Cors Accounting

Global BBA 08/01/2020
Financial Accounting II
2019-20
Prof. Wolfgang Dick (dick@essec.edu)
PART 1 :INTRODUCTION
Wolfgang Dick
2019
1
1. CONTENTS
Financial Accounting Regulation

IASB and IFRS
Use and impact of accounting information
LVMH – Overview
Understanding Financial Information
Auditing and audit market
FINANCIAL ACCOUNTING REGULATION
2
1. ACCOUNTING REGULATION
Accounting regulation disciplines accounting

choices
Types of regulatory body:
 Government
 Stock exchange
 Private sector body
 Professional accountants
 Specialist industry organizations
Separate rules for banks and insurance
companies.
1. GOVERNMENT AS ACCOUNTING REGULATOR
Regulation of accounting designed to ensure that

the markets can operate free from fraud and
misrepresentation
 Accounting laws
 Commercial codes
 Government regulatory agencies
Regulation of accounting for tax collection
purposes
3
1. STOCK EXCHANGE AS ACCOUNTING

REGULATOR
Stock exchange regulates the financial

information to be provided by listed companies
In some countries this is done by a government
regulator
 US: Securities and Exchange Commission (SEC) as
accounting regulator
EU: national regulators coordinated through the
European Securities and Markets Authority
(ESMA)
1. PRIVATE SECTOR AS ACCOUNTING REGULATOR
Delegation of responsibility of writing detailed accounting

rules to private sector bodies, financed by contributions
from companies, audit industry, etc..
 US: Financial Accounting Standards Board (FASB)
 Global: International Accounting Standards Board
(IASB)
Flexible and rapid rule-making, as opposed to
governmental rule-making
Technical committees from professional accounting bodies
may function as catalyst
4
1. INTERNATIONAL BODIES
International Accounting Standards Board (IASB)

 The world’s leading accounting standards-setter
 Issues the International Financial Reporting Standards (IFRS)
 IFRS either compulsory or allowed in more than 100 countries
Intergovernmental Working Group of Experts on
International Standards of Accounting and Reporting
(ISAR)
 Under the auspices of the UN Conference on Trade and
Development (UNCTAD)
 Commissions research reports into current accounting problems
International Federation of Accountants (IFAC)
 International representative of the accounting profession
1. INTERNATIONAL FINANCIAL REPORTING

STANDARDS
Single set of global accounting and reporting

standards, issued by the IASB
Increasingly used by many large and multinational
companies
Accepted by most security market authorities
Used as a basis for national accounting
requirements (partially or in full) or as a benchmark
for the development of national accounting rules
5
1. INTERNATIONAL ACCOUNTING STANDARDS BOARD
A private sector body

Operates under the IFRS Foundation (IFRSF)
Has no responsibility to any governmental
organization
Has no enforcement authority
Develops and issues both main standards (IAS /
IFRS) and interpretations (SIC / IFRIC)
1. THE STRUCTURE OF THE IASB
Monitoring Board IFRS Foundation

Trustees
IFRS Advisory International Accounting

Council Standards Board
Technical staff
IFRS Interpretations
Committee
6
1. IFRS – STANDARD-SETTING DUE PROCESS
The IASB’s standard-setting procedures have to ensure that resulting

IFRS are of high quality and are issued only after giving IASB’s
constituencies opportunities to make their views known at several
points in the standard-setting due process
An overview of the due process is presented in figure 1.3
1. STANDARD-SETTING DUE PROCESS OF THE

IASB
National Standard
Setters Others
Research
Discussion Comment Exposure Comment Effective

Standard
paper analysis draft analysis Date
9-15 months 9-15 months 6-18 months
7
1. IFRS IN THE WORLD
Recent decisions of various governments result in the requirement

or permission of the use of IFRS by more than one hundred
countries
EU: IAS Regulation of 2002
• Requirement of use of IFRS for consolidated financial statements of
EU quoted companies as from 1 January 2005
• Member state option to extend the application of IFRS to not-listed
companies and to individual financial statements
Adoption of IFRS (-equivalent) as national accounting rules in a
number of countries (Australia, Singapore, Hong Kong, …)
Planned adaption by Canada, several major South American and
Asian countries in the near future
US: convergence programme of US accounting rules and IFRS
started in 2002 (“Norwalk Agreement”) and still pending
1. FINANCIAL REPORTING IN THE EUROPEAN UNION

– MAIN DEVELOPMENTS
1978 4th Company Law Directive (Individual financial statements)

1983 7th Company Law Directive (Consolidated financial statements)
1995 Decision on new accounting strategy (adhering to IAS instead of
further development of specific European accounting rules)
2000 Announcement of plan to require IAS for consolidated financial
statements of listed companies by 2005
2001 Fair Value Directive (requiring/allowing for fair value measurement of
specific balance sheet items (mainly financial instruments))
2002 IAS Regulation (Application of IFRS by 2005 - see Table 1.3)
2003 Modernization Directive (reflecting IFRS developments in the 4th and
7th Directive)
2005/2007 IFRS mandatory for listed companies in European Union
8
1. EFFECTS OF THE IAS REGULATION (EU)
Individual financial Group/ Consolidated

statements financial statements
Listed companies Member state option IFRS mandatory
Not-listed companies Member state option Member state option
1. LIST OF IASB RULES AS OF JANUARY 2012
Conceptual Framework
CF Framework for the Preparation and Presentation of Financial Statements/
Conceptual Framework for Financial Reporting
Main standards
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events after the Reporting Period
IAS 11 Constructions Contracts
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
9

(CONT.)
Main standards (continued)

IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Separate Financial Statements
IAS 28 Investments in Associates and Joint Ventures
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 30 Disclosure in the Financial Statements of Banks and Similar Financial Institutions
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture
IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating segments

(CONT.)
IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosures of Interests in Other Entities
IFRS 13 Fair Value Measurement
10
Financial information and financial markets – Adobe

Systems Inc (ADBE)

Systems Inc (ADBE)
11

Systems Inc (ADBE)
 Adobe:
Three business segments:
1. Digital Media (creative cloud, Photoshop, etc.)
2. Digital Marketing (web marketing, social marketing analytics)
3. Print and Publishing (“legacy” products)

Systems Inc (ADBE)
 What happened on December 12, 2013?

 Stock price change: +12.8%
 Q4 FY2013 expected revenue: $1.03 billion
 Q4 FY2013 Fourth quarter expected earnings per share: $0.32
From Adobe press release on December 12, 2013:

 Q4 FY2013 Fourth quarter realized revenue: $1.04 billion
 Q4 FY2013 Fourth quarter realized earnings per share: $0.32
 Q4 FY2013 +402,000 new subscribers to Adobe Creative Cloud (more than
expected)
“Adobe has redefined the Creative and Digital Marketing categories with its
industry-leading Cloud offerings”
Shantanu Narayen (president and CEO of Adobe)
12

Systems Inc (ADBE)
 December 13, 2013:

 Stock price change: -3.9%
 Analysts’ expectations (from Institutional Brokers’ Estimate System)
prior to Adobe press release:
 Q1 FY2014 Revenue: $1.02 billion
 Q1 FY2014 Earnings per share: $0.34
 Target (performance expected by management) –

 Q1 FY2014 Revenue: $950 million to $1.0 billion
 Q1 FY2014 Earnings per share: $0.22 to $0.28
LVMH Group – Overview
 Origins – merger in 1987 of

1. Moët Hennessy (Champagne since 1743)
2. Louis Vuitton (Luggage since 1854)
 Bernard Arnault
1. Chairman of the board and CEO since 1989
2. 68 years old
3. Net worth $36 billion in 2015 (34 billion: 2014)
4. Forbes 2015 list #13 (Bernard Arnault & Family)
13
 Ownership:
 Arnault Family: owns 46% of capital through Pilinvest (63% of voting
rights)
 Foreign institutional investors: 30%
 French institutional investors: 15%
 Individuals (shares available to trade): 5%
 Activities
1. Wines & Spirits
2. Fashion & Leather goods  Employees: 100,000+
3. Perfumes & Cosmetics  Listed in Euronext Paris
4. Watches & Jewelry  Luxury = High margins
5. Selective retailing  Competitors:
• Richemont (Cartier,
 Brands (selective example for each activity): Dunhill)
• Kering - Gucci
(1) (2) (3) (4) (5)
14
LVMH Group – 2014
EUR millions 2014 2013 2012

Revenue 30,638 29,149 28,103
Operating profit 5,431 5,894 5,739
Net Income 5,648 3,436 3,909
Total assets 53,362 55,674 49,930
Equity 23,003 27,723 25,666
Market value 66,371 67,300 69,399
• Revenue
• Operating profit: measure performance of core business before effects of financing and tax
• Shareholders’ equity: “value of company in accounting” Equity = Assets ‐ Liabilities
• Market value = NOSH x Share Price = total value of the company on the stock market
• Net income: Bottom line from P&L
LVMH Group – 2014
15
Understanding the Financial Statements (FS)

The perception The reality
Poor Informed
Data Rules decisions decisions
Misleading Useful information

information
Black White Earnings Critical

management? Accounting thinking
judgments
Right
Yes No
Wrong
Shades of gray
Assets Liabilities
Financial statements:
Economic activities:
BS / IS / Cash flows
 A complete set of financial statements is composed of

1. A statement of financial position (balance sheet)
2. A statement of (comprehensive) income (income statement)
3. A statement of changes in equity
4. A statement of cash flows
5. Notes
 The annual report comprehends the financial statements and
additional information (message from the chairman, organization
of the firm, development of the group, governance, MD&A,
sustainability report, etc)
16
 Can we be sure that the data is true and fair?

