Professional Documents
Culture Documents
2022 Accounting Lectures
2022 Accounting Lectures
2022 Accounting Lectures
Issue of valuation (measurement) and the impact: USA reducing the price of firearm to sell more
firearm to Ukraine. Shows that accounting is both an enabler and infringer.
Recognised = included
Should there be an accounting fine in highly polluted cities for companies? To protect the
environment
E.g., A horse’s ass shows that concepts persist, and they impact practice – US rail tracks made a
specific distance due to how they were formed on old roads. 4 feet 8.5 inches comes from the
spacing needed by imperial roman chariots. Space shuttle has 2 rocket boosters which were shipped
by train to the factory, so they had to be designed by the width of a horse’s ass.
When rules change it has a significant effect on the economy. rulemaking and the impact on society
and as much as it has on individuals
Fair Value: amount at which asset exchanged between knowledgeable and willing parties in arms-
length transaction
Removes the historic basis which meant that you included something at how much it cost originally
e.g., building bought 10 years ago for 200,000 still valued at that. It used to continue to be used in
accounts. Fair value amount now asks what someone would be willing to pay us now and that
number is in the accounts. It is more current and up to date, but it is subject to manipulation.
Fair value caused huge losses as the value of its assets declined, caused RBS (Royal Bank of Scotland)
to become nationalised 12 months after paying 70 billion pounds to overtake a Dutch bank ABN
Amro. It shows how fair value can have negative impacts. Regulation of the financial industry had
loosened known as light touch regulation.
Overtook 26 companies in 8 years. Should have used the collapsing markets as a sign not to do the
deal. RBS shares dropped to 10p each. Observation that the board of the company failed in its
responsibilities.
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AC4305 Week 2 Lecture 2: Chapter 3
For what purpose? Control society/our future – AI challenges the future of financial analysis
Can test accounting, is it the best source of info? What is relationship between accounting
information and the market?”
Perspective is away from the preparer of accounting info and now asks questions from the
perspective of the users. Asks the market their reality.
The real issue is is it relevant to users and can they make sense of it.
Testable: can ask the market can they make sense of it.
NOTE: Long–Term Capital Management (LCTM) shows the EMH also had problems.
Market as best captor of information – market is most efficient creator and user of
accounting info
Share price as best measure of wealth – the market is adapting to share price e.g.; energy
companies have seen their shares move more dramatically due to the increase in the price
of energy
All impounded immediately in share price – unlike accounting info this process is much more
immediate and doesn’t take months
Stocks valued fairly in light of all available information – values fairly what is going on in the
company
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Efficiency
Efficiency?
Impact on;
o Accounting Regulators
o Accountants
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Week 3 Lecture 1
o cultural reasons – e.g., comparison between Ireland (common law) and France
(bureaucratic approach - detailed codes for what needs to happen under certain
circumstances)
o commercial focus
o strong shareholding culture will require strong reporting culture e.g countries where
you have the stock exchange
Characterised by:
board of directors
Financial accounts seen as one means of bridging gulf between directors and owners (their
company)
Best Practice
Flaws:
too rigid – no flexibility, only one way of doing it, we could learn from the German
CG model
open to abuse
too focused on rights of investors – accounts not geared to all users e.g., employees,
Accounting bodies, government proactive – companies now have to report on their carbon
footprint (part of CSR - Corporate Social Responsibility, how will that transaction affect a
company)
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Various reports address different aspects
First big response in an attempt to address the flaws in CG. Changed the rules about how companies
are structured and most importantly how they impact society. Changed the balance and how
companies behaved. Stopped asking companies to comply with 1000’s of rules. Assumes you are
applying with best practice or explain otherwise
Audit Committee: critical role in liaising with auditor, should comprise of 3 non-executive
directors, has emerged as critical element of CG regime
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Week 3 Lecture 2: Guest
Greenbury Report
Refers to the structural relationship and operation mode between various elements.
disclosure provisions
remuneration policy
The Wirecard Fraud – How one man fooled all of Germany (video)
What should the board of directors have been Common characteristics to these frauds :
doing? strong charismatic individual at the top of the
company who can operate outside of the
What were the auditors up to? How can you
board
miss 1.9 billion dollars?
