The first is here. This will introduce to the Statement of Financial Position of a business, This shows the assets, liabilities and capital of a business as at a point in time.
Morag Shalini – elearning 2
The second is here. This second looks at the differences between the Statement of Financial Position of the business as an unincorporated business with what it might have looked like if it had been incorporated as a limited liability company.
There are some great quizzes in both these resources to give you formative feedback on your progress.
Alternative presentations
If you want to work through Shalini offline the list of transactions is at http://ecourse.co.uk/materials/moragtrans.pdf
and the matrix of transaction effects is at http://ecourse.co.uk/materials/moragtable.pdf
and there is a blank matrix if you want to work through the transactions yourself at http://ecourse.co.uk/materials/moragtableblank.pdf.
Introduction to your teacher
Here’s an introduction to your teacher for this module. This includes closed captions.
Introduction to NBS8135
Welcome to teaching week 1 of NBS8135!
INTRODUCTIONS
Induction material
Induction material is available as
*try downloading the Articulate Mobile Player from https://apps.apple.com/us/app/articulate-mobile-player/id505546381
Lectures
Lectures and seminars will be delivered by
Donald Halliday [email: donald.halliday@newcastle.ac.uk]
Syllabus
The module syllabus can be accessed at: http://www.ncl.ac.uk/module-catalogue/module.php?code=NBS8135 or using the link in the menu.
Timetable
The module timetable can be accessed via http://www.ncl.ac.uk/timetable/ or using the link in the menu – you’ll have to log in with your user name and password to access the timetable.
Administration
- How to use Canvas and the Blog
- Publication schedule for teaching materials
- The Module Handbook
Blog posts
CORE – essential material that must be covered
ADD – additional supportive material, useful but not essential
ADMIN – administrative material
Week 12 Qualitative characteristics of ‘good’ accounting information
Summary
‘Good’ accounting information should be ‘useful’
- to users
- who make financial decisions
Fundamental qualitative characteristics
- relevant
- faithful representation
Enhancing qualitative charactistics
- comparable
- verifiable
- timely
- understandable
Our best guide to the qualitative characteristics of useful financial information is the IASB’s Conceptual Framework for Financial Reporting – most recent version, 2018
The qualitative characteristics apply equally to financial information in general purpose financial reports as well as to other forms of financial information.
According to the IASB financial information is useful when it is
Relevant and represents faithfully what it purports to represent – fundamental qualitative characteristics
Usefulness is further enhanced if it is comparable, verifiable, timely and understandable.
Fundamental qualitative characteristics
Relevance
Financial information is relevant if it could make a difference in the decisions made by users. Financial information is capable of making a difference in decisions if it has
- predictive value
- confirmatory value
- or both.
The predictive value and confirmatory value of financial information are interrelated.
Materiality is recognised as an entity-specific aspect of relevance based on the nature and/or magnitude of the items to which the information relates in the context of an individual entity’s financial report.
Faithful representation
To be useful must also represent faithfully the phenomena it purports to represent.
This means representation of the substance of an item not just its legal form.
A faithful representation seeks to maximise the underlying characteristics of completeness, neutrality and freedom from error.
A neutral depiction is supported by the exercise of prudence. Prudence is the exercise of caution when making judgements where there is uncertainty.
Applying the fundamental qualitative characteristics
Information which is not relevant and faithfully represented is not useful useful.
Enhancing qualitative characteristics
These are:
- comparability
- verifiability
- timeliness
- understandability
Comparability
Information about a reporting entity is more useful if it can be compared with other entities and for earlier periods.
Verifiability
Verifiability helps to assure users that information represents faithfully the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could agree that a particular depiction is a faithful representation.
Timeliness
Timeliness means that information is available to decision-makers in time to be capable of influencing their decisions.
Understandability
Information should be clear and concise. However, some information is inherently complex and cannot be made easy to understand. This should not be excluded if it would make financial reports incomplete and potentially misleading. Financial reports are prepared for users. It must be assumed that users have a reasonable knowledge of business and economic activities exercise diligence.
Applying the enhancing qualitative characteristics
Enhancing qualitative characteristics should be maximised to the extent necessary. However, information that is irrelevant or not represented faithfully cannot be useful.
