Interpreting company reports 10th edition

This book is intended as a practical guide to the interpretation of reports and accounts It contains frequent reference to the legal and accounting requirements in the UK, both as regards to IFRS (International Financial Reporting Standards) and UK GAAP (UK Generally Accepted Accounting Practice) This is done in the context of interesting information to look out for, rather than how a set of accounts should be prepared Packed with relevant real world examples, this highly accessible book shows readers how to analyse company reports and accounts, both qualitatively and quantitatively The analysis is illustrated with numerous published accounts, extracts and examples and references to corporate websites Key Features • Key points from company accounts are highlighted and explained throughout the book • Each topic chapter examines the implications of adopting IFRS • The chapter ‘Putting it all together’ takes readers step by step through the reports, accounts and press cuttings of an AIM company • The authors comment as well as inform - previous editions highlighted the serious weaknesses of both Polly Peck and Maxwell Communications Corporation well ahead of their collapse Interpreting Company Reports and accounts The tenth edition of Interpreting Company Reports and Accounts guides the reader through the many conventions and complexities of company accounts, explaining how to assess the financial and trading position of a company from year to year, how to spot undue risk-taking and ‘cosmetic accounting’, and where to look for clues on the quality of management Tenth Edition Interpreting Company Reports and accounts Geoffrey Holmes Alan Sugden and Paul Gee New to this edition • • • • Explains the key differences between UK GAAP and IFRS Analyses how companies present the impact of the transition from UK GAAP to IFRS Tenth Edition Coverage of small and medium-sized entities (SMEs) reporting Interpreting Company Reports and Accounts is suitable for intermediate or advanced undergraduate accounting and finance courses, as well as MBA courses The book is recommended reading for several professional examinations and will also be highly relevant to practitioners Geoffrey Holmes FCA, FTII was, for more than 20 years, the highly regarded and much respected Editor of Accountancy, the Journal of the Institute of Chartered Accountants Alan Sugden is a Sloan Fellow of the London Business School and a retired director of Schroder Investment Management He spent nearly 20 years in the City as an analyst and fund manager, running the £100 million Schroder Recovery Fund for several years Paul Gee BA (Econ) FCA is a member of the National Assurance Technical Group of Smith & Williamson and lectures widely in the UK on financial reporting An imprint of Front cover image © Getty Images Holmes, Sugden and Gee Includes recent developments in narrative reporting: Operating and Financial Review Developments; Business Review; and Corporate Social Responsibility Reporting www.pearson-books.com www.ebook3000.com 9780273711414_COVER.indd 13/2/08 14:53:06 Interpreting Company Reports and Accounts www.ebook3000.com We work with leading authors to develop the strongest educational materials in business, finance and marketing, bringing cutting-edge thinking and best learning practice to a global market Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high quality print and electronic publications which help readers to understand and apply their content, whether studying or at work To find out more about the complete range of our publishing please visit us on the World Wide Web at: www.pearsoned.co.uk www.ebook3000.com Interpreting Company Reports and Accounts TENTH EDITION Geoffrey Holmes Alan Sugden Paul Gee www.ebook3000.com Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published 1979 Tenth edition published 2008 © Geoffrey Holmes and Alan Sugden 1979, 1983, 1986, 1990, 1994, 1997, 1999 © The Estate of Geoffrey Holmes; Alan Sugden and Paul Gee 2002, 2005, 2008 The rights of Geoffrey Holmes, Alan Sugden and Paul Gee to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988 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 publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS ISBN: 978-0-273-71141-4 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Holmes, Geoffrey Andrew Interpreting company reports and accounts / Geoffrey Holmes, Alan Sugden, Paul Gee -10th ed p cm ISBN-13: 978-0-273-71141-4 Financial statements Corporation reports I Sugden, Alan II Gee, Paul III Title HF5681.B2H63 2008 657′.3 dc22 2007049783 10 12 11 10 09 08 Typeset in 9.75/12 Times by 35 Printed and bound by Ashford Colour Press., Gosport The publisher’s policy is to use paper manufactured from sustainable forests www.ebook3000.com Brief contents Contents Preface Publisher’s acknowledgements 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 vii xi xii Overview of the regulatory scene International Financial Reporting Standards (IFRS) overview Accounting principles The annual report Chairman’s statement and the operating and financial review Corporate governance and the auditors’ report The profit and loss account: overall structure The profit and loss account: turnover and revenue recognition The profit and loss account: further disclosure areas The profit and loss account: interpretation, ratio analysis, segmental analysis and earnings per share Equity statements, dividends and prior period adjustments The balance sheet: an introduction Tangible fixed assets