new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page i UNLOCKING COMPANY REPORTS AND ACCOUNTS new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page ii In an increasingly competitive world, we believe it’s quality of thinking that will give you the edge – an idea that opens new doors, a technique that solves a problem, or an insight that simply makes sense of it all The more you know, the smarter and faster you can go That’s why we work with the best minds in business and finance to bring cutting-edge thinking and best learning practice to a global market Under a range of leading imprints, including Financial Times Prentice Hall, we create world-class print publications and electronic products bringing our readers knowledge, skills and understanding which can be applied whether studying or at work To find out more about our business publications, or tell us about the books you’d like to find, you can visit us at www.business-minds.com For other Pearson Education publications, visit www.pearsoned-ema.com new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page iii UNLOCKING COMPANY REPORTS AND ACCOUNTS Wendy McKenzie An imprint of Pearson Education London ● New York ● Toronto ● Sydney ● Tokyo ● Singapore ● Hong Kong Cape Town ● New Delhi ● Madrid ● Paris ● Amsterdam ● Munich ● Milan ● Stockholm new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page iv PEARSON EDUCATION LTD Head Office: Edinburgh Gate Harlow CM20 2JE Tel: +44 (0)1279 623623 Fax: +44 (0)1279 431059 London Office: 128 Long Acre London WC2E 9AN Tel: +44 (0)20 7447 2000 Fax: +44 (0)20 7447 2170 Website: www.business-minds.com First published in Great Britain 1998 © Financial Times Professional Limited 1998 The right of Wendy McKenzie to be identified as author of this work has been asserted by her in accordance with the Copyright, Designs, and Patents Act 1988 ISBN 273 63250 British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1P 0LP This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers 10 Typeset by Northern Phototypesetting Co Ltd, Bolton Printed and bound in Great Britain by Bookcraft, Midsomer Norton The Publishers’ policy is to use paper manufactured from sustainable forests new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page v To Bob, who made this possible new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page vi new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page vii Contents How to use this book xi Part INTRODUCTION TO COMPANIES AND THEIR ACCOUNTS Introduction What are the accounts? • The published accounts Accounting practice 23 Introduction • The legal and regulatory framework • The bases used in preparing accounts • The accounting principles Companies 36 Introduction • Alternatives to starting a company • Companies • Different types of company • Getting a listing on the Stock Exchange • The Alternative Investment Market Introduction to the accounts 50 Introduction • The chairman’s statement • The directors’ report • The operating and financial review • The financial statements • The auditors’ report • The Cadbury Committee’s Code of Best Practice • Greenbury • The notes to the accounts Part THE ACCOUNTS The balance sheet: share capital and reserves 65 Introduction • Share capital and share issues • Reserves • Debt–equity hybrids The balance sheet: borrowings 82 Introduction • How much should a company borrow? • How much can a company borrow? • What sort of borrowings does a company have? • The lender’s perspective • Managing interest rate exposure • Accounting treatment • FRED 13 • The borrowing ratios vii new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page viii Contents The balance sheet: intangible fixed assets 112 Introduction • Capitalised research and development costs • Patents and trade marks • Brand names • Goodwill The balance sheet: tangible fixed assets 122 Introduction • Identifying the cost of an asset • Government grants • Depreciation of assets • Changing the basis of depreciation • Ownership of assets • Revaluation of assets • Disposal of tangible assets • Information disclosed in the notes • The fixed asset ratios The balance sheet: fixed asset investments 150 Introduction • Subsidiaries • Participating interests • Associated undertakings • Other investments 10 The balance sheet: stock 163 Introduction • Valuing stock • The stock ratios 11 The balance sheet: other current assets 180 Debtors • Businesses held for resale • Investments • Cash at bank and in hand 12 The balance sheet: creditors and other liabilities 189 Creditors • Provisions for liabilities and charges • Contingent liabilities • Capital commitments 13 Profit and loss account: turnover to profit before tax 197 Introduction • Capital costs and revenue costs • Turnover • Operating costs • Accounting adjustments • Pension costs • Employee share schemes • Long-term contracts • Operating profit • Share of associated undertaking’s profits and losses • Share of joint venture’s profits and losses • Significant associates and joint ventures • Exceptional and extraordinary items • Profit on sale of fixed assets • Profit on sale of operations • Net interest payable • Additional information available in the notes • FRS and the presentation of the profit and loss account • Creating profit • Profitability ratios 14 The profit and loss account: introduction to taxation 235 Introduction • Taxable profit • The tax charge • Disclosure requirements 15 The profit and loss account: profit after tax to retained profit 258 Introduction • Minority interests • Preference dividends • Earnings per share • FRED 16 (Earnings per Share) • Dividends • The note of historical cost profits and losses • Relevant ratios viii new Prelims/Reports&Accnts.1 7/6/02 11:59 am Page ix Contents 16 The cash flow statement 282 Introduction • Exemptions from the accounting standard • The construction of the cash flow statement • Additional