 Forget about being 100% correct !
 Numerous estimations are used (subjectivity)
 …and cross the fingers
 Only the financial statements are audited
 The Board of Directors is responsible for the preparation of
the financial statements
 The auditor expresses an opinion on the financial statements:
Auditor’s report
 Who are the auditors?
EY, pwc, KPMG,

Deloitte, Mazars,
etc.
 ‘’Think straight, talk straight’’

 85,000+ employees (2001)
 94 countries (2001)
 $9.3 billion in revenue (2001)
17
The failure of Enron’s Auditor

• Auditor mission: Issue an independent opinion of whether
or not the financial statements of a firm are relevant,
accurate, complete and fairly presented according to
GAAP
• Four types of opinions:
1. Unqualified opinion
2. Qualified opinion
3. Adverse opinion
4. Disclaimer of opinion
• Arthur Andersen (Houston Office) received from Enron
(2000):
– $25 million in audit fees
– $27 million in consulting fees
Feb 12, 2001

Skilling becomes
CEO
Aug14, 2001 Oct 16, 2001
Skilling resigns restatement against
as CEO equity $1.2 B
Oct 30, 2991 Moody’s

Downgrades Enron Bonds
from Baa1 to Baa2
September 9, 2001
Andersen shreds
documents December 2, 2001
Enron files for
bankruptcy
18
May 2015:
The company
overstated profits by
151.8 billion yen ($1.2
billion) over a seven-
year period.
 ‘’Building relationships – creating value’’

 195,433 employees (2014)
 758 locations worldwide (2014)
 $ 34 billion in revenue (2014)
 ‘’Building a better working world’’

 212,000+ employees (2015)
 $ 28.7 billion in revenue (2015)
 73 countries (2014)
 ‘’Cutting through complexity’’  250 offices
 162,000+ employees (2014)  15,000 employees (2014)
 $ 24.8 billion in revenue (2014)  €1.08 billion in revenue
(2014)
 150+ countries
 210,400+ employees (2014)
 $ 34.2 billion in revenue (2014)
19
1. AUDIT MARKET: CONFIDENCE CRISIS IN A SELF-REGULATED

INDUSTRY
Briefing: Accounting Scandal (The Economist, December 13th – 19th 2014)
• Enron (US)
• Olympus (Japan)
• Worldcom (US)
• Autonomy (UK)
• Tesco (UK)
• Bankia (Spain)
• Colonial Bank (US)
• Lehman Brother’s (US)
• TierOne (US)
• Satyam (India)
• Integrated Energy
(China)
• Sino-Forest (China)
• Noble Group?
(Singapore)
• Toshiba (Japan)
• The four “watchdogs” asleep vs. the “fantastic four”
1. Concentration of the audit market
• USA : • European Commission:
• Systemic risk introduced by audit

market concentration?
• France (2007):
• Big 4 auditors share 61% of audit

fees (vs. 91% in other G8
countries)
20
PART 2: CONSOLIDATED FINANCIAL

STATEMENTS
Wolfgang Dick
2019
1. CONTENTS
Introduction – Company groups

Rationale for consolidated financial statements
Control as the basis for consolidation
Acquisition method
Non-controlling interest
Consolidated statement of profit or loss
Types of inter-company relationships
Associates and joint arrangements
Disclosure requirements
21
1. INTRODUCTION – COMPANY,
GROUPS
1. CONSOLIDATED FINANCIAL STATEMENTS
Group (or consolidated) financial statements are

the financial statements of a set of two or more
enterprises organized as an economic entity
Group is defined according to concept of “control”
Control = power (de jure or de facto) to govern the
financial and operating policies of an entity so as
to obtain benefits from its activities (IFRS)
22
1. COMPANY GROUPS
Company group characteristics

 Vertical group
 Horizontal group
 Conglomerate
Group expansion
 Development of new subsidiaries
 Acquisition by takeover of other companies
 Merger between companies
1. SHARES - RIGHTS
Membership rights :
 Influence on management, voting power
Equity rights:
 Right to participate in distribution of profits + equivalent part of liquidation balance
Rights are usually proportional to capital share

 Exceptions: preferment shares, limitations to voting power, multiple votes per
share,...
Percentage of interest
vs.
Percentage of control
23
1. GROUP STRUCTURE
Enterprise A
100% 25%
51%
Enterprise B Enterprise C Enterprise D
9% 100%
Enterprise F Enterprise E
2008-2009
1. EXAMPLE : PARENT LTD
Parent Ltd
18% 99% 80% 70%
5% Joop AB Albert AG Benoît SA Denis PLC
20%1 50%2 35% 30% 25%

95% 10%
Kasse AG Heinz GmbH Charles SA Emerson PLC
16%
Francis SA
1 with double voting rights (only double voting rights existing) 65%3
2 jointly controlled with Fox Mulder, Inc. (USA)
3 sold the 1st January N+1 to Scully, Inc. (USA)
Guy SA
What are the percentages of control and interest 31/12/N ?

48
24
RATIONALE FOR CONSOLIDATED

FINANCIAL STATEMENTS
1. RATIONALE FOR CONSOLIDATED FINANCIAL

STATEMENTS
Interdependent relationships within a group (patrimonial,

contractual, personal ties)
Loss of part of their independence of individual entities
Common or unified management
Economic interest of the group > individual interests of
legal entities involved
It is economically more relevant to present the financial

statement of the economic whole as an aggregate of all
assets and liabilities under unified control
25
1. FROM INDIVIDUAL TO GROUP ACCOUNTS
Co. H Co. X H Group

€’000 €’000 €’000
Non-current tangible assets 500 1000 1500

Investment in subsidiary 500 - -
Current assets 250 350 600
Totals 1250 1350 2100
Share capital 500 500 500

Retained earnings 300 (50) 250
800 450 750
LT debt 300 700 1000
Trade payables 150 200 350
Totals 1250 1350 2100
Debt/Equity ratio 37.5% 155% 133%
1. OFFSETTING THE INVESTMENT IN A

SUBSIDIARY
Holding Sub Co. Elimination Group

€m €m €m €m
Non-current tangible
assets 100 20 - 120
Investment in subsidiary 25 - (25)
Current assets 30 10 - 40
Totals 155 30 (25) 160
Share capital 70 25 (25) 70

Retained earnings 30 - - 30
100 25 (25) 100
Current liabilities 15 5 - 20
Long-term liabilities 40 - - 40
Totals 155 30 (25) 160
26
1. CURRENT STANDARDS
IFRS 10 Consolidated Financial Statements

IFRS 3 Business Combinations
IAS 28 Investments in Associates and Joint
Ventures
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
Seventh EC Company law Directive
CONTROL AS THE BASIS FOR

CONSOLIDATION
27
1. CONTROL AS THE BASIS FOR CONSOLIDATION
A reporting entity (investor) is required to consolidate an

investee, if the investor controls the investee.
IFRS 10 : “An investor controls an investee when the
investor is exposed, or has rights, to variable returns
from the involvement with the investee and has the
ability to affect those returns through its power over the
investee” (IFRS 10, par.6).
Control gives rise to a parent-subsidiary relationship
1. ELEMENTS OF THE DEFINITION OF CONTROL
Power to direct
Exposure/rights to Control
variable returns
Linkage between
power and returns
28
1. CONTROL – 3 ESSENTIAL CRITERIA
1) Power to direct - Does the investor have the

current ability to direct activities that significantly
affect an investee’s returns?
2) Exposure (or rights) to variable returns
from an investee, and
3) Linkage between power and returns -
Ability of the investor to use its power to affect its
returns of the investee.
CONSOLIDATION PROCEDURE
29
1. CONSOLIDATION PROCEDURE
Adjust recognition criteria / measurements of financial statements of

subsidiaries to uniform principles (IFRS) – Faire value adjustments
Aggregation of financial statements of all subsidiaries
Remove/eliminate intra-group balances and transactions
Remove/eliminate investment in subsidiaries / Identify goodwill

and non-controlling interest
Follow-up of recognition and fair value adjustments/ Deduct

impairment losses on goodwill
Group financial statements
UNIFORM ACCOUNTING PRINCIPLES
30
Uniform principles
• Why ?
– The individual financial statements are prepared in accordance

with local accounting principles (which may differ from one
country to another)
– Some local accounting principles are strongly influenced by

purely fiscal reasons
– Certain accounting treatments are not economically rational

and should be restated to meet the needs of the consolidation
Uniform principles
How ?
 An analysis of the financial statements of each consolidated

company must be performed to detect the types of
reprocessing to achieve
 Restatement entries must be recorded in the consolidation

journal to make the accounts consistent and "ready to
consolidate”
 The development of group accounting principles defines and

thus facilitates the reprocessing
31
Uniform principles – usual adjustments
Depreciation
Interest on Debt
R&D expenditures
Inventories
Finance lease
Start-up costs
Construction contracts
Elimination of hidden reserves

Elimination for tax reasons
Revaluation of fixed assets
Uniform principles – example
 Different useful life of fixed assets .
 Inventories valuation (FIFO, LIFO, Average).
32
Uniform principles– Example : Start-up costs
Firm F has recorded in year N-1 start-up costs for a value of