Intangible fixed assets Fixed asset investments Stocks and long-term contracts Debtors and other receivables Current asset investments; cash at bank and in hand Creditors and provisions Tax in the balance sheet Bank loans and overdrafts Loan capital Derivatives and other financial instruments Equity share capital and reserves Balance sheet disclosures Cash flow statements Financial reporting for SMEs (small and medium-sized entities) Group accounts, acquisitions and mergers Joint ventures, associates and foreign operations Historical summaries, ratios and trends Inflation www.ebook3000.com 11 22 34 43 52 55 62 74 88 95 99 109 116 122 131 141 145 155 163 167 185 197 209 217 230 234 243 258 269 vi 32 33 34 35 Brief contents Half-yearly reports (interim reports) UK GAAP and IFRS compared Adopting IFRS for the first time Putting it all together Appendix Appendix Appendix Appendix Appendix Appendix Index 273 278 281 290 UK GAAP: Current Financial Reporting Standards and Exposure Drafts International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) Useful website addresses Present value Retail Price Indices since 1950 Problems and solutions www.ebook3000.com 296 297 298 299 300 300 312 Contents Page xi xii Preface Publisher’s acknowledgements Overview of the regulatory scene Purpose of the book The regulatory structure in the UK The annual report and accounts The objective of financial statements The Financial Reporting Council’s role International Financial Reporting Standards (IFRS) UK company law Categories of companies Extracts from published accounts International Financial Reporting Standards (IFRS) overview Introduction Terminology The Standards Who must adopt IFRS? Convergence Approach followed in the book Accounting principles What is UK GAAP? Accounting principles The profit and loss account – UK GAAP The balance sheet – UK GAAP Worked example – putting the accounts together Format and terminology differences – UK GAAP and IFRS compared Accounting policies – UK GAAP Accounting policies – IFRS 11 The annual report Information other than the financial statements What is the annual report? The directors’ report The business review The enhanced business review Presenting the business review in practice Annual review and summary financial statements Sequence of study of a report and accounts The need to read the notes 22 Chairman’s statement and the operating and financial review Presenting the annual report in practice Corporate social responsibility (CSR) report Chairman’s statement Chief executive’s report Enhanced business review The operating and financial review (OFR) 34 Corporate governance and the auditors’ report Corporate governance The Combined Code Directors Directors’ remuneration Accountability and audit Relations with shareholders Going concern The auditors’ report Audit reports other than those which are unqualified 43 The profit and loss account: overall structure Introduction The format of the profit and loss account under UK GAAP The format of the income statement under International Financial Reporting Standards (IFRS) 52 www.ebook3000.com viii Contents The profit and loss account: turnover and revenue recognition Turnover and revenue Revenue recognition under UK GAAP Revenue recognition under IFRS 55 The profit and loss account: further disclosure areas Introduction Basic disclosure areas Directors’ and staff costs Other expenses Pension costs (retirement benefits) Share option charges Research and development expenditure Exceptional items Discontinued and continuing operations Comparative figures Finance costs Investment income Taxation Segment reporting Group issues 62 10 The profit and loss account: interpretation, ratio analysis, segmental analysis and earnings per share Interpretation and ratio analysis Segment analysis Earnings per share Investment ratios 74 11 Equity statements, dividends and prior period adjustments Introduction The statement of total recognised gains and losses (STRGL) Reconciliation of movement in shareholders’ funds Prior period adjustments Equity dividends Preference dividends Equity statements under IFRS 88 12 The balance sheet: an introduction Introduction The format of the balance sheet under UK GAAP International Financial Reporting Standards 95 13 Tangible fixed assets Tangible fixed asset categories Depreciation Revaluation of fixed assets Sales and other disposals of fixed assets Investment properties Government grants Ratios 99 14 Intangible fixed assets Intangible fixed asset categories Goodwill Capitalised development costs Computer software Other intangibles Impairment Revaluation 109 15 Fixed asset investments Fixed asset investment categories UK GAAP International Financial Reporting Standards 116 16 Stocks and long-term contracts Different classes of stock UK GAAP The inclusion of overheads in stock Net realisable value Consignment stocks The danger of rising stocks Long-term contracts Stock ratios International Financial Reporting Standards 122 17 Debtors and other receivables Categories of trade debtors and other debtors Hire purchase and credit sales transactions Factoring and invoice discounting Loans receivable International Financial Reporting Standards 131 18 Current asset investments; cash at bank and in hand Current asset investments – UK GAAP Cash at bank and in hand Disclosure requirements Current asset investments – IFRS Cash at bank and in hand – IFRS 141 19 Creditors and provisions Creditors Working capital and liquidity ratios Provisions Leases IFRS 145 www.ebook3000.com Contents ix 