disclosures in the notes • Using cash flow statements in analysis • Ratios for calculating cash flow per share 17 The statement of total recognised gains and losses 300 Introduction • Constructing a statement of total recognised gains and losses • Reconciliation of movements in shareholders’ funds • Using the statement of total recognised gains and losses in financial analysis Part OTHER ACCOUNTING ISSUES 18 Other information disclosed in the notes to the accounts 309 Introduction • Related-party transactions • Segmental analysis • Post balance sheet events 19 Group accounts, acquisitions and mergers 322 Introduction to group accounts • Accounting for acquisitions • Accounting for mergers • Disclosure requirements for acquisition and mergers 20 Foreign exchange 353 Introduction • SSAP 20 • How companies cope with exchange rate movements • FRED 13 – the proposal’s impact on currency disclosures • What should we look for? • What impact exchange rates have on the business? Part ANALYSING COMPANY ACCOUNTS 21 Ratio analysis 377 Introduction • The profit and loss account • The balance sheet • The cash flow statement • Solvency ratios • Profitability • Cash management • The investor’s ratios 22 A spreadsheet for analysis 411 Introduction • The spreadsheet ix Appendix 2.1 7/6/02 12:30 pm Page 470 Appendix Total intangible fixed assets Investment and other assets: Long-term cash at bank Investment in securities Investment in subsidiaries Investment in affiliates Investment in partnerships Long-term loans Allowance for bad debts Long-term loans to shareholders, officers and employees Allowance for bad debts Long-term loans to affiliates Allowance for bad debts Doubtful receivables Long-term prepaid expenses Other Total investment and other assets Total fixed assets DEFERRED CHARGES Organisation expenses Pre-operating costs Experimental research costs Development costs Stock issuing costs Bond discounts Interest during constructions Total deferred charges Total assets 470 Reserve for dividend equalisation Reserve for business extension Reserve for additional equipment Reserve for sinking fund General reserve Unappropriated Total capital Total liabilities and capital Appendix 2.1 7/6/02 12:30 pm Page 471 Profit and loss account – North America ● PROFIT AND LOSS ACCOUNT – NORTH AMERICA CONSOLIDATED STATEMENT OF INCOME / STATEMENT OF EARNINGS REVENUES Sale of goods Sale of services Other income Total revenues COSTS AND EXPENSES: Cost of goods sold Cost of services sold Interest and other financial charges Other costs and expenses Minority interest in net earnings of consolidated affiliates Total costs and expenses EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Provision for income taxes EARNINGS FROM CONTINUING OPERATIONS Earnings from discontinued operations net of taxes NET EARNINGS NET EARNINGS PER SHARE (in dollars) Continuing operations Discontinued operations Net earnings per share DIVIDENDS DECLARED PER SHARE (in dollars) 471 Appendix 2.1 7/6/02 12:30 pm Page 472 Appendix ● BALANCE SHEET – NORTH AMERICA BALANCE SHEET / STATEMENT OF FINANCIAL POSITION ASSETS Cash and equivalents Marketable securities Securities purchased under agreements to resell Current receivables Inventories Other receivables Property plant and equipment Intangible assets All other assets Net assets of discontinued operations TOTAL ASSETS LIABILITIES Short-term borrowings Accounts payable Securities sold under options to repurchase Dividends payable All other current costs and expenses accrued Long-term borrowings All other liabilities Deferred income taxes Total liabilities Minority interests in equity of consolidated affiliates Common stock Other capital Retained earnings Total share-owners’ equity TOTAL LIABILITIES AND EQUITY 472 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 473 Index acceptance 100 definition 111 account preparation 29-31 accounting adjustments 200-5 provisions 201-3 accounting for associates 151 Accounting for Associates (IAS 28) 158 Accounting for Deferred Taxation (SSAP 15) 243, 278 accounting for dividends 275 international differences 275 Accounting for ESOP Trusts (UITF 13) 70, 211 accounting gearing 31, 108, 384 Accounting for Government Grants and Disclosure of Government Assistance (IAS 20) 126 Accounting for Government Grants (SSAP 4) 124 Accounting for Investment Properties (SSAP 19) 126 Accounting for Investments (IAS 25) 127, 187 Accounting for Leases and Hire Purchase Contracts (SSAP 21) 134 Accounting for Operations in Hyperinflationary Economies (UITF 9) 361 Accounting for Pension Costs (SSAP 24) 209 Accounting for Post Balance Sheet Events (SSAP 17) 319-20 accounting practice 23-35 accounting principles 31-5 bases for preparing accounts 29-31 legal and regulatory framework 23-8 accounting principles 31-5 consistency principle 32 definition 35 going concern principle 32 international differences 33-4 matching/accruals principle 31-2 materiality 32-3 prudence principle 32 recent developments 33 substance over form 32 accounting requirements: listed companies 44-5 accounting rules 24-6 amendments to Companies Act 24 current structure 25 Financial Reporting Review Panel 25 historical perspective 24 new structure 24 Accounting Standards Board (ASB) 24-6 definition 35 Accounting Standards Committee (ASC) 24 definition 35 Accounting for Subsidiary Undertakings (FRS 2) 186, 222 Accounting for the Substance of Transactions (FRS 5) 134, 164 accounting treatment: borrowing 104-6 all borrowings 104-5 bonds with warrants 105-6 convertibles 105 disclosure 105 repurchase of debt 106 accounting/filing medium private companies 40 small private companies 40 accounts 3-17 accounts see introduction to the accounts accounts April 15-17 February 7-12 January 3-7 March 12-14 accruals/accrued expenses, definition 22 accrued expenses and deferred income 190 definition 196 acquisition accounting 328-43 acquisitions 