Enron of Europe
Short selling
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Hampel Report
Recommendations:
training of directors
Turnbull Report
ICAEW set up group to pursue Cadbury ideas on internal control & risk
Emphasis on:
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Corporate Response: the Risk Management Framework
Higgs
Diverse
NEDs to comprise at least 50% of board – we now believe majority NEDs is best
Danger of Golden Circle: same people on every board, thinking of the same thing in every meeting
Smith
UK CORPORATE GOVERNANCE CODE JULY 2018 (Combined Code) - Not mandatory but carries a
significant Moral Authority
Cadbury, Greenbury and Hampel formed basis of original Combined Code adopted by SE
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Code based on “Comply or Explain” approach
Essentially ‘principles-based’
The inherent problem: ownership versus control leading to a clash between shareholder primacy
and director primacy.
Criticised as:
Limited in perspective
Short-term focus
Open to abuse
Stakeholder theory
Reminds corporations that they are corporate citizens i.e. pay taxes, adhere to laws
employees
environmentalists
Summary
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CG regime in UK part of Anglo-American scheme
“Comply or Explain”
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Week 4 Lecture 1 (Chapter 5)
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This type of report recommended by Cadbury
Equivalent of US Management’s Discussion & Analysis
Replaces Operating & Financial Review (OFR)
Commentary by directors on strategy/plans/risks
Historical assessment, but with future perspective
FRC: Guidance on the Strategic Report:
Insight into business model
Describe risks and future prospects
Analysis of past performance
Not required by statute: Most interesting because it is not controlled, disclose some key insights
which wouldn’t have been disclosed otherwise.
Chairman’s statement: Personal perspective, Comments on macro contexts, Usually
refers to: significant events, overall results, performance, future prospects, Danger of
management ‘spin’
Chief Executive’s report,
Other, e.g., historical summaries.
Other Elements
Financial
Tesco PLC - See especially pp. 116 & 118 in the annual report (will be given in the exam – will be
asked to calculate some ratios and analyse). Asked to analyse the performance of Tesco under
several headings which will be covered in Tutorials.
Fraud resulting from internal accounting – under pressure they decided to be creative and to
include earlier than should have been the case income of the company = aggressive revenue
recognition.
Revenue Recognition
Inflated profits (£250m) that should not have been shown until 2016
Whistle-blower
Governance
o Auditors – at fault
o Board – serious deficiencies in leadership with many being replaced after this event
Reaction of Stakeholders - not just shareholders who lost money due to drop in share price.
Real hit on suppliers as they couldn’t trust Tesco’s pricing policy. Many customers stopped
shopping there.
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Week 4 Lecture 2
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• Frauds tell us much about how accounting works (or is exploited!)
• Phar Mor shows how simple stock valuation methods can hide $m
• Auditors
• Board of Directors
• Management
WorldCom
• Strong cost-control culture = how you account for expenses and stock internally,
manipulation of these items directly impacts profits.
• Expenses began to be shown as Assets – this increased profits e.g., WorldCom incurred
salaries costs in one of its companies instead of putting it in the income statement they
put in in the Balance Sheet
Notes:
The accounting team were asked to come up with accounting entries to show profits which did not
match reality. They were under pressure to do this as the company is chasing profits because its
share price relies on those profits = earnings management/profits manipulation.
Pre-paid capacity
Pension funds typically lose the most when these events occur apart from employees losing jobs, the
may also lose their jobs.
Toshiba
• Incentive structures
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• Profits manipulated to ensure share price rises
• ‘Earnings management’ – financial analysts working for large investment banks, analyse
companies to see what’s going on and how its acting, as they come more familiar, they
try to project profits, companies then try to chase the profits set by analysts as
reasonable expectations, if they don’t reach it the shares lose value.
• Short-termism
• Profits of $1.2b ‘created’ over time – uncovered in 2015 - to achieve these targets by analysts
they pretended to make profits that they never made.
• Overstated inventory (stock) numbers i.e. product that 10e was revalued at 15e so that it would
be valued at 15e in the accounts and not 10 the price it was actually sold for.