200, that are depreciated over 5 years. The group accounting
principles considers this costs as expenses.
Provide the adjusting journal entries for year N.
Uniform principles– Example : Start-up costs
Consolidated entries for the Balance sheet : DT CT
Depreciation of Start-up costs 40

Reserve F 160
Start-up costs 200
Adjustments related to year N-1
Depreciation of Start-up costs 40

Net Income F 40
Consolidated entries for the Income Statement :

DT CT
Net Income 40
Depreciation expenses 40
Elimination of the depreciation
33
Uniform principles– Example : Provision
A provision (for fiscal reason) of 80 was on the balance

sheet of year N-1 of firm M. This provision has been
increased to 100 a the end of year N.
Provide the adjusting journal entries.
Uniform principles– Example : Provision
Consolidated entries for the B/S : DT CT
Provisions 100
Net Income M 20
Reserve M 80
Elimination of the provision
Consolidated entries for the I/S :
DT CT
Net Income 20
Provision expense 20
Elimination of the expense
34
ELIMINATION OF INTRA-GROUP
TRANSACTIONS
Elimination of intra-group transactions
Transactions without impact on group profit/loss:

Transactions BS / BS
Receivables / Payables
Intra-group loans
Transactions IS / IS
Purchases / sales
Financial expenses / financial revenues
35
• BS / BS:
M sells exclusively to F and is granting a loan to F of 100
M F Elimination Consolidated
Loan given 1000 -100 900
Investment in F 500 -500 0
Receivables 300 400 -300 400
Other assets 500 700 1200
Total assets 2300 1100 -900 2500
Capital 1000 500 -500 1000

Reserves
Financial debt 500 100 -100 500
Suppliers 500 -300 200
Other liabilities 800 800
Total SE & L 2300 1100 -900 2500
• IS / IS:
M sells exclusively to F and is granting a loan to F of 100 generating interest revenue of 50 for M.
M F Elimination Consolidated
Sales 1000 1300 -1000 1300
Operating expenses -780 -1095 1000 -900
Fin. revenues 70 400 -50 420
Fin. expenses -25 -50 50 -25
Net profit/loss 265 555 0 820
36
Transactions with impact on group profit/loss:

- Paiement of dividends.
- Elimination of profit on sale of inventory.
- Elimination of gains/losses on disposal of assets.
Elimination of dividends:
- Two transactions must be eliminated:
• The decrease of equity of the (distributing) subsidiary
• The financial revenue of the parent.
- Book entries:
Debit Credit
BS
Reserves 100
Net profit/loss 100
IS
Financial revenues 100
Net profit/loss 100
37
Elimination of profit on sale of inventory:

 A parent company is generating profit by selling inventory to a subsidiary.
 At closing date, if the subsidiary has not resold the inventory to a non-group customer, the profit
generated by the parent company must be eliminated.
- Book entries:
Debit Credit
BS
Inventory 100
Net profit/loss 100
IS
Cost of goods sold 100
Net profit/loss 100
Elimination of gains and losses on disposals of non-current assets (tangible, intangible,

financial)
The adjustment consists in:

 Eliminating in the IS the gain or loss on disposal as it is not representing any value for the group.
 Maintaining in the BS the original value of the non-current asset.
- Book entries:
Debit Credit
BS
Non-current asset 100
Net profit/loss 100
IS
Gain on disposal 100
Net profit/loss 100
38
ACQUISITION ACCOUNTING
1. ACQUISITION ACCOUNTING
Acquisition method
Consolidation difference at acquisition date
Recognition and fair value adjustments of acquired
assets and liabilities
Goodwill and its subsequent measurement
Non-controlling interest
Consolidated statement of profit or loss
39
1. ACQUISITION METHOD
A business combination is an event in which an acquirer

obtains control of another business (the acquiree)
Acquisition date = date of transition of control
The acquirer recognizes the identifiable assets and
liabilities of the acquiree at their fair values at acquisition
date
Goodwill arises as a consolidation difference if the
acquisition cost of the investment is not equal to the fair
value of the identifiable net assets acquired
1. CONSOLIDATION DIFFERENCE AT
ACQUISITION DATE
Holding Sub Co. Elimination Group

€m €m €m €m
Non-current tang. assets 100 20 - 120
Investment in subsidiary 38 - (38)
Goodwill - - 13 13
Totals 155 30 (25) 160

Retained earnings 30 5 (5) 30
100 25 (25) 100
Long-term liabilities 40 - - 40
Totals 155 30 (25) 160
40
1. RECOGNITION AND FAIR VALUE

ADJUSTMENTS OF ACQUIRED ASSETS
AND LIABILITIES
The individual assets and liabilities of the acquiree

have to be revised to their fair value at acquisition
date
This exercise may imply (de-)recognition of new (old)
assets and liabilities
Goodwill will be the difference between the revalued
net assets and the investment by the parent
Fair value at acquisition date is considered to be the
new historical cost from the point of view of the
parent
1. RECOGNITION AND FAIR VALUE

ADJUSTMENTS APPLIED
Book value Adjustments Fair value

of Sub balance sheet
€m €m €m
Non-current assets
- Intangible - 8 8
- Tangible 20 2 22
Current assets 10 - 10
Totals 30 10 40
Share capital 20 - 20
Retained earnings 5 10 15
25 10 35
Current liabilities 5 - 5
Totals 30 10 40
41
1. GOODWILL AFTER ADJUSTMENTS
Holding Revised Sub Elimination Group

€m €m €m €m
Non-current assets
- Goodwill 3 3
- Other intangibles - 8 - 8
- Tangibles 100 22 - 122
Investment in Sub 38 - (38) -

Totals 155 40 (35) 160

100 35 (35) 100
Long-term 40 - - 40
liabilities
Totals 155 40 (35) 160
1. SUBSEQUENT MEASUREMENT OF
GOODWILL
IFRS before 2004 + European Accounting

Directives:
Amortize goodwill on a systematic basis over the best
estimate of its useful life
Rebuttable assumption of a maximum of 20 years
IFRS 3 Business Combinations (from 2004):

 Test goodwill for impairment annually (or more
frequently if indications of impairment)
42
1. IMPAIRMENT OF GOODWILL
First allocate goodwill at CGU-level

Compare recoverable amount of the CGU with its net
carrying value (including allocated goodwill)
Impairment charge at CGU-level will first be allocated to
goodwill and, second, to the other non-monetary assets at
CGU-level in proportion to their carrying amounts
The carrying value of individual assets should not be
reduced below their recoverable amount
IAS 36 Impairment of Assets
1. IMPAIRMENT AT CGU-LEVEL
A CGU with a recoverable amount of €48m,

comprises the following assets:
Carrying value (€m):
Goodwill 10
Property 40
Plant and equipment 20
70
43
1. ALLOCATION OF CGU IMPAIRMENT LOSS
Goodwill Property Plant and Total

Equipment
Carrying value
before impairment 10 40 20 70
Impairment loss
(10) (8) (4) (22)
Carrying value after

impairment 0 32 16 48
NON CONTROLLING INTEREST
44
1. NON-CONTROLLING INTEREST (NCI)
Non-controlling interest (or minority interest)

appears if the group does not own 100% of the
shares in a subsidiary
They represent the part of the net assets and profit
or loss of the subsidiary attributable to the shares
that are not controlled by the parent
1. NCI AND GOODWILL
IFRS 3 allows two alternatives:

1.Partial goodwill method: NCI is recognized at
its share of the fair value of the identifiable net
assets and does not include goodwill
2.Full goodwill method: NCI includes goodwill
Full goodwill method: the difference between the
fair value (at acquisition date) of the NCI and
the amount established under the partial
goodwill method is added to the value of the
NCI
45
1. NCI AND PARTIAL GOODWILL METHOD
L Co. M. Co Elimination Group

€’000 €’000 €’000 €’000
Goodwill - - 280 280
Non-current tangibles 1200 300 - 1500
Investment in M 600 - (600) -
Totals 2350 525 (320) 2555
Share capital 800 300 (300) 800

Non-controlling interest 80 80
1950 400 (320) 2030
LT liabilities 200 - - 200
Totals 2350 525 (320) 2555
CONSOLIDATED STATEMENT OF PROFIT

AND LOSS
46
1. CONSOLIDATED STATEMENT OF PROFIT OR LOSS
In the consolidated statement of profit or loss, the

effect of intra-group transactions has to be
eliminated
 Only income and expenses recognized with regard to
parties outside the group, will be retained
Follow-up effects of recognition and fair value
adjustments over time have to be integrated
Impairment losses on goodwill may also have a
significant impact on the consolidated profit or loss
1. INTRA-GROUP TRANSACTIONS
Subsidiary A
Expenses 1200
Sales to B 1500
Profit 300
Subsidiary B
Purchases from A 1500
Other expenses 5000
Sales to C 7500
Profit 1000
Subsidiary C
Purchases from B 7500
Other expenses 500
Sales to retailers 8500
Profit 500
Totals 15700 17500 1800
47
1. CONSOLIDATION PROCEDURES
Adjust recognition criteria / measurements of financial

statements of subsidiaries to uniform principles (IFRS)
Aggregation of financial statements of all subsidiaries
Recognition and fair value adjustments / Remove investment

in subsidiaries / Identify goodwill and non-controlling interest
Follow-up of recognition and fair value adjustments/ Deduct

impairment losses on goodwill
Remove intra-group balances and intra-group transactions
Consolidated financial statements
ASSOCIATES AND JOINT