348-50 alignment of accounting policies 334 cash flow statement 341-2 consolidation adjustments 336-40 fair value adjustments 335-6 goodwill 329-34 international differences 351 mergers 350-1 profit and loss account 340-1 acquisition accounting/purchase method, definition 352 act of parliament 38 ACT tax credits 72 adjusting event, definition 321 Admissions Directive 42 definition 48 advance corporation tax 248-55 abnormal tax charges 253 ACT and acquisitions 252 chargeable gains 253 company profits earned overseas 250-1 definition 257 foreign income dividends 252-3 franked investment income 253 high profits overseas 253 imputation system 249-50 irrecoverable ACT 251-2 prior year adjustments 253-4 reducing irrecoverable ACT 252 473 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 474 Index scrip dividends 252 shadow ACT 252 tax losses from previous years 253 adverse opinion 61 aftermarket 45 Alfred McAlpine 312 alloted shares 66 allotment 46 Alternative Investment Market (AIM) 42, 48 definition 48 alternatives to company 36-7 partnerships 37 self-employment 36 unincorporated associations 36-7 Amendment of SSAP 19, Accounting for Investment Properties (FRED 9) 127 American Depository Receipts (ADRs) 68 definition 80 amortisation 112 definition 121 Anglian Water 97 Anglo American South Africa 27 annual general meeting 38 annuity method, definition 149 Arjo Wiggins Appleton 161 Articles of Association 38 definition 48 asset, definition 22 asset cost identification 123-4 capitalisation of interest 124 commissioning costs 123 international differences 124 subsequent expenditure 124 asset depreciation see depreciation of assets asset ownership 134-41 disclosure requirements 138-40 finance leases 134-8 asset replacement 146-7 asset revaluation see revaluation of assets asset utilisation 148 increasing profit margins 148 increasing sales 148 associated undertaking profits/losses 216-18 associated undertakings 151-60 accounting for associates 151 definition 162, 233 equity method 151-5 international differences 158 joint ventures 155-7 other statutory disclosure requirements 158-9 share of profits and losses 216-18 significant associates and joint ventures 157-8 Associates and Joint Ventures (FRS 9) 216, 255 Auditing Practices Board (APB) 59 auditors’ report 58-61 adverse opinion 61 Boots Company 59 definition 62 disclaimer of opinion 60 fundamental uncertainty 60 qualification of accounts 60 474 Auditors’ Reports on Financial Statements (SAS 600) 60 authorised and issued share capital 66 authorised share capital 38, 66 definition 80 balance sheet: borrowings 82-111 accounting treatment 104-6 borrowing ratios 107-10 FRED 13 106-7 how much can a company borrow? 89 how much should a company borrow? 83-9 lender’s perspective 100-1 managing interest-rate exposure 101-3 what sort of borrowings does a company have? 89-100 balance sheet: creditors and other liabilities 18996 capital commitments 196 contingent liabilities 193-6 creditors 189-92 provisions for liabilities and charges 192 balance sheet: fixed asset investments 150-62 associated undertakings 151-60 other investments 160-2 participating interests 151 subsidiaries 150-1 balance sheet: intangible fixed assets 112-21 brand names 116-17 capitalised research and development costs 113-15 goodwill 117-20 patents and trade marks 115-16 balance sheet: other current assets 180-8 businesses held for resale 186 cash at bank and in hand 188 debtors 180-5 investments 186-8 balance sheet: share capital and reserves 65-81 debt-equity hybrids 79 reserves 77-9 share capital and share issues 65-77 balance sheet: stock 163-79 stock ratios 175-9 valuing stock 165-75 balance sheet: tangible fixed assets 122-49 changing basis of depreciation 132-3 depreciation of assets 126-32 disposal of tangible assets 145 fixed asset ratios 146-8 FRED 17 143-5 government grants 124-6 identifying asset cost 123-4 information disclosed in notes 146 ownership of assets 134-41 revaluation of assets 142-3 balance sheet 55-7, 214-15 creditors 214-15 definition 22 format 56-7 format 57 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 475 Index ratio analysis 380-1 spreadsheet 415-17 stocks and debtors 214 balancing charge/allowance, definition 257 base stock, definition 179 bases for account preparation 29-31 current cost accounting 30-1 inflation and accounts 29-30 benchmark treatment 26 beta factor, definition 410 bills of exchange 96-7, 100 definition 111 BMW 318 bonds 91-2, 99 definition 111 bonds with warrants 99-100, 105-6 bonus issues 71-2 definition 80 book value/carrying value, definition 149 Boots Company plc 59, 187, 323, 426-49 1994-7 427 1997 427-9 the accounts 432-41 accounts analysis 441-6 AG Stanley 430 Boots Contract Manufacturing 430 Boots Healthcare International 430 Boots Opticians 430 Boots Properties 430 Boots The Chemist 429 Do It All 430-2 Halfords 429-30 investment potential 446-9 overview 427-32 Borrowing Costs (IAS 23) 124 borrowing ratios 107-10 combined gearing effect 110 gearing 108-10 interest cover 107-8 leverage effect 110 operational gearing 110 sensitivity to interest rates 108 borrowings 44, 83-9 and cost structure 84-8 and returns on capital 83-4 see also balance sheet: borrowings; company borrowings bought deal 69 brand names 116-17 brands 117 British Steel 181, 196 British Telecom 207 Business Combinations (IAS 22) 331, 342 businesses held for resale 186 buying/selling businesses and trades 58 buying/selling fixed assets 58 Cadbury Committee Code of Best Practice 44 definition 62 Cadbury Schweppes 316 calculating profit 213 calculating turnover 212-13 called up shares 66 capital allowance, definition 257 capital asset pricing model, definition 410 capital commitments 196 capital cost/capital expenditure, definition 233 capital costs and revenue costs 198 capital grants 125 definition 149 capital instruments: accounting treatment 104-6 all borrowings 104 bonds with