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Annual Report photographs of a business and its performance overtime.
Consolidation
Consolidated accounts of EU listed companies the focus of this module e.g., Tesco plc
E.g., Enron which had a parent company called Enron and at the end they over 3,000 subsidiaries,
Tesco would be much simpler.
Group Structures
Scenario 1 shows us that P plc owns 100% of S1 plc -> wholly owned subsidiary i.e. included in P plc
consolidated accounts.
Scenario 2 shows us that P plc owns 51% of S2 plc -> partially owned i.e. included
Note: If a company owns more than 50% it will be included in the accounts.
Scenario 3 shows us that P plc owns 5% -> not included in consolidated accounts
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Format of Financial Statements
IAS 1, Presentation of Financial Statements, the principal standard for large plcs – created by
IASB which has a number of principles.
Overall principles:
“Fair presentation” [NB: “True & Fair”] – fair is typically established by case law
Income Statement (Profit and Loss Account) – looks at the income of the company to try
and calculate the profit of the company
Cash Flow Statement – tells us what’s actually going on in a company, cash that goes in
and out, a lot of frauds have been uncovered from these
Notes to the accounts – largest section in AR, provide more detail on items included in
the first three items
Ratio Q3
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Subject to minimum disclosure provisions
Assets and Liabilities must be divided between “current” and “non-current” – only requirement
under IAS1
“Current” if:
Group Balance Sheet p118 will be given in exam to do calculations/ratios, significance of the
results?
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The idea of trends is very important – discloses significant information to us
Intangible Assets
e.g.: intellectual capital (knowledge a business has), customer loyalty, brands, software
etc
‘identifiable’ – separable
Classify as
Used to account for 15% now account for 70% in relevant importance in a company’s assets
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Revenue
Finance costs
Tax expense
Allocation of profit
CFS allows an assessment of ability to generate and apply cash (or cash equivalents)
Stock/Debtors/Creditors
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Disclose:
Basis of preparation
Summary
Kenneth Lay
Graded employees 1-5 and those graded 5 were fired, ranked on capacity to generate money for the
company this made employees exploit accounting rules to show as high a profit as possible.
Mark to market – aggressive accounting style: companies gather in profits that they haven’t yet
earned and to show them as profit immediately e.g., profits for next 10 years(5bn) could be included
now even if it isn’t received in the next 10 years/falls through. It had been lobbied for by the energy
companies in the USA and were given this concession by the accounting board. Proves accounting is
political. Meaning company is worth more on paper.
When they arrived at plant discovered it wasn’t connected to energy grid – unable to produce
anything as no electricity. Still allowed show 5nb profit in accounts.
Company collapsed 20 years ago, and they are still finding subsidiaries.
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Generating negative cash flow – found in operating activities
Large overdraft
Irritated creditors
Reduced dividends – if company pays dividend every year, shareholders begin to expect this. If
it’s lower than last year may indicate a problem
Approaches to Analysis
Fundamental Analysis
Common-size Statements
Provide a common base -> same worldwide revenue – expenses = operating profit ->
enables us to compare industries
e.g., express all as % of sales
Enables comparison:
o cross-sectional
o segmental
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o temporal
May remove size as explanatory variable
Tesco post in Feb to include Christmas sales as share price usually increases
o Account for the year
Use of Ratios
Art/Skill
o Matching principle
Ratios: Issues/Problems
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Want to be able to know have some of the assets been impaired.
Cash
Importance of cash
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‘Cash is King’
Liquidity: ‘availability of cash in short term’
o Capacity of firm to generate cash
Activity: ‘efficient management of funds’
o Efficiency of cash generation
Liquidity and activity linked
Activity
Financing
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Long-term focus
Financial structures of firms vary e.g., retail sector is common -> lot of short-term funding
sources i.e., sell regularly, large quantities meaning large amount of cash coming but they must
have enough funding for building. Different to company in property -> more concerned in long
term-funding. e.g., Ryanair trying to use short-term loans -> funding would be too costly, and
they would be bankrupt
Equity v. Debt
Equity
o issued/authorized
o issued share -> shares that the company has made available in the market
o Authorized -> the maximum number of shares that a company can issue.