ARRANGEMENTS
48
1. IAS 28 INVESTMENTS IN ASSOCIATES AND JOINT

VENTURES
IAS 28 Investments in Associates and Joint

Ventures assumes significant influence if the
investor holds at least 20 per cent of the voting
rights of the investee
IAS 28 requires the equity method to account for
associated companies
The part of the investor in the profit and loss of the
associated company is introduced as a separate
caption in the consolidated statement of profit or
loss (“income from associates”)
1. IFRS 11 JOINT ARRANGEMENTS
In a joint arrangement two or more parties have

joint control
• Joint control is the contractually agreed sharing of control of
an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the
parties sharing control
IFRS 11 recognizes two kinds of arrangement:
1. Joint operations – Direct ownership of assets and liabilities
2. Joint ventures – Rights in net assets (usually a legal entity)
An investment in a joint venture is accounted for
using the equity method (proportionate
consolidation is no longer allowed under IFRS)
49
DISCLOSURE REQUIREMENTS
1. SPECIFIC DISCLOSURE REQUIREMENTS
IFRS 12 Disclosure of Interests in Other Entities specifies

minimum disclosures with regard to interests in subsidiaries,
joint arrangements, associates and unconsolidated
structured entities
The required disclosures aim to provide information in order
to enable users to evaluate
1. the nature of, and risks associated with the reporting entity’s interests in
other entities, and
2. the effects of those interests on the group’s financial position, financial
performance and cash flows
Special attention to structured entities (or special purpose
vehicles)
50
1. ILLUSTRATION - ASSOCIATED COMPANY
Company C
ASSETS
Non-current tangible
assets 600
Current assets 300
Company A
Total 900
buys 20% of
FINANCING
Company C
Share capital 400

Retained earnings 50
450
Payables 200
Debt 250
Total 900
1. ILLUSTRATION - EQUITY METHOD
Co A Co C Group
Non-current tangible assets 1050 1050
Investment in C 150 - 150
Goodwill - +60 60
Equity value of investm. in C +90 90
Current assets 420 420
Totals 1620 - 1620
Share capital 300 300

Retained earnings 420 420
720 720
Payables 300 300
Debt 600 600
Totals 1620 1620
51
1. ILLUSTRATION – RENAULT INVESTMENT IN

NISSAN – AT EQUITY

NISSAN – AT COST
Balance sheet of Renault SA indicates two categories of investments :

- investments measured at equity
- other investments
52

NISSAN – AT COST
The note about accounting

policies gives more
information about the criteria
for selecting one or the other
valuation method.

NISSAN – AT COST
Investment in Nissan is therefore included in ‘Other investments’ and

measured at cost.
53

NISSAN
The difference between historical cost in 1999 (6 217) and value at equity at
the end of 2017 (19 135) reflects the evolution of Renault’s share in the
equity of Nissan.
The amount of 19 135 can be verified by calculating the share of Renault in

the equity of Nissan (see next page).

NISSAN – EQUITY OF NISSAN
54

NISSAN – RENAULT’S SHARE IN NISSAN’S
EQUITY
Nissan’s equity amounts to 5 689 billions of Yen. Given the exhange rate of
131 yen for 1 euro, this corresponds to 43,4 billions of Euros.
Renault’s hare in this is 43,7% (see below), ie 19,0 billions of Euros which
corresponds almost exactly to the amount ‘at equity’ in the consolidated
balance sheet of Renault.
The difference between the amount calculated above and the one indicated in Renault’s balance sheet may be
related, among others, to a change of the exchange rate between 31/12/2017 and 31/03/2018, the profit of the 1st
quarter of Nissan….

NISSAN – GAIN IN 2017
The total gain of 19 135 – 6 217 = 12 918 covers the period since 1999.
The gains for the years 2017 and 2016 are disclosed in the income
statement for 2017 of Renault :
The entire income statement is shown on the following page.
55

NISSAN – GAIN IN 2017

NISSAN – CHANGE 2016-2017
The table below confirms that the most important ‘ordinary’ drivers for the
value of the investment in Nissan are the share in income and the dividends
distributed.
For both year 2017, there is also an significant impact of the change in the
translation rate JPY – Euro.
The entire income statement is shown on the following page.
56
1. ILLUSTRATION - ASSOCIATED COMPANY
The firm CPTC acquired 100 shares of the Anderson Company on

December 31, 2014 at € 25 per share. The market price of a share of
Anderson on December 31, 2015 was € 35 per share.
For the year ended December 31, 2015, Anderson paid dividends of € 1.50
per share and had earnings of € 2.50 per share.
Given that CPTC can exercise a significant influence but no control over the
investee (Anderson), compute:
- the investment income (amount in the Consolidated Statement of
Comprehensive Income) and
- the carrying amount (amount in the Consolidated Statement of Financial
Position) of these shares
in the CPTC’s Financial Statements for the year ended December 31, 2015.
1. ILLUSTRATION – JOINT CONTROL -

PROPORTIONATE CONSOLIDATION –
NATIONAL GAAP IN F, D …
Co A Co C (20%) Eliminations Group

Non-current tangible assets 1050 120 - 1170
Investment in C 150 - -150
Goodwill - - + 60 60
Totals 1620 180 -90 1710
Share capital 300 80 -80 300

Retained earnings 420 10 -10 420
720 90 -90 720
Payables 300 40 - 340
Debt 600 50 - 650
Totals 1620 180 -90 1710
57
TYPES OF INTER-COMPANY
RELATIONSHIPS
1. TYPES OF INTER-COMPANY RELATIONSHIP
One can discern different types of relationship

between an investor company and an
investee company according to voting rights
under control of the investor company
Control / Significant influence / Joint control/
Ownership without real influence
Accounting rules differ according to the type
of relationship
58
1. INTER-COMPANY RELATIONSHIPS
Type of inter- Amount of Qualification of

company voting rights shareholdings
relationship generally
1 Control > 50% Subsidiary
2 Significant >= 20% Associate

influence
3 Joint control Equal in Joint arrangement
substance
4 No real < 20% Financial
influence investment
1. INTER-COMPANY RELATIONSHIP AND

ACCOUNTING CONSEQUENCES
1 Control > 50% Subsidiary Acquisition

method
2 Significant influence >= 20% Associate
Equity
method
3 Joint control Equal Joint
in subs. arrangement
4 No real influence < 20% Financial Fair value

investment (or at cost)
59
PART 3: ADDITIONAL ACCOUNTING

NOTIONS
Wolfgang Dick
2019
1. CONTENTS
1. Tangible assets
2. Intangible assets
3. Financial instruments
4. Impairment
5. Leasing
6. Provisions / Contingent liabilities
7. Pension obligations
8. Segment reporting
60
1. TANGIBLE ASSETS
1. TANGIBLE ASSETS
Tangible assets
 Land and buildings
 Plant and equipment
 Leased assets
61
1. TANGIBLE ASSETS
IAS 16 Property, Plant and Equipment

Acquisition cost = purchase price + ancillary costs to
bring the asset to the location and condition necessary for
it to be capable of operating in the manner intended by
management
Separate values for land and buildings
Land usually has an indefinite useful life and is therefore
not depreciated
In some cases acquisition cost will include capitalized
decommissioning costs
Control over tangible assets can be through ownership or
lease agreement
2. INTANGIBLE ASSETS
62
Intangible assets
 Research and development
 Brand names
 Patents
 Purchased goodwill
Reflect intangible resources such as scientific and

technical knowledge, development of new
processes or systems, intellectual property,
privileged customer relationships, etc.
Typical examples: R&D, brand names, copyrights,
computer software, licences, patents
63
1. IAS 38 - INTANGIBLES
An intangible is an identifiable non-monetary asset

without physical substance
Main characteristics:
 They meet the definition of an asset
 They lack physical substance
 They are identifiable
1. IAS 38 – INTANGIBLES (CONT.)
Definition refers to “identifiability”

 Separability, or
 Arising from contractual or other legal rights
Recognition criteria challenge - Degree of
uncertainty with respect to the future economic
benefits
 Magnitude and timing of future economic benefits?
 Control over economic benefits?
The useful life of an intangible asset can be finite
or indefinite
64
1. RESEARCH AND DEVELOPMENT
IAS 38: distinction between the research and the

development phase
 Research costs are always expensed
 Development costs may qualify for asset recognition
Specific recognition criteria for internally generated

intangible assets specify when development costs
should be recognized as an asset
1. BRAND NAMES
Expenditure on internally generated brands is in most

cases not distinguishable from the cost of developing
the business in general
A brand name acquired from another company will
generally meet asset recognition criteria
Brand names can have an indefinite useful life
 If indefinite useful life, no systematic amortization
65
1. PATENTS
Internally generated patents:

 Application of specific recognition criteria for
development costs
 Identification of the related costs can be
problematic
Depreciation schedule can be a matter of debate
3. FINANCIAL INSTRUMENTS
Minority passive investments
66
Minority passive investments
 Shares and bonds issued by other firms bought in order to

generate a financial profit
 NO significant influence and NO control: generally < 20%
 Passive Investments must be classified into 4 categories
1. Loans and receivables
2. Held to Maturity
3. Held for Trading (Fair value through profit or loss)
4. Available for Sale - OCI
Loans and receivables
ST or LT Short & long term assets
NATURE All financial assets with fixed or determinable

payments that are not quoted in an active
market
VALUATION
BS Amortized cost (discounted if LT)
IS Interest (revenue)
67
Held to maturity
NATURE Debt securities for which the firm must have both
the intention and the ability to hold to maturity
VALUATION
BS Amortized cost
IS Interest
+/- Realized gains and losses
Held to Maturity
Acquisition cost 01/01/N 300
Market value 31/12/N 310
BS
300
IS
68
Held for Trading
ST or LT Short term assets
NATURE Debt and equity securities acquired for speculative

purpose (in order to make short term
profits)
VALUATION
BS Fair value
IS Interest / Dividends
+/- Unrealized gains and losses
Held for Trading
BS
300 10
10
IS
10
69
Available for Sale
NATURE Debt and equity securities that can not be classified

in another category
VALUATION
BS Fair value
IS Interest / Dividends
Comprehensive+/- Unrealized gains and losses
Income
Available for Sale
BS
300 10
10
IS
70
4. IMPAIRMENT
ASSET IMPAIRMENT
• An asset is considered to have become impaired

if its remaining expected future benefits drop
below its net carrying value
• If so, the carrying value of the asset will be
adjusted for an impairment loss
• IAS 36 Impairment of assets
71
IMPAIRMENT TESTING
• At the end of a reporting period, assets have

to be reviewed for indications of possible
impairment
• If there is an indication of impairment, an
impairment test will be carried out
– Compare net carrying amount and ‘recoverable
amount’
– Recoverable amount = value recoverable through
use or sale
RECOVERABLE AMOUNT
• The recoverable amount is the higher of an

asset’s fair value less costs to sell and its
value in use
• Fair value of an asset is the amount for which
the asset could be exchanged between
knowledgeable, willing parties in an arm’s
length transaction
• Value in use is the present value of estimated
future cash flows from continued use of the
asset and eventual disposal at the end of its
useful life
72
RECOVERABLE AMOUNT
Recoverable
Carrying value compare amount
< is higher of >
Fair value
less costs to sell Value in use
ACCOUNTING FOR IMPAIRMENT
• If an impairment test shows that the

recoverable amount of an asset is lower than
its net carrying amount, the asset value is
written down to the lower value
• The asset write-down is expensed as an

impairment loss
– Assets  = Equity  + Liabilities 0
73
ACCOUNTING FOR IMPAIRMENT (CONT.)
• Impairment rationale
– If impairment and the asset value were left
unadjusted => overestimation of future economic
benefits and current profit
• In case of subsequent increase of the

recoverable amount => Reversal of impairment
loss
IMPAIRMENT OF A LONG-TERM ASSET -

ILLUSTRATION
Assume a company acquired on 2 January 20X1 a specialised machine

for €1,500,000, expecting to use it to produce a specific item for 12
years.
The equipment was depreciated on a straight-line basis. By the end of
20X4 demand for the specific product has dropped so much that the
company expects that the net cash flows the item would generate over
the remainder of its product life cycle would be less than the machine’s
net carrying value (€1,000,000).
The value in use was estimated at €800,000, while the estimated net
selling price on 1 January 20X5 was €750,000.
The equipment is therefore written down to €800,000, its estimated
value in use, and the impairment loss is recognised in the 20X4 income
statement.
74
CASH-GENERATING UNITS
• Impairment testing is done at the individual or

aggregate asset level
• A cash-generating unit is the smallest identifiable
group of assets that generate cash flows that are
largely independent of the cash flows from other
(groups of) assets
• The existence of an active market for the output
produced by a group of assets constitutes
primary evidence that cash flows are
independent
Impairment – Renault
75
Impairment – Microsoft
“On April 25, 2014, we completed the transaction to acquire substantially all of NDS [Nokia] for a
total purchase price of $9.5 billion, including cash acquired of $1.5 billion (“the Acquisition”). The
purchase price consisted primarily of cash of $7.1 billion and Nokia’s repurchase of convertible
notes of $2.1 billion which was a non-cash transaction.”
“The Acquisition is expected to accelerate the growth of our Devices and Consumer (“D&C”)
business through faster innovation, synergies, and unified branding and marketing.”
Microsoft 10-K report – 2014
• Steven Elop (Left) & Steve Ballmer
76
“Impairment, integration, and restructuring expenses were $10.0 billion for fiscal year
2015, compared to $127 million for fiscal year 2014. The increase was mainly due to
impairment charges of $7.5 billion related to our Phone Hardware business in the
fourth quarter of fiscal year 2015. Our annual goodwill impairment test as of May 1,
2015 indicated that the carrying value of Phone Hardware goodwill exceeded its
estimated fair value. Accordingly, we recorded a goodwill impairment charge of $5.1
billion, reducing Phone Hardware goodwill from $5.4 billion to $116 million, net of
foreign currency remeasurements, as well as an impairment charge of $2.2 billion
related to the write-down of Phone Hardware intangible assets. Restructuring charges
were $2.1 billion, including employee severance expenses and the write-down of
certain assets in connection with our restructuring activities. Integration expenses
increased $308 million, due to a full-year of integration activities in fiscal year 2015
associated with the acquisition of NDS.”
Microsoft 10-K report – 2015
5. LEASES
Only Lessee perspective
77
Leases (IAS 17 – until 2018)
 A lease is an agreement whereby the lessor conveys to the

lessee in return for a series of payments the right to use an asset
for an agreed period of time
 2 types of leases
1. Finance lease – transfers substantially all the risks and
rewards incidental to ownership of an asset
2. Operating leases – other than a finance lease
 A lease must be classified as a finance lease if at least one of the

following criteria is met
1. There is a transfer of ownership by the end of the lease
2. The lessee has the option to purchase the asset at a price
that is expected to be sufficiently lower than the fair value
3. The lease covers the major part of the economic life of the
asset
4. The PV of the minimum lease payments amounts to at least
substantially all of the fair value of the asset
5. The leased assets are of such a specialized nature that only
the lessee can use them without major modifications
78
 Finance lease – treat as if assets were purchased with debt

 Balance sheet: Asset and Liability
 Income statement: Depreciation and Interest expense
 Notes: Long term liabilities; PPE
 Operating lease
 Balance sheet: Nothing
 Income statement: Rent expense
 Notes: Contingent liabilities
Finance Lease Operating Lease

BS BS
Lease
Leased assets
obligation
IS IS
Interest
Rent
Depreciation
79
Leases
 Additional disclosures (for both types of leases)

 A description of the lease contract
 For each class of asset, the net carrying amount
 The future minimum lease payments (1, 2-5, after 5 years)
 A reconciliation between the total of future minimum lease
payments and their present value
Leases (IFRS 16 – from 2019)
 A lease is a contract, or part of a contract, that conveys the right to

use an asset (the underlying asset) for a period of time in
exchange for consideration.
80
 General case: A lessee shall recognize a right-of-use asset and a

lease liability
 Exceptions (optional):
 Short-term leases (less than 12 months in general)
 The leased assets is of low value ( this is an absolute value,
independent from the size of the lessee, different from ‘non-
material’. Example Air France: 5 000 euros
 General case – recognition of an asset and a liability

 Balance sheet: Intangible Right-of-use and Liability
 Income statement: Depreciation and Interest expense
 Notes: Long term liabilities; PPE
 Exceptional case
 Balance sheet: Nothing
 Income statement: Rent expense
 Notes: Contingent liabilities
81
General case Exceptional case

BS BS
Intangible right- Lease

to-use assets obligation
IS IS
Interest
Rent
Depreciation
Leases (IFRS 16 – from 2019): Example Air France
Annual report 2017 (p. 211)
08/01/2020
82
08/01/2020
1. EXAM
PLE
AIR
FRAN
CE
Half year
report 2018 (p.
38 s.)
08/01/2020
83
Half year report 2018 (p. 38 s.)
08/01/2020
1. EX
A
M
PL
E
AI
R
FR
Half AN
year CE
report
2018 (p.
38 s.)
08/01/202
Communication financière
0
84
Leases (IFRS 16 – from 2019): Example Lufthansa
08/01/2020
Leases (IFRS 16 – from 2019): Example LVMH
08/01/2020
85
6. PROVISIONS / CONTINGENT
LIABILITIES
1. PROVISIONS
A provision is a present obligation as a result of a

past event, whereby
 It is probable that settlement of the obligation will lead
to a future outflow of company resources
 The amount or timing of future outflow is uncertain
 A reliable estimate of the amount of the obligation is
feasible
Borderline between provisions and contingent
liabilities
86
1. CONTINGENCIES
A contingency is a condition or situation, the

ultimate outcome of which (gain or loss) will be
confirmed only by the occurrence or non-
occurrence of uncertain future events not wholly
under control of the company
IAS 37 Provisions, Contingent Liabilities and
Continent Assets
1. DECISION TREE - RECOGNISING A

PROVISION
Start
Present
obligation as a No Possible No
result of an obligation ?
obligating event
Yes
Probable No Yes
Remote?
outflow ?
Yes No
Reliable No (rare)
estimate ?
Yes
Disclose
Provide Do nothing
contingent liability
Source: IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
87
1. CONTINGENT LIABILITIES
A contingent liability refers to

1. A possible obligation that arises from past
events, or
2. A present obligation that is not recognized
because the future expenditure is not probable or
the obligation cannot be measured with sufficient
reliability
Requires disclosure in the notes to the accounts
as it may affect the assessment of future
profitability
1. ONEROUS CONTRACTS
Pending contracts in general need no special

accounting treatment except if they are ‘onerous’
Onerous contracts are contracts where the
expected unavoidable costs of meeting the
contract are greater than the benefits expected to
be received from it
If a contract is onerous, the present obligation
under the contract terms should be recognized as
a provision
88
7. PENSION OBLIGATIONS
Retirement benefits
 Retirement benefit plans are arrangements whereby a firm

provides benefits for employees on or after termination of service
 These plans may be classified in

 Defined-contribution plans (DC) – the company promises
employees that it will contribute a certain amount to the plan
for each period (expense of the period): % of salary
 Defined-benefit plans (DB) – the company promises that the
employee will receive a certain pension amount after
retirement: e.g., employee will receive 80% of last salary until
he/she dies
89
Retirement benefits
John joins the firm John retires John dies
Working life (1) Retirement (2)

John acquires rights to receive future John receives benefits
benefits
John performs his job for some promised

benefits in the future: the firm accumulates a
“(long term) obligation”
 The firm needs to recognize a provision.