warrants 105-6 convertible borrowings 105 repurchase of debt 106 Capital Instruments (FRS 4) 66 capital reconstructions 71-2, 76-7 bonus issues 71-2 share consolidations 72 share splits 72 Capitalisation of Interest Costs (FAS 34) 124 capitalisation issue, definition 80 capitalised interest 44 capitalised research and development costs 11315 international differences 114-15 Caradon plc 75 cash, definition 299 cash at bank and in hand 188 cash available for reinvestment 298 cash equivalent, definition 299 cash flow 284-8, 400-2 cash flow performance, spreadsheet 424 cash flow statement 57-8, 282-99 acquisitions and disposals 290-1 additional disclosures in notes 289-93 analysis of changes in net debt 289-90 construction 284-9 definition 22 detailed cash flows 284-8 exemptions from accounting standard 283-4 international differences 291-3 ratio analysis 381-2 ratios for calculation per share 298 spreadsheet 417-19 use in analysis 293-8 Cash Flow Statements (FRS 1) 188 Cash Flow Statements (IAS 7) 291 cash management 398-9 operating and financial review 398-9 certificate of incorporation 38 chairman’s statement 50-1 definition 62 financial review 52 chargeable gain/loss, definition 257 city gearing 109-10, 385 clawback 66 definition 80 close companies 41-2, 44 closing rate/net investment method, definition 373 clubs 36-7 475 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 476 Index Coats Viyella 209, 264 combined gearing effect 110 commercial paper 98, 100 definition 111 common stock 66 Commonwealth countries 34 Community Hospitals Group 73 companies 36-49 Alternative Investment Market (AIM) 48 alternatives to starting a company 36-7 the company 37-9 different types 39-42 Companies Act 23-4 amendments 24 registration of company 38 Companies (Single Member Private Companies) Regulations 38 company 37-9 formation 37-8 limitation of liability 37 registration 38-9 stock exchange listing 42-8 company accounts 1-62 accounting practice 23-35 companies 36-49 introduction 3-22 introduction to accounts 50-62 company borrowings 83-100 and cost structure 84-8 how much? 89 long-term borrowings 90-6 returns on capital 83-4 security to lender 90 short-term borrowings 96-8 what sort 89-100 company share option plans 70 company size/ownership 27-8 auditing small company accounts 27 definition of company size 27 financial reporting for smaller entities 27-8 company types 39-42 close companies 41-2 private companies 39-41 public companies 39 comparability 33 complex valuation 166 consignment stock, definition 179 consistency principle 32 consolidated accounts, definition 352 Consolidated Financial Statements (IAS 27) 326 consolidation, overseas companies 360-1 consolidation adjustments 336-40 construction company 171-3 Construction Contracts (IAS 11) 173 Consultative Committee of Accountancy Bodies 59 Contingencies and Events Occurring after the Balance Sheet date (IAS 10) 195, 320 contingency, definition 196 contingent consideration, definition 352 contingent liabilities 193-6 476 international differences 195-6 continuing obligations 43-4, 47-8 definition 48 contracts 44 convertible bonds 79, 93-4, 99, 105 definition 111 convertible preference shares, definition 80 Cookson 256-7 copyrights 116 corporate ownership 34 corporation tax 190 definition 257 cost of sales adjustment 30 definition 35 cost structure, and borrowings 848 creating profit 228-32 operating profit 228-32 creditors 189-92 creditor ratios/creditor days 191-2 definition 22 types 189-91 creditors and other liabilities see balance sheet: creditors and other liabilities cumulative preference shares, definition 80 cumulative sinking funds 95-6 currency adjustments 204-5 current assets definition 22 see also balance sheet: other current assets current cost 30 definition 179 current cost accounting 30-1 definition 35 fixed assets 30 gearing 31 stocks 30 trade credit 30-1 current liabilities, definition 22 current purchasing power 30 Dearing Committee 24 debentures 90-1, 99 definition 111 debt-equity hybrids 79 convertible bonds 79 mezzanine finance 79 redeemable preference shares 79 debtor days, definition 188 debtors 180-6 definition 22 factoring 184-5 international differences 185 trade debtors 182-4 deferral method, definition 257 deferred consideration/earn out, definition 352 deferred income, definition 196 deferred shares 67 definition 80 deferred taxation 243-7, 254 definition 257 international differences 247-8 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 477 Index defined benefits pension schemes, definition 206, 233 defined contributions pension schemes, definition 205, 233 depreciation 203-4 definition 22 Depreciation Accounting (IAS 4) 132 depreciation adjustment 30 definition 35 depreciation of assets 126-32 how should we depreciate? 128-32 international differences 132 investment properties 126-7 land 127 what should we depreciate? 126-7 depreciation basis 132-3 Derivatives: Practices and Principles 106 Derivatives and Other Financial Instruments: Disclosures (FRED 13) 106-7, 194, 366-8 development costs 114 definition 121 Diageo 116 differential price 166 direct method, definition 299 directors 38, 44 directors’ report 51, 62 disclaimer of opinion 60 Disclosure of Accounting Policies (SSAP 2) 199 disclosure requirements 74-7, 255-7 acquisitions and mergers 348-51 borrowings 105 Caradon plc 75 lessor/lessee 138-40 discounted cash flow 453-9 assumptions in appraisals 459 internal rate of return 458 present value and compound interest 454-5 present value formulas 456-8 project risk comparison 455-6 disposal of tangible assets 145 dividend cover 279-80 dividend declaration 38 dividend yield 280 dividends 58, 272-5, 402-3 accounting for dividends 275 foreign income dividends 274 from joint ventures and associates 58 from UK companies 240-1 legal restrictions 273-4 scrip dividends 274 dividends per share 279 double taxation relief, definition 257 