o value
o nominal/issue price -> price at which shares are made available -> figure in BS
o market price -> as traders trade the shares the value fluctuates
Dividends
Reserves
Making profits every year but chooses to retain its profits and not pay a dividend -> typically do it as
they need to keep investing in the company
o Non-distributable - share premium -> profits the company can’t give back
typically for legal reasons
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Because ‘owed to owners’
Debt
Form of funding
External – does not grant ownership rights e.g., loan from bank
o fixed v. variable cost
Security usually required
o fixed / floating
Normally paid before shareholders so considered more secure
e.g., company that has most of its funding provided by its owners is fairly much in control of that
dynamic. Relationship between company and providers of debt are very different.
Types of Debt
Week 7 Lecture 2
Types of Debt
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Leases – “finance” or “operating” (see Chapter 12)
Bonds
o Increasingly important source of funding
o “Issued” by companies and purchased on market
o Covenant restrictions
Securitization – sales of future inflows
Derivatives
Ratios
o internal/external
o long-term/short-term
o debt/equity
o high/low
WACC: reflects mix of funding types/structures -> not examined (Weighted Average Cost of
Capital)
Interest cover: PBIT/interest expense -> the degree of comfort we have in anticipating whether
our profits cover the cost of our debt (interest)
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Current Liabilities 200,000
Funding Profile
Shows how funding impacts the capacity of the company to develop into both the short and long
term
Mismatch didn’t have the right type of debt/funding to progress into the future.
The info was in the report, but they had to go through too much info to find.
Summary
Group Project
1. Executive summary
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2. NB Financial Analysis
3. Interpretation
4. Governance
5. Future prospects
6. Conclusion/recommendations
7. Appendix (link to annual report, include calculations of the ratios used in financial section) -> not
included in word count of 3,500 -4,500 words.
1. profitability
2. return on investment
3. payout policy => reference to dividends => ratios have been developed as a mean of assessing
the quality of these earnings.
Profitability
Critical for long-term viability - profits are increases in value that result from investments.
Gross Profit (Margin) rate: expresses gross profits as a function of overall revenue => useful as it
looks at that core activity of the business which is its core trading activity e.g., pubs as a sector
are expected to have a gross profit rate of 45% which you can compare against.
Net Profit rate: further refinement of profit as we deduct more expenses, reflects the increasing
deductions we are making as we deal with more expense types.
Operating/Net/EBIT (Earnings before interest and Tax) /PBIT (Profits before Interest and Tax)
interchangeable!
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Profitability Example
Company A:
Revenue €10m
Gross Profit € 3m
Net/Operating Profit € 1m
e.g., Company A has earnings (Profits) of €20m with four million shares in issue (able to buy +
sell):
o EPS = €20m/4m = €5 -> for each share out in the market it has earned €5
Calculation of denominator (equity shares in issue) complicated by: difficult to compare to last
years
o new issues -> If a company keeps issuing shares it’s difficult to choose which number to
include
Market Ratios
The higher the ratio shows that the company is doing/projected to do well, market is positive about
the prospects of the company.
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o PER = €40/5 = 8
Payouts
Summary
Common and serious problem for accounting -> impact on quality of accounting info that
becomes available.
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Highlighted by recent frauds: Enron, Wildcard, etc
‘Use and abuse of accounting techniques and principles to create financial statements that do
not give a true and fair view’
o emphasises intentional aspect
o both techniques and principles manipulated
o correct context of ‘true and fair’ [or ‘fair presentation’]
o both active and passive aspects
Governance context
Accounting Manipulation
A plc & B plc have following balance sheets, and both are seeking loan of 50:
A plc B plc
Earnings Management
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Creative Accounting Practices
Role of Ethics
Whistleblowing
Regulators seeking to protect those who alert authorities to fraud, malpractice, etc
Irish Protected Disclosures Act 2021 (2022)
o Identifies corporate culture as critical
o Focus on protecting whistle blower
o Use of ‘prescribed persons’ as conduit
o Office of Protected Disclosures + Commissioner
EU Whistleblowing Directive 2019
Comparison with US approach
Summary
Responsibility – ethical
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Recent developments and contexts
o globalization
o ‘green’ agenda -> environmental impulses, should have a view to our engagement with
the environment
o stakeholder theory -> reports to individuals/entities/employees other than owners
o social responsibility -> companies understood as corporate citizens have both rights and
responsibilities
Financial reporting responding
‘Attitude not techniques’
o Seeks qualitative as well as quantitative expression -> numbers don’t suffice
o Addresses issues such as environmental impact
Some pioneer companies, e.g., Prudential, BT
investors
employees
community
customers, etc
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Measures performance under:
o Financial;
o Social; and
o Environmental
E.g., Shell must disclose; how much they contribute to political lobbying each year, degree they have
degraded areas, carbon emissions.