 Which amount?
Retirement benefits
John Doe hired for Present value of

Year 1 €50,000 per year future obligation?
Payment of future
benefits
Future debt:
John Doe retires for Wage = 100,000 x 0.03 x 20
Year 20
€100,000 = €60,000
90
Retirement benefits
DC Plans vs. DB Plans
Defined Contribution Plans

• Economic risk falls on the employee (must manage to get sufficient
resources available at retirement)
• Very few analysis issues
Defined Benefit plans
• Economic risk falls on the company (must manage to get sufficient
cash flows, i.e., plan assets, available to pay defined benefits in
future).
• Extensive use of assumptions and more technical accounting
Retirement benefits
Measuring the Pension Obligation
Under IFRS the measure of the obligation is the actuarial present

value of the pension benefits earned including projected salary
increases.
- It is called Defined Benefit Obligation (DBO) under IFRS
Companies usually set aside and invest funds (in a separate legal
entity) in a plan to face future needs of future retired employees:
Plan Assets
91
Retirement benefits
 Principle for DB Plans: the cost (pension expense) of the

retirement is recognized when the employee acquires these
rights (i.e. during the employee’s length of service) and not when
they receive the retirement benefits (matching)
 Pension expense on the P&L can be expressed as the net result
of the three components:
Current Service Cost
+ Interest Cost
- Return on Plan Assets
= Pension Expense (for the current period)
Retirement benefits
 Components of Pension Expense
Current Service Cost = The increase in the defined benefit obligation

resulting from employee service in the current
period.
+ Interest Cost = The increase in the defined benefit obligation
during the current period due to the passage of
time.
- Return on Plan Assets = IFRS allows use of the expected return to
reduce volatility of reported pension expense.
 Not in the income statement:
 Contributions to the fund & Withdrawals from the fund
92
Retirement benefits
 Other adjustments booked in OCI
Actuarial gains and losses There are two sources of actuarial gains and
= losses: 1) the difference between actual and
expected return on plan assets and 2) changes
in actuarial assumptions.
Retirement benefits
 Components of Pension Expense: effect of main estimates
Higher (lower) Higher (Lower) Higher (Lower)

Discount rate compensation expected rate
growth rate of return on
Increase Plan Assets
On DBO Lower (Higher) Higher (Lower) No Impact
On Pension Lower (Higher) Higher (Lower) Lower (Higher)
expense
93
Retirement benefits
 Recognition of retirement benefits in the Balance Sheet

 Actuaries calculate the Defined Benefit Obligation (DBO) of the
employer (I)
DBO = f (discount rate, rate of compensation increase, turnover, etc)
(-) (+)
 Plan assets (PA) are valued at fair value (II)
Retirement benefits
Recognition of retirement benefits in the Balance Sheet

Step 1: Determine the Defined Benefit Obligation at the end of the period as
follows:
Defined Benefit Obligation, Beginning

+ Current Service Cost (P&L)
+ Interest cost (P&L)
+/- Actuarial losses/gains (OCI) in the Current Period (PUFER)
- Benefits paid to Retirees
= Defined Benefit Obligation, Ending
94
Retirement benefits

Step 2: Determine the Plan Assets at the end of the period
Fair value of Plan Assets, Beginning

+ Actual return on Plan Assets
+ Plan Contributions
- Benefits paid to Retirees
= Fair value of Plan Assets, Ending
Retirement benefits

Step 3: Calculate the funded status at the end of the period
Net Funded Status = Fair value of Plan Assets (PA) – Defined Benefit
Obligation (DBO)
Recognition of retirement benefits in the Balance Sheet (netting)

 If DBO > PA : difference recognized as a liability (provision), Underfunded
 If PA > DBO : difference may be recognized as an asset, Overfunded
Yearly variations of (PA) – (DBO)

 Recognized in the comprehensive income (NI or OCI)
95
Retirement benefits
Source: Deloitte (IAS 19 – Employee benefits: A closer look at the amendments made by IAS 19R and their impacts in
Switzerland).
8. SEGMENT REPORTING
96
Segment reporting
 IFRS 8 Operating Segments

 “Management approach”
 Pure disclosure issue, no recognition or measurement
implications
 Operating segment - component of the entity
1. That engages in business activities
2. Whose operating results are regularly reviewed by
management
3. For which discrete financial information is available
Segment reporting
 Aggregation criteria
 Two or more operating segments into a single operating
segment
 Similarity of economic characteristics, products/services,
production processes, customers …
97
Segment reporting
 An operating segment becomes a reportable segment if at least

one of the following
 external and internal (combined) sales
 operating profit / loss (do course website exercise)
 assets
… is 10% or more of the corresponding combined figures of all the
operating segments (that make profit / loss)
 OR management believes information would be useful to
users
 At least 75% of the entity’s external revenue must be attributable
to reportable segments
Segment reporting
 Steps in verifying the threshold criteria

 Identify operating segments: with external revenues
 Compute the total for operating segments (of sales,
profits/losses, assets)
 Compute the % of external and internal sales
 Compute the % of segments with profits
 Compute the % of segments with losses
 Compute the % of assets
 Compute the total of external revenue and compare to 75%
(from the income statement)
 Idem for the previous year
98
Segment reporting
 For the reportable segments: segment information

 Information about other operating segments that are not
reportable is combined and disclosed in an “all other segments”
 If an operating segment is identified as a reportable segment in
the current period, data for the prior period is restated for
comparative purposes
Segment reporting
 Disclosures for each reportable segment

 Revenues
 Operating profit or loss
 Assets
 Liabilities
 Depreciation and amortization, etc
 Entities are also required to disclose additional information about:
products and services, geographical areas, major customers
 Always think about management’s incentives (costs and benefits)
to disclose!
99
Segment reporting
Segment reporting
100
PART 4: CASH FLOW STATEMENT AND

OTHER FINANCIAL STATEMENTS
Wolfgang Dick
2019
SESSION 7 & 8 OTHER FINANCIAL STATEMENTS
Overview of cash flow statement

Cash flow presentation method
 Direct method
 Indirect method
Interpreting the cash flow statement
Statement of changes in equity
TOUDOU case
101
1. OVERVIEW OF CASH FLOW STATEMENT
Useful because it shows

 Ability to generate cash internally
 Management of current assets and current liabilities
 Details of firm’s investments and external financing
OVERVIEW OF CASH FLOW STATEMENT
 Cash flow presented in 3 categories: operating, investing, financing
Main operations
Inventory
Procurement Work in Progress Sales
Current payables Inventory Current receivables
Cash and cash

Payments Receipts
equivalents
Investing/ Productive
External financing
infrastructure
102
OVERVIEW OF CASH FLOW STATEMENT
Problems in classifying certain cash flows

 Income tax – operating
 Interests and dividends received – operating or investing
 Interest and dividends paid – operating or financing
Structure of CFS
Net cash from operating activities A

Net cash from investing activities B
Net cash from financing activities C
Net change in cash during the period D=A+B+C
Cash at the beginning of the period E
Cash at the end of the period F=D+E
CASH FLOW PRESENTATION METHOD
Presented using
 The direct method
 Or the indirect method
 Alternative ways to arrive at the same number
Direct method
 Less used because more costly to implement
+ Operating cash receipts (cash received from sales, etc)

– Operating cash payments (purchases, wages, taxes… paid)
= Operating cash flow
103
CASH FLOW PRESENTATION METHOD
Indirect method
 Start from the net income in the income statement and adjust for noncash items to arrive at the
cash inflow or outflow
For this purpose

 Adjustment 1: eliminate non-operating items (financial expenses and revenues)
 Adjustment 2: eliminate non-cash expenses (depreciation and provisions) and revenues
(reversal of provisions)
 Adjustment 3: take into account changes in working capital
OPERATING CASH FLOW INDIRECT METHOD
Net income
– Non operating revenues
+ Non operating expenses Adjustment 1
= Operating income
+ Non cash expenses
– Non cash revenues Adjustment 2
– Changes in working capital Adjustment 3
+/ – Miscellaneous (here or somewhere else)
= Operating cash flow
104
ADJUSTMENT FOR CHANGES IN WORKING CAPITAL
Operating assets Operating liabilities
Inventories Accounts payables
Accounts Other short term

receivables liabilities
Other short term

Working Capital
receivables (WC)
WC = OPERATING ASSETS – OPERATING LIABILITIES
ADJUSTMENT FOR CHANGES IN WORKING CAPITAL
Receivables from
clients at the beg. of Payments received
the period from clients during
the period
(Receipts)
Sales of the period
(Revenue) Receivables from
clients at the end of
the period
Cash inflow from sales = Revenue + Receivables beg. – Receivables end