earnings 403-4 earnings per share 259-69 definition 281 IIMR headline earnings 263-4 normalised earnings 262-3 share issues 264-7 share options 267-8 tax and earnings 260-2 Earnings per Share (IAS 33) 269 Earnings per Share (SSAP 3) 259 earnings yield 278 Eastern Group 82 economic value added (EVA), definition 410 Effect of Changes in Foreign Exchange Rates (IAS 21) 362 employee share ownership plan (ESOP), definition 80 employee share schemes 70, 211-12 Employee Share Schemes (UITF 17) 71, 211 Energy Group 319 equity, definition 22 equity dividends 35 definition 22, 62 equity method 151-5 equity method of accounting, definition 162, 233 equity shares, definition 80 ESOP trusts 70-1 Eurobonds 92-3, 99 definition 111 European Union (EU), accounting systems 34 exceptional and extraordinary items 220-2 international differences 221-2 exceptional item, definition 233 exchange rate movements 364-6 forward contracts 365 options 365-6 swaps 366 extendible bond 92 extraordinary item, definition 233 factoring 186 accounting treatment 184 definition 188 full recourse agreements 185 limited recourse agreements 184-5 non-recourse agreements 184 fair value, definition 352 fair value adjustments 335-6 Fair Values in Acquisition Accounting (FRS 7) 194, 208, 335 finance leases 134-8 accounting treatment 134 definition 149 lessee 134-7 lessors 138 financial adaptability 33 Financial Instruments: Disclosure and Presentation (IAS 32) 106-7 Financial Reporting Council (FRC) 25 definition 35 Financial Reporting Exposure Drafts (FREDs) 26 definition 35 Financial Reporting of Interest in Joint Ventures (AS 31) 158 Financial Reporting Review Panel 25 definition 35 Financial Reporting for Smaller Entities (FRSSE) 27 Financial Reporting Standards (FRSs) 26 definition 35 477 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 478 Index financial review 52 definition 10, 62, 410 Financial Services Act 1986 42 financial statements 52-8 balance sheet 55-7 cash flow statement 57-8 profit and loss account 53-5 statement of total recognised gains and losses 58 first in, first out (FIFO), definition 179 fiscal years/financial years 236 fixed asset investments see balance sheet: fixed asset investments fixed asset ratios 146-8 asset replacement 146-7 asset utilisation 148 fixed asset turn 394 fixed assets 30 definition 22 fixed charge 90, 98 definition 111 fixed cost, definition 111 fixed dividend 66 fixed price offer 45 floating charge 90, 98-9 definition 111 Foreign Currency Translation (SSAP 20) 204 foreign exchange 353-410 accounting policies 368-70 companies and exchange rate movements 3646 exchange rate impact 370-3 and financial ratios 371 FRED 13 366-8 further information 371-2 international differences 363-4 reported profitability 370-1 SSAP 20 354-64 what should we look for? 368-70 foreign income dividends (FIDs) 72, 274 definition 281 formation of company 37-8 forward contracts 365 definition 373 forward markets 101 forward rate agreement (FRA) 103 definition 111 FR 226-7 France accounting system 34 balance sheet 462 profit and loss account 461 FRED 13 106-7, 366-8 discursive disclosures 106 international differences 107 numerical disclosures 106-7 FRED 14 202-3 disclosure 203 future operating losses 203 FRED 16 269-71 basic earnings per share 269 478 fully diluted earnings per share 269-71 FRED 17 143-5 profit on disposal of fixed assets 144 revaluation of assets 143-5 revaluation gains and losses 144 free cash flow, definition 299 full distribution earnings, definition 281 fully diluted earnings, definition 281 fully paid shares 66 functional currency, definition 373 fundamental uncertainty 60 gearing 384 accounting gearing 108 city gearing 109 gearing adjustment 31 definition 35 geographical destination, definition 321 geographical origin, definition 321 Germany balance sheet 464 profit and loss account 463 going concern principle 32 goodwill 117-20 definition 121, 352 international differences 119-20 Goodwill and Intangible Assets (FRS 10) 112-13, 117 Gordon growth model, definition 410 government grants 124-6 capital grants 125 international differences 126 revenue grants 125 Grand Metropolitan 116-17 gross equity method of accounting, definition 162 group accounts group 325-6 parent 324 subsidiaries 324-5 group accounts, acquisitions and mergers 322-52 acquisition accounting 328-43 disclosure of acquisitions and mergers 348-51 international differences 326-7, 351 introduction to group accounts 322-7 merger accounting 343-8 Group of Thirty 106 guarantee 37 Guinness 166 hausse des prix 173 hierarchy of ratios 396-7 hire purchase agreements 141 historical cost accounting 30 definition 35 Hitachi, reserves 77 holdover relief, definition 257 hyperinflationary economies 361-2 ICI 353 IIMR headline earnings 263-4 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 479 Index definition 281 IMI 229 Impairment of Fixed Assets and Goodwill (FRED 15) 130 Income and Corporation Taxes Act 1988 41, 51 indirect method, definition 299 inflation and accounts 29-30 information disclosed in notes 146 Institute of Chartered Accountants 24, 37 intangible fixed assets 122 see also balance sheet:intangible fixed assets Interbrand Group 116 interest, dividends 58 interest-rate exposure 101-3 forward markets 101 options 102 swaps 102-3 Interim Reports Directive 42 definition 48 intermediaries offer 46 internal rate of return, discounted cash flow 458 international accounting formats 460-72 France, balance sheet 462 France, profit and loss account 461 Germany, balance sheet 464 Germany, profit and loss account 463 Japan, balance sheet 469-70 Japan, profit and loss account 467-8 Netherlands, balance sheet 466 Netherlands, profit and loss account 465 North America, balance sheet 472 North America, profit and loss account 471 International Accounting Standard (IAS), definition 35 International Accounting Standards Committee (IASC) 26 definition 35 international accounting standards (IASs) 26-7 International Organisation of Securities Commissions (IOSC) 26 introduction 3-22, 46 definition 48 published accounts 17-22 what are the accounts? 