Cost constraints
Ceneral purpose financial reporting imposes costs and those costs should be justified by the benefits of reporting that information. The IASB assesses costs and benefits in relation to financial reporting generally, and not solely in relation to individual reporting entities.
Week 11c: IFRS15 and Revenue Recognition
LECTURE NOTES FOR TODAY
The lecture notes for today can be downloaded from here.
The lecture notes work through a case study which is available here (Mobile Com plc).
There is an additional case study here (Haway Hate plc).
An International Accounting Standard regulates the measurement of revenue from construction contracts. Typically construction contracts involve lots of resources and large sums of money. They also tend to span more than one accounting year, and can be subject to varying degrees of uncertainty as the contract progresses. Things can go wrong perhaps unexpectedly – see Carillion shares slump
Source: BBC
There will be few problems if a contract is started and finished in the same financial year. The revenue earned and costs incurred on the completed contract will be measurable – and hence the profit or loss. However, if a contract spans two financial years (even if the contract lasts less than 12 months) there will be measurement issues at the end of the first financial year.
Let’s imagine a company engages in a three year construction contract which is expected to be profitable. How should the expected profit on the contract be taken.
Should it all be taken in the first year? Foolhardy, or not?
Or would it be prudent to wait and report no profit on the contract until the final year? Too conservative? If the contractor wants to take some profit each year, is that allowed? and how can be taken each year? Also, how should the contract be reported in the financial statements? A lot of questions there. So do the accounting standard setters have anything to say on this? Well, yes they do. And it’s all to do with reporting the profitability of the contract reliably [and prudently] over the life of the contract.
… but things have changed
However, things changed from 1 January 2018* when standard IFRS 15 Revenue from Contracts with Customers came into operation. The standard replaced a number of previous standards with a principles based five-step model to be applied to all contracts with customers. Those five steps are:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognise revenue when (or as) the entity satisfies a performance obligation.
* deferred from 1 January 2017 [IASB, 11 September 2015]
Reading on the new standard (IFRS 15)
Impacts on the construction industry of the new revenue standard. A downloadable 18 page pdf document discussing the impact of IFRS 15 on the Construction Industry.
Impact on the aerospace industry
EY Applying IFRS in Engineering and Construction
Optional additional reading and viewing on the impact of the new standard
- Video with worked example
- Another video with worked example
- A final video which sums up what’s required in just a little bit more than you need
- Video discussion produced by Deloitte on the impact of IFRS on different sectors. Really good stuff!
NB
KPI = Key performance indicator
IFRS = International Financial Reporting Standards
USGAAP = United States Generally Accepted Accounting Principles, a separate set of Accounting Standards produced by the FASB (fasbee), the Financial Accounting Standards Board, the US body similar to the IASB (International Accounting Standards Board). The IASB and the FASB work closely together with a view to harmonising accounting standards. - IasPlus for general discussion of IFRS 15
- IFRS 15 Revenue from Contracts with Customers for more detailed discussion of the application of the standard to construction contracts.
- IFRS 15 Examples: How IFRS 15 Affects Your Company a well illustrated article showing comparisons between IAS 11 and IFRS 15 with numerical examples.
Week 11b [CORE]: Operating segments
Users of financial statements can considerably enhance their understanding of the financial performance and position of a quoted company by referring to and analysing the segmental information the company is required to report.
The relevant accounting standard is IFRS 8 Operating Segments and we shall look at this in more detail using these notes.
Case study
A case study question – Florian plc.
There is a suggested solution here.
Additional reading
Press release by FRC on the 2015 Financial Statements of Sports Direct.
IFRS 8
https://www.ifrs.org/issued-standards/list-of-standards/ifrs-8-operating-segments/#about. This will enable you to access the text of IFRS 8, but you will have to create an account.
IFRS 8 – Principles in brief
https://www.grantthornton.global/en/insights/articles/ifrs-8-principles-in-brief/
IASPLUS
http://www.iasplus.com/en/standards/ifrs/ifrs8
IMPLEMENTATION GUIDANCE FROM PWC
https://www.pwc.com/gx/en/ifrs-reporting/pdf/segment-reporting.pdf