20 Tax in the balance sheet Introduction UK GAAP – current taxation UK GAAP – deferred tax UK GAAP – the tax charge in the profit and loss account UK GAAP – accounting policies UK GAAP – the tax reconciliation note UK GAAP – tax in the balance sheet IFRS 155 21 Bank loans and overdrafts Bank facilities Overdrafts Bank loans The big picture Cash flow statements 163 22 Loan capital Company borrowings generally Debentures, unsecured loan stock and bonds Accounting for finance costs Share capital Convertible loan capital Financial instrument disclosure issues Reporting the substance of transactions, FRS Gearing ratios International Financial Reporting Standards 167 23 Derivatives and other financial instruments Introduction UK GAAP Definition of a derivative Risk management and derivative trading Narrative disclosures Common types of derivatives Numerical disclosures Counterparty risk Concern about derivatives But why bother with derivatives? Benefits of disclosure International Financial Reporting Standards 185 24 Equity share capital and reserves Introduction Share capital Issue of further shares Dividends Reserves Share-based payment arrangements including share options Purchase and reduction of shares International Financial Reporting Standards 197 25 Balance sheet disclosures Introduction Related party disclosures Operating leases Contingent liabilities and contingent assets Capital commitments Events after the balance sheet date 209 26 Cash flow statements Overview of the cash flow statement and related notes Cash flow – definitions and ratios International Financial Reporting Standards 217 27 Financial reporting for SMEs (small and medium-sized entities) Introduction Small companies and concessions available The Financial Reporting Standard for Smaller Entities (FRSSE) The International Financial Reporting Standard for SMEs Medium-sized companies and concessions available Small and medium-sized groups 230 28 Group accounts, acquisitions and mergers Acquisitions of businesses Group accounts The consolidated balance sheet The consolidated profit and loss account Acquisitions and mergers Acquisition accounting Merger accounting International Financial Reporting Standards 234 29 Joint ventures, associates and foreign operations Introduction Joint arrangement that is not an entity Joint venture Associates Foreign exchange 243 30 Historical summaries, ratios and trends Historical summaries Ratios Trends International Financial Reporting Standards 258 www.ebook3000.com Appendix notes to the accounts, in particular any analysis of turnover and profit; n the cash flow statement The accounts are, in fact, those of TAYLOR WOODROW for 2002 Their financial review explained: n Housing The housing businesses located in the United Kingdom, North America, Spain and Gibraltar all had a successful 2002 Construction Taylor Woodrow Construction has continued its good performance (iii) The issue of transfers from current assets to fixed assets was considered by the UITF which, in July 1992, issued Abstract 5, Transfers from current assets to fixed assets The UITF was concerned, in the then current economic climate, that ‘companies could avoid charging the profit and loss account with write-downs to net realisable value arising on unsold trading assets This could be done by transferring the relevant assets from current assets to fixed assets at above net realisable value, as a result of which any later write-down might be debited to revaluation reserve.’ The UITF agreed that in respect of such transfers, the current asset accounting rules should be applied up to the effective date of transfer (the date of management’s change of intent) The transfer should then be made at the lower of cost and net realisable value Thus the land that cost £56m should be transferred to fixed assets at £40m, and the shortfall charged to the profit and loss account 307 (iv) to assure potential joint venture partners that the company, while not in the same league in size terms as they are, can fund its share of future operations (found for example in oil exploration and development); (v) as a more general store of value; (vi) to earn income (there being no better use of funds in the short term); (vii) where required under the terms of a contract, or by statute, as with insurance funds; (viii) where the group acts as its own insurer (because cover is impossible to obtain or prohibitively expensive, e.g certain types of disaster cover), as large sums could be needed urgently (b) It is important for the reader of accounts to have a clear idea of the reasons for any significant holding of current asset investments because: n Money which is tied up (under, say, (vii) or (viii) above) is not available to support general operations n Money set aside for a purpose (e.g taxation) is earmarked n If money currently earning income is used for non-income-generating activities, income will fall n If large sums of money are invested: (a) has management clear plans as to their use? or (b) has the business become a ‘cash cow’, a generator of cash which it cannot itself usefully employ? (c) is management simply sitting on money that it does not know what to with (black mark!)? Solution 9.1 The initial outlay is Solution 8.1 (a) Possible reasons why companies hold current asset investments include: (i) to set aside (and earn interest on) money later required to pay taxation; (ii) to save towards a planned expansion, refurbishment, or reorganisation; (iii) to cover contingencies (e.g a shortfall in receipts); (250 × 100 × £10