3-17 introduction to the accounts 50-62 auditors’ report 58-61 Cadbury Committee 61 chairman’s statement 50-1 directors’ report 51 financial statements 52-8 Greenbury Committee 61-2 notes to the accounts 62 operating and financial review 51-2 Inventories (IAS 2) 173 investment performance, spreadsheet 425 investment properties 126-7 investments 44, 58, 122, 160-2, 186-8 accounting for short-term investments 187 company owns 20 per cent 160 international differences 187 other disclosure requirements 161 significant investments 160-1 investor’s ratio 399-409 cash flow 400-2 conventional valuation methods 399-400 dividends 402-3 earnings 403-4 sales 405 shareholder value 405-9 irrecoverable ACT, definition 257 issued share capital 66 definition 80 Japan accounting system 34 balance sheet 469-70 profit and loss account 467-8 joint venture, definition 162, 234 joint venture profits/losses 218-19 joint ventures 155-7 keiretsu 313 Kvaerner 25 land 127 Laporte 130 last in, first out (LIFO) 179 Leases (IAS 17) 140 legal and regulatory framework 23-8 accounting rules 24-6 Companies Act 23-4 company size and ownership 27-8 international accounting standards 26-7 statements of recommended practice 26 stock exchange listing 28 legal system 33-4 lender’s perspective 100-1 lessee 134-7, 139 lessor 138-9 leverage effect 110 liabilities and charges see provisions for liabilities and charges liability 38 definition 22 liability limitation 37 liability method, definition 257 licences 116 definition 121 limitation of liability 37 Limited Partners Act 1907 37 limited rights in liquidation 66 liquid resources, definition 299 liquidity 387-8 listed companies accounting 44-5 listed company 42 definition 48 listed investments 161 Listing Particulars Directive 42 definition 48 listing on stock exchange 45-7 fixed price offer 45 introduction 46 479 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 480 Index offer for sale 45 placement 46 tender offer 46 London International 202 long-term borrowings 90-6, 99 bonds 91-2 borrowing details 91 convertibles 93-4 cumulative sinking funds 95 debentures and unsecured loan stock 90-1 Eurobonds 92-3 long-term loan 90 mezzanine finance 94 non-cumulative sinking funds 95 security 91 sinking funds 94 subsequent borrowings 91 trustee powers 91 warrants 94 long-term contracts 212-15 balance sheet 214-15 calculating profit 213 calculating turnover 212-13 definition 233 loss of capital 41 manufacturer 166-71 margin of safety 86 market to book ratio, definition 410 market value added (MVA), definition 410 marketability 42, 47 marking to market, definition 188 Marks & Spencer 127, 166 Massgeblichkeitsprinzip 132 matching/accruals principle 31-2 materiality 32-3 Measurement of Tangible Fixed Assets (FRED 17) 122, 128, 143-5, 198, 222 medium-sized private company, definition 48 members 37 Memorandum of Association 38 definition 48 merger accounting 343-8 merger accounting/pooling of interests, definition 352 mezzanine finance 79, 94 definition 80 minority interests 258 monetary assets and liabilities, definition 373 monetary working capital adjustment 31 definition 35 Mutual Recognition Directive 42 name 38 negative gearing, definition 410 negative pledge 90 definition 111 net assets test, definition 281 net debt 385-6 net interest payable 223-4 interest capitalised 224 480 interest paid 224 investment income 224 Net Profit or Loss for the Period (IAS 8) 221 net redemption yield 101 net worth 383 Netherlands balance sheet 466 profit and loss account 465 replacement accounting 30 NFC 276 nil distribution earnings, definition 281 nominal/par value 38, 66 definition 80 non-adjusting event, definition 321 non-compliance 44-5 non-cumulative sinking funds 95 non-equity shares, definition 80 non-monetary assets, definition 373 normalised earnings 262-3 North America balance sheet 471 profit and loss account 471 Norwich Union 46 note of historical cost profits and losses 275-6 definition 281 notes 97, 100, 146, 225-6 definition 111 see also other information objects of company 38 offer for sale 45 definition 48 offer for subscription 45 definition 48 offset agreement, definition 188 Oil Industry Accounting Committee 26 operating costs 200 operating and financial review 51-2, 398-9 balance sheet 55-7 cash flow statement 57-8 financial review 52 operating review 51-2 profit and loss account 53-5 statement of total recognised gains and losses 58 Operating and Financial Review (ASB) 51, 398 operating leases 140-1 accounting treatment 141 definition 149 disclosure 141 operating profit 215, 228-32 definition 22 depreciation 230 exchange rates 230-1 profit on sale of fixed assets 231-2 provisions 230 reducing the costs 229 revenue recognition 228-9 stock valuation 229 operating profit margin, definition 22 operating review 51 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 481 Index definition 62, 410 operational gearing 87-8, 110 definition 111 options 102-3, 365-6 definition 111, 373 ordinary shares 66-7 definition 80 other creditors 190 other information in notes to accounts 309-21 post balance sheet events 319-20 related party transactions 309-14 segmental analysis 314-19 other taxation and social security 190 overseas companies, consolidation 360-1 overseas tax and double taxation relief 241-2 overseas taxation/double taxation agreements 254 parent company 324 parent/holding company, definition 352 participating interest, definition 162, 234 participating preference shares, definition 80 Partnership Act 1890 37 partnerships 37 patents and trade marks 115-16 copyrights 116 licences 116 payments received on account 189 Peninsular and Oriental Steam Navigation Company (P&O) 37 pension costs 205-11 accounting for surplus 207-8 