Sub-set of CSR
o e.g., Shell
o genuine or propaganda? E.g., Unilever grow financial profits as they engage with this
particular agenda.
Increased disclosures:
o contingent liabilities for environmental damage -> companies might have to include a
charge against profits for their cleanup costs of activities in the future e.g., airlines being
charged due to damage to environment. Tax on the company reflecting their impact on
society.
o Carbon emissions
Sustainability – Exam Q
o Ensuring that what happens this year (activity/performance) does not compromise
future years,
o Natural:
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Critical -> water, air, natural resources such as metals, ground earth-based
resources, -> air provided by nature; exists apart from our engagement with it
UNILEVER
Paul Polson impact he had on the company which turned around their impact on the
environment
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Long-term perspective
Earnings Management Culture
ULSP (Sustainable Living Plan)
o Reduce costs
o Mitigate risks
o Drive growth of brands
Annual Report
One point at which interests of developed and developing world may converge
Political roles:
o Regulatory bodies
Circular Economy
Fashion industry
– combating inefficiencies - over production - they are produced initially with the idea of being
recycled - mass market
Sustainability Finance
Variety of options
o do nothing
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o include financial charge/provision
o Principles-based framework
Summary
Social and environmental concerns are now of central importance to users of ARs
o do nothing
See Chapter 6, pp. 205-212; 231-234, Worked examples in Tutorials Weeks 11 & 12
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Three primary statements:
o Comprehensive Income Statement – IS (Profit & Loss Account)
o Balance Sheet – B/S (SoFP)
o Cashflow Statement (not required)
Prepare in accordance with IAS 1, Presentation of Financial Statements
Principal issue is presentation, with some additional calculations
Lecture approach will be to progress through this topic step-by-step
o Covered by worked examples in lectures (W10) and in tutorials (W11 & 12)
o IF YOU CAN DO TUTORIAL EXAMPLES, YOU CAN DO EXAM QUESTION
o Items listed in Trial Balance have one effect: (i.e., entered once in final accounts)
o Items listed after Trial Balance (Post-Trial) have two effects: (i.e., entered twice in final
accounts)
Exam: Provided with Trial Balance + Adjusting items. Required to prepare B/S + IS by applying the
two principles above in accordance with IAS1
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1. Depreciation (see example in Text, pp.211-2)
• = €50,000,000
2. For presentation purposes, you are asked to group some items together under ‘Distribution
Costs’
Distribution Costs:
184,941
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Summary
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Week 10 Lecture 2 – Chapter 15
International Accounting
Accounting Blocs
For historical, commercial, social, and cultural reasons accounting practice varies
However, possible to identify 4 blocs:
o Anglo-American
o Continental European
o Islamic -> as a scheme it doesn’t allow certain practices such as charging of interest,
subordinate to the Anglo-American system as others are.
o Marxist e.g., China -> doesn’t recognise assets, ownership, property rights, profit ->
unsuitable to modern world
Significant variations between, within these
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Harmonization & convergence
IASB and FASB have seen a possibility to try and converge and become one single unique accounting
scheme
o Japan, where voluntary adoption is permitted but not required (250+ plcs now
adopting)
o China, which has committed to adopt IFRS at some undefined future date
Summary
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Week 11 Lecture 1
It can change
It can be misused
-> needs to be regulated -> otherwise the people with money/power can decide what happens
Money paid to owners (dividends) do not decrease profits -> owners are taking a risk -> not an
expense
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