= Revenue – (Receivables end – Receivables beg)
= Revenue – Changes in receivables
Same reasoning for all operating assets and operating liabilities.
105
BALANCE SHEET AND CASH FLOW STATEMENT
Assets Equity/Liabilities
Outflow Inflow
Increase
(−) (+)
Inflow Outflow
Decrease
(+) (−)
INTERPRETING THE CASH FLOW STATEMENT
Distinction between types of activity

 Operating cash flow: positive
 Investing cash flow: generally negative, but could be positive if large sale of fixed
assets
 Financing cash flow: positive or negative, depending on the first two cash flows
Internally generated cash = Net income +/- Adjustment 1 and 2
 The ability of the firm to generate “potential” cash
 Independent of earnings management
Changes in working capital
 Link to the operating activity of the firm
 Increase/decrease of operating assets and liabilities
106
INTERPRETING THE CASH FLOW STATEMENT
Free cash flow

 How much cash flow can be “freed up” for investment?
 Approximated as Operating + Investing cash flow
Positive FCF
 Financing available for acquisitions and new investment opportunities
 Extra debt repayments or dividend increases
Negative FCF
 Extra financing needed to keep up current level of activity
 How many years can this go on for?
THE STATEMENT OF CHANGES IN EQUITY
Explains all the changes in equity (the value of the firm) during the period
The statement of changes in equity reconciles the beginning balance with the
ending balance by showing:
 The comprehensive income
 Contributions from the shareholders
 Distributions to the shareholders
107
Comprehensive income
 Presented separately or together with the Income Statement
 Comprehensive income =
Net income + Other changes in equity (Dirty Surplus)
Net income Dirty Surplus

BS BS
Gain Gain Gain Gain
IS IS
Gain
Dirty Surplus = Other Comprehensive Income Items = PUFER

 (P) Pension accounting: actuarial gains and losses on defined benefit Plans
 (U) Unrealized gains and losses on re-measuring the value of available-for-sale securities
 (F) gains and losses arising from translating the financial statements of a Foreign
operation
 (E) Effective portion of gains and losses in a cash flow hedge
 (R) changes in Revaluation surplus
The comprehensive income is sometimes called total recognized income and
represents the changes in the value of the firm during the period as a result of
operations
108
Operations in N
Net income N
Equity Equity N-1

end N-1 Retained
Net income N
Equity
Dividends CI end N
Other CI
Net
Shareholders contributions in
N
CI = Comprehensive Income
TAKEAWAYS
Simple concept
 CFS explains the change in cash between the beginning and the end of the year
 Cash principle to record transactions instead of the accrual principle for the income statement
Cash is king, but CFS doesn’t tell the whole story
 Certain transactions do not show up in a CFS, e.g., acquisitions of assets by finance leases,
conversion of debt to equity
 Transactions that could be classified differently in CFS
Not easy to compute cash flows
 The two methods (direct and indirect) are two sides of the same coin
109
TOUDOU CASE – BACKGROUND INFORMATION
TOUDOU is a family owned and operated business specialized in the resale of carpets for
interior design. Every aspect of the business is operated, controlled and handled by the family.
The company makes their mission to provide personalized exceptional service and quality
products, at the most affordable prices. From concept to completion, they work alongside with
their clients to guide them through a vast selection of products.
TOUDOU was founded in 2013 by Mr. Desbiens and managed since to gain a significant market
share. In 2016 Mr. Desbiens convinced a partner to invest 200 000 € in the firm in the form of 2
000 preferred shares with a fixed dividend of 18 € per share. On December 31st, 2018 the
partner required and obtained from TOUDOU a share buy-back for 100 000 € (at par value).
In order to cover the financing needs, Mr. Desbiens negotiated during 2018 with the bank a short
term loan of 300 000 €.
TOUDOU CASE – THE BALANCE SHEET (1)
Assets 2018 2017

Land 20 000 20 000
Buildings 1 200 000 890 000
(-) Accumulated depreciation (-) 350 000 (-) 270 000
Equipment 701 000 628 000
(-) Accumulated depreciation (-) 371 000 (-) 278 000
Total non-current assets 1 200 000 990 000
Inventories 813 000 503 000
Receivables 723 000 398 000
Cash - 68 000
Total current assets 1 536 000 969 000
TOTAL ASSETS 2 736 000 1 959 000
110
TOUDOU CASE – THE BALANCE SHEET (2)
Equity and Liabilities 2018 2017

Share capital 100 000 100 000
Preferred capital 100 000 200 000
Retained earnings 429 000 264 000
Equity 629 000 564 000
Overdraft 67 000 -
Suppliers 280 000 195 000
Short term bank loan 800 000 500 000
Short term part of mortgage 70 000 50 000
Short term part of financial lease 30 000 25 000
Total current liabilities 1 247 000 770 000
Mortgage 680 000 500 000
Financial lease 180 000 125 000
Total non-current liabilities 860 000 625 000
TOTAL EQUITY AND LIABILITIES 2 736 000 1 959 000
TOUDOU CASE – THE INCOME STATEMENT
2018 2017
Sales 3 031 000 2 231 000
(-) Cost of goods sold 1 819 000 1 406 000
(=) Gross margin 1 212 000 825 000
(-) Selling expenses 480 000 200 000
(-) Administrative expenses 104 000 205 000
(-) Depreciation expense 173 000 127 000
(=) EBIT 455 000 293 000
(-) Interest expense 187 000 105 000
(=) Profit before taxes 268 000 188 000
(-) Income taxes 67 000 47 000
(=) Net profit 201 000 141 000
111
TOUDOU CASE – QUESTION 1
WHAT DO YOU THINK

ABOUT THE BUSINESS?
TOUDOU CASE – THE CASH FLOW STATEMENT
Operating cash flow 2018 2017

Net profit 141 000
(+) Depreciation expense 127 000

Receivables -104 000
Inventories -76 000
Suppliers 47 000
(=) Operating Cash Flow 135 000
112
Operating cash flow 2018 2017

Net profit 201 000 141 000
(+) Depreciation expense 173 000 127 000

Receivables -325 000 -104 000
Inventories -310 000 -76 000
Suppliers 85 000 47 000
(=) Operating Cash Flow -176 000 135 000
Receivables = - (723 000 – 398 000) = - 325 000

Inventories = - (813 000 – 503 000) = - 310 000
Suppliers = + (280 000 – 195 000) = 85 000
Financing Cash Flow 2018 2017

Bank loan 20 000
Dividends paid -36 000
Mortgage -40 000

Financial lease 30 000
Share buy-back -
(=) Financing Cash Flow -26 000
113
Financing Cash Flow 2018 2017

Bank loan 300 000 20 000
Dividends paid -36 000 -36 000
Mortgage 200 000 -40 000

Financial lease 60 000 30 000
Share buy-back -100 000 -
(=) Financing Cash Flow 424 000 -26 000
Bank Loan = 800 000 – 500 000 = 300 000

Dividends paid = 2 000 preferred shares * 18 € per share = - 36 000
Mortgage = (70 000 + 680 000 – 50 000 – 500 000) = 200 000
Finance Lease = (30 000 + 180 000 – 25 000 – 125 000) = 60 000
Share buy-back (preferred shares) = - 100 000
Loan Mortgage
About Relationship between lender Mortgages are secured loans
and borrower. Lender is also that are specifically tied to
called a creditor and the real estate property, such as
borrower is a debtor. Money land or a house. The property
lent and received in this is owned by the borrower in
transaction is known as a loan: exchange for money that is
the creditor has "loaned out" paid in installments over time.
money, while the borrower has
"taken out" a loan.
Types Open-end and closed-end Fixed-rate mortgages, FHA

loans, unsecured and secured mortgage loans, adjustable
loans, student loans, mortgage rate mortgages, VA loan
loans, payday loans. mortgages, interest-only
mortgages, reverse
mortgages.
114
Investing Cash Flow 2018 2017

Acquisition of Buildings -70 000
Acquisition of Equipment -53 000
(=) Investing Cash Flow -123 000
Investing Cash Flow 2018 2017

Acquisition of Buildings -310 000 -70 000
Acquisition of Equipment -73 000 -53 000
(=) Investing Cash Flow -383 000 -123 000
Buildings = - (1 200 000 – 890 000) = - 310 000

Equipment = - (701 000 – 628 000) = - 73 000
115
Cash Flow Statement 2018 2017

Operating Cash Flow -176 000 135 000
Financing Cash Flow 424 000 -26 000
Investing Cash Flow -383 000 -123 000

(=) Net Cash Flow -135 000 -14 000
Cash at the beginning of the year 68 000 82 000
Cash at the end of the year -67 000 68 000
TOUDOU CASE –CHANGES IN EQUITY
Share capital Preferred Retained Total

shares Earnings
January 1st, 2018 100 000 200 000 264 000 564 000
Net Profit 201 000 201 000
Share Buy-back -100 000 - 100 000
Dividends -36 000 -36 000
December 31st, 2018 100 000 100 000 429 000 629 000
116
WHAT DO YOU THINK

ABOUT THE BUSINESS?
PART 5: FINANCIAL STATEMENTS

ANLAYSIS
Wolfgang Dick
2019
117
SESSION 9 FINANCIAL STATEMENT ANALYSIS
Agenda
 Performance ratios
• Net profit margin
• Return on equity
• Return on assets
• Asset turnover
• Return on capital employed
 Equilibrium ratios
• Capital structure
• Long-term debt to equity
• Current ratio
• Quick ratio
• Acid test
NET PROFIT MARGIN
Sales
Current liabilities (-) Cost of sales
Current assets
= Gross profit
(-) Other operating expenses
Non-current liabilities = EBIT
(-) Interest
= EBT
Non-current assets (-) Income tax
Equity
= Net income
Net income after tax 201/3 031 = 6,63% (6,32% for 2017)
Net profit margin (ROS) =
Sales
118
NET PROFIT MARGIN
Measure of overall profitability

 Shows how successful management is in creating profit from a given quantity of sales
Could narrow down the analysis to operating profitability
 Use net or gross operating margin
Margin ratios are useful for trend analysis and intra-industry comparisons
 Tend to be industry-specific so hard to compare across industries
RETURN ON EQUITY
Sales
Current assets
= Gross profit
(-) Interest
= EBT
Equity
= Net income
Net income after tax 201/629 = 31,96% (25,00% for 2017)

ROE =
Equity
119
RETURN ON EQUITY
Measure of how much the company has earned on the funds invested by its
shareholders
 Using total equity implies both directly invested funds and funds invested indirectly through
retained profit
Reflects a shareholder perspective
It is not a “real” return
 Should not be compared, for example, to the interest rate paid on a bank deposit account
RETURN ON ASSETS
Sales
Current assets
= Gross profit
(-) Interest
= EBT
Equity
= Net income
Net income after tax 201/2 736 = 7,34% (7,20% for 2017)
ROA =
Total assets
120
RETURN ON ASSETS
Measure of how much the company has earned on the investment of all its financial
resources
 How well the company used its resources, irrespective of the relative magnitudes of the
sources of those funds
Interpret in conjunction with ROE
 Whether the return to shareholders is changing better or worse than the return on overall
financing
ASSET TURNOVER
Sales
Current assets
= Gross profit
(-) Interest
= EBT
Equity
= Net income
Sales 3 031/2 736 = 1,11 (1,14% for 2017)

AT =
Total assets
121
ASSET TURNOVER
Part of the asset utilization ratios

 Turnover ratios – how many times assets need to “be replaced/rotated” in order to achieve a
certain result
How efficient a company is in using its total asset base
 Compare as a trend or between companies from the same industry
 Could help indicate, for example, dying markets for a product
DUPONT DECOMPOSITION OF ROA
Sales
AT =
Total assets
Net income
ROS =
Sales
Net income Net income Sales

ROA = = x
Total assets Sales Total assets
= ROS x AT
7,34 % = 6,63 % * 1,11
122
RETURN ON CAPITAL EMPLOYED
Sales
Current assets
= Gross profit
LT debt (-) Other operating expenses
Other non-current = EBIT
liabilities (-) Interest
= EBT
Equity
= Net income
EBIT 455/(680+180+70+30) = 47,39 %

ROCE = (41,86 % for 2017)
Equity + LT debt
RETURN ON CAPITAL EMPLOYED
Measure of how much the company has earned on invested long-term funds
 Permanently employed capital
 Capital employed is expected to finance non-current assets and the portion of current assets
that is not financed by current liabilities (or net working capital).
123
CAPITAL STRUCTURE
Sales
Current assets
= Gross profit
(-) Interest
= EBT
Equity
= Net income
Liabilities 2 107/2 736 = 77,01 % (71,21 % for 2017)

CS =
Assets
CAPITAL STRUCTURE
Primary measure of risk

 Refers to the way in which a firm is financing its assets through a combination of debt and equity
Used by analysts as a screening device
 As long as it is within certain limits, the focus is on other ratios
Disadvantage
 Does not distinguish between short-term and long-term
124
LONG-TERM DEBT TO EQUITY (LTDE)
Current liabilities Sales

(-) Cost of sales
Current assets Current port. of LTD = Gross profit
(-) Interest
= EBT
Equity
= Net income
Long term debt 960/629 = 1,53 (1,24 for 2017)

LTDE =
Equity
LONG-TERM DEBT TO EQUITY (LTDE)
Long-term debt represents the part of debt that may be considered permanent
 LTD = Non-current liabilities + Current portion of Non-current liabilities
Some analysts take into account only borrowings and bonds issued
125
CURRENT RATIO (CR)
Sales
Current assets
= Gross profit
(-) Interest
= EBT
Equity
= Net income
Current assets
CR = 1 536/1 247 = 1,23 (1,26 for 2017)
Current liabilities
CURRENT RATIO (CR)
Measures if the firm has enough resources to pay its debts over the next 12 months
 A low CR signals that the firm may have problems in meeting its short-term obligations
 A high CR may signal that the firm is not using efficiently its current assets
 Generally, a value around 2 is considered good
126
QUICK RATIO (QR)
Current assets Sales

Cash Current liabilities (-) Cost of sales
ST Investments = Gross profit
Receivables from cl. (-) Other operating expenses
(-) Interest
= EBT
Equity
= Net income
Cash + ST Investm. + Clients

QR = (0+723)/1 247 = 0,58 (0,61 for 2017)
Current liabilities
ACID TEST (AT)
Current assets Sales

Cash Current liabilities (-) Cost of sales
ST Investments = Gross profit
Receivables from cl. (-) Other operating expenses
(-) Interest
= EBT
Equity
= Net income
Cash
AT = 0/1 247 = 0 (0,09 for 2017)
Current liabilities
127
QUICK RATIO (QR) / ACID TEST (AT)
Quick ratio
 Measures the firm’s ability to maintain operations as usual with current cash and near cash
reserves (without additional sales)
 Conservatively, should be around 1
Acid test
 Gives an idea of what will happen if all current liabilities are to be settled right away
 Quite extreme, might give a distorted picture of the firm
CASE TOUDOU - RATIOS
2018 2017
Net profit margin 6,63 % 6,32 %
Return on Equity 31,96 % 25,00%
Return on Assets 7,34 % 7,20 %
Asset turnover 1,11 1,14
Return on capital employed 47,39 % 41,86 %
Capital structure 77,01 % 71,21 %
Long term debt to equity 1,53 1,24
Current ratio 1,23 1,26
Quick ratio 0,58 0,61
Acid test 0 0,09
128
WHAT DO YOU THINK

ABOUT THE BUSINESS?
SESSION 10: REVISIONS

Wolfgang Dick
2018
129
Final exam
130

Cors Accounting

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cors Accounting

Uploaded by

Copyright:

Available Formats

Global BBA 08/01/2020

Prof. Wolfgang Dick (dick@essec.edu)

Financial Accounting Regulation

FINANCIAL ACCOUNTING REGULATION

Accounting regulation disciplines accounting

1. GOVERNMENT AS ACCOUNTING REGULATOR

Regulation of accounting designed to ensure that

1. STOCK EXCHANGE AS ACCOUNTING

Stock exchange regulates the financial

1. PRIVATE SECTOR AS ACCOUNTING REGULATOR

Delegation of responsibility of writing detailed accounting

International Accounting Standards Board (IASB)

1. INTERNATIONAL FINANCIAL REPORTING

Single set of global accounting and reporting

1. INTERNATIONAL ACCOUNTING STANDARDS BOARD

A private sector body

1. THE STRUCTURE OF THE IASB

Monitoring Board IFRS Foundation

IFRS Advisory International Accounting

1. IFRS – STANDARD-SETTING DUE PROCESS

The IASB’s standard-setting procedures have to ensure that resulting

1. STANDARD-SETTING DUE PROCESS OF THE

Discussion Comment Exposure Comment Effective

9-15 months 9-15 months 6-18 months

1. IFRS IN THE WORLD

Recent decisions of various governments result in the requirement

1. FINANCIAL REPORTING IN THE EUROPEAN UNION

1978 4th Company Law Directive (Individual financial statements)

1. EFFECTS OF THE IAS REGULATION (EU)

Individual financial Group/ Consolidated

Not-listed companies Member state option Member state option

1. LIST OF IASB RULES AS OF JANUARY 2012

1. LIST OF IASB RULES AS OF JANUARY 2012

Main standards (continued)

IFRS 1 First-time Adoption of International Financial Reporting Standards

1. LIST OF IASB RULES AS OF JANUARY 2012

IFRS 9 Financial Instruments

Financial information and financial markets – Adobe

Financial information and financial markets – Adobe

Financial information and financial markets – Adobe

Financial information and financial markets – Adobe

 What happened on December 12, 2013?

From Adobe press release on December 12, 2013:

Financial information and financial markets – Adobe

 December 13, 2013:

 Target (performance expected by management) –

LVMH Group – Overview

 Origins – merger in 1987 of

LVMH Group – Overview

LVMH Group – Overview

(1) (2) (3) (4) (5)

LVMH Group – 2014

EUR millions 2014 2013 2012

Operating profit 5,431 5,894 5,739

Net Income 5,648 3,436 3,909

Total assets 53,362 55,674 49,930

Equity 23,003 27,723 25,666

Market value 66,371 67,300 69,399

• Net income: Bottom line from P&L

LVMH Group – 2014

Understanding the Financial Statements (FS)

Misleading Useful information