fund size 206-7 international differences 210-11 pension accounting and financial analysis 2089 proposals for change 209-10 types of scheme 205-6 Pension Costs in the Employer’s Financial Statements (ASB) 209 pension schemes 205-6 defined benefits 206 defined contributions 205 percentage of completion, definition 234 permanent differences, definition 257 Pinault Printemps-Redoute 119-20 placement 46 definition 48 placing 69 definition 80 placing/open offer 69 definition 80 Plan Comptable 34, 293 plc 39 political/historical factors 34 post balance sheet events 319-20 international differences 320 Post Office 38 preference dividends 259 preference shares 67 definition 80 preferred stock 67 prepayment, definition 22 present value and compound interest, discounted cash flow 454-5 present value formulas, discounted cash flow 456-8 Presentation of Financial Statements (IAS 1) 304 price to book ratio, definition 410 price/earnings ratio 277-8 prior year adjustment, definition 306 private companies 39-41 accounting/filing criteria 40 advantages 40 loss of capital 41 medium-size companies 40 share capital 40-1 small companies 40 unrealised capital loss 41 private company, definition 49 profit see creating profit profit after tax to retained profit see profit and loss account: profit after tax profit calculation 213 profit forecasts 44 profit and loss account: introduction to taxation 235-57 disclosure requirements 255-7 fiscal and financial years 236 tax charge 241-55 taxable profit 236-41 profit and loss account: profit after tax to retained profit 258-81 dividends 272-5 earnings per share 259-68 FRED 16 269-71 historical profits and losses 275-6 minority interests 258 preference dividends 259 relevant ratios 276-80 profit and loss account: turnover to profit before tax 197-234 accounting adjustments 200-5 associated undertaking 216-18 capital costs and revenue costs 198 creating profit 228-32 employee share schemes 211-12 exceptional and extraordinary items 220-2 FRS 226-7 joint venture 218-19 long-term contracts 212-15 net interest payable 223-4 notes information 225-6 operating costs 200 operating profit 215 pension costs 205-11 profit on sale of fixed assets 222 profit on sale of operations 222-3 profitability ratios 232-3 significant associates/joint ventures 219 turnover 198-200 profit and loss account 53-5, 65, 78 481 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 482 Index definition 22 format 154 format 55 layout 53 ratio analysis 379-80 spreadsheet 412-15 profit margins 391-4 profit on sale of fixed assets 222 profit on sale of operations 222-3 profit-sharing schemes 70 profitability 388-97 hierarchy of ratios 396-7 improving fixed asset turn 394 improving profit margins 391-4 improving return on capital employed 390-1 improving working capital ratio 394-8 return on capital employed 388-90 spreadsheet 421-3 profitability ratios 232-3 interest cover 233 operating profit margin 232 return on capital employed 232-3 project risk comparison, discounted cash flow 455-6 Property, Plant and Equipment (IAS 16) 132, 145 proportional consolidation, definition 162 proposed dividends 190 prospectus 43, 47 definition 49 provisions 201-3 definition 22 Provisions and Contingencies (FRED 14) 202 see also FRED 14 provisions for liabilities and charges 192 prudence principle 32 public company 39 definition 49 Public Offers of Securities Regulations 1995 43 published accounts 17-22 balance sheet 21 cash flow statement 18-20 construction of cash flow statement 20-1 profit and loss account 17-18 qualification of accounts 60 Railtrack 192 Rank Group 199 ratio analysis 377-410 balance sheet 380-1 cash flow statement 381-2 cash management 398-9 investor’s ratio 399-409 profit and loss account 379-80 profitability 388-97 solvency ratios 382-8 ratios, spreadsheet 420 realised compound yield 101 realised profits test, definition 281 redeemable ordinary share 67 redeemable preference share 80 482 redeemable preference shares 79 reducing balance method, definition 149 registered office 38 Registrar of Companies 38 registration of company 38-9 Memorandum 38 related party, definition 321 Related Party Disclosures (FRS 8) 310, 312 Related Party Disclosures (IAS 24) 313 related party transactions 309-14 definition 311 disclosure 311-12 who is a related party? 310-11 relevant ratios 276-80 dividend cover 279-80 dividend yield 280 dividends per share 279 earnings yield 278 price/earnings ratio 277-8 return on equity 276-7 replacement accounting 30 Reporting Financial Information by Segment (IAS 14) 317 Reporting Financial Performance (FRS 3) 145, 203, 253, 255 repurchase of debt 106 research costs 114 definition 121 research and development 113-15 Research and Development Costs (IAS 9) 114 Research and Development (SSAP 13) 114 reserves 77-9 Hitachi accounts 77 profit and loss account 78 revaluation reserve 78 share premium account 78-9 retailer 166 Retirement Benefits (IAS 19) 210 retractable bond 92 return on capital employed 388-91 return on equity 276-7 returns on capital, and borrowings 83-4 revaluation of assets 142-3 FRED 17 143-5 international differences 145 revaluation reserve 65, 78 revenue cost/revenue expenditure, definition 234 revenue grants 125 definition 149 revenue reserve, definition 80 rights issues 68-9 definition 49, 80 RMC Group 368-9 rollover relief, definition 257 Royal Charter 37 running yield 100 Sainsbury’s 235, 336 sales 405 sales of assets chargeable gains and balancing charges 238-40 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 483 Index balancing charges 239 chargeable gains and losses 239 rollover and holdover relief 239-40 save-as-you-earn (SAYE) schemes 70 Schmalenbach, Eugen 34 scrip dividends 71, 274 accounting 71 definition 80, 281 scrip issue, definition 80 security to lender 90 fixed charge 90 floating charge 90 segmental analysis 314-19 disclosure requirements 315-16 Segmental Reporting (SSAP 25) 199 self-employment 36 servicing the debt 386 share buy-backs 72-4 accounting for buy-backs 73-4 Community Hospitals Group 73 definitiion 80 share capital 38, 40 share and capital reserves see balance sheet: share and capital reserves share capital and share issues 65-77 authorised and issued share capital 66 capital reconstructions 71-2 Caradon plc 75 Community Hospitals Group 73 different types of share 66-8 disclosure requirements 74-7 share buy-backs 72-4 share issues 68-71 share consolidations 72, 80 share issues 46-8, 68-71, 76, 264-7 accounting for scrip dividends 71 acquisition accounting 266-7 bonus issues 264-6 employee share schemes 70 ESOP trusts 70-1 full market price 264 merger accounting 267 other methods 69-70 rights issues 68-9 scrip dividends 71 shares issued in an acquisition 266 share options 267-8 share premium account 65, 78 definition 81 share splits 72 definition 81 share types 66-8, 76 accounting for warrants 68 ADRs 68 deferred shares 67 ordinary shares 66-7 preference shares 67 warrants 67-8 shareholder return, definition 410 shareholder value 405-9 shareholders, list 38 shareholders’ funds, definition 22 shares 37 and loans 58 and shareholders 45 short-term borrowings 96-8 bills of exchange 96-7 commercial paper 98 notes 97 short-term investments 187 significant associates and joint ventures 157-8, 219 international differences 158 significant investments 161-2 definition 162 sinking funds 94 definition 111 size of provision 203 small private company, definition 49 SmithKline Beecham 372 solvency ratios 382-8 immediate solvency/liquidity 387-8 long- and medium-term solvency 383-6 short-term solvency 386-7 spot price, definition 373 spreadsheet for analysis 411-25 balance sheet 415-17 cash flow statement 417-19 measures of cash flow performance 424 other measures of investment performance 425 profit and loss account 412-15 profitability 421-3 ratios 420 SSAP 20 354-64 consolidating overseas companies 360-1 hyperinflationary economies 361-2 requirements for companies 354-8 requirements for groups 358-60 Statement of Principles for Financial Reporting (ASB) 33 statement of total recognised gains and losses 58, 300-6 construction of statement 301-4 definition 62 and financial analysis 305-6 international differences 304 movements in shareholders’ funds 304-5 Statements of Auditing Standards (SASs) 59 Statements of Recommended Practice (SORPs) 26 definition 35 statutory corporation 38 step-down bonds 92 step-up bonds 92 stock 30 see also balance sheet: stock stock days 177-9 stock exchange listing 28, 42-8 additional accounting requirements 44-5 continuing obligations 43-4 marketability 42 prospectus 43 underwriting 47 ways to get listing 45-6 483 Index/Unlocking/Reports.1 7/6/02 12:31 pm Page 484 Index Stock and Long-Term Contracts (SSAP 9) 163 stock ratios 175-9 stock days 177-8 stockturn 175-7 stock valuation 165-75 construction company 171-3 international differences 73-5 manufacturer 166-71 retailer 166 stockturn 175-7, 179 straight line method, definition 149 striking price 46 subordinated loan, definition 111 subsidiaries 150-1, 324-5 definition 162 substance over form 32 sum of the digits, definition 149 swaps 102-3, 366 definition 111, 373 tangible fixed assets 114, 122 see also balance sheet: tangible fixed assets tax 58 tax charge 241-55 advance corporation tax 248-55 deferred taxation 243-7 overseas tax and double taxation relief 241-2 UK corporation tax rates 241 tax and earnings 260-2 full/maximum distribution 261-2 nil distribution 261 taxable profit 236-41 capital allowances 237-8 charges on income 237 dividends from UK companies 240-1 non-allowable expenditure 237 sale of assets,chargeable gains and balancing charges 238-40 taxation 34 see also profit and loss account: introduction to taxation Taxation under the Imputation System (SSAP 8) 255, 320 Taylor Woodrow 159, 164, 194 temporal method, definition 373 tender offer 46, 49 Tesco 223 timing difference, definition 257 total recognised gains and losses see statement of total recognised gains and losses trade credit 30-1 trade creditors 189, 196 trade debtors 182-5 debtor days 182-4 484 definition 188 trade mark, definition 121 trading 58 Trafalgar House 25 Treatment of Goodwill on Disposal of Business (UITF 3) 222 Treatment of Taxation under the Imputation System in the Accounts of Companies (SSAP 8) 240 trustee powers 91 turnover 198-200, 212-13 definition 22, 234 turnover to profit before tax see profit and loss account: turnover to profit before tax UK companies dividends 240-1 UK corporation tax rates 241 underwriting 47 definition 49 Unilever 181, 190 unincorporated associations 36-7, 49 United Biscuits 227, 294-7 unlisted company 42 unlisted investments 161 unrealised capital loss 41 Urgent Issues Task Force (UITF) 25-6 definition 35 Valeo 292 valuation methods 399-400 value based management (VBM), definition 410 valuing stock see stock valuation variable cost, definition 111 vendor placing 69 definition 81 Vichy government 34 Volvo 114, 371 voting rights 67 warrants 67-8, 81, 94 accounting 68 definition 111 weighted average cost of capital (WACC), definition 410 Whitbread 147 winding-up procedures 38 witnessed list of shareholders 38 working capital ratio 394-8 Yellow Book 42 continuing obligations 43 prospectus 43 yield, definition 111 zaibatsu 313 ... the accounts and the wealth of information that can be found in a set of company accounts Part 2: The accounts – there are 13 chapters in this section, covering all aspects of the accounts and. .. Profit and loss account – France Balance sheet – France Profit and loss account – Germany Balance sheet – Germany Profit and loss account – The Netherlands Balance sheet – The Netherlands Profit and. ..new Prelims /Reports& Accnts.1 7/6/02 11:59 am Page i UNLOCKING COMPANY REPORTS AND ACCOUNTS new Prelims /Reports& Accnts.1 7/6/02 11:59 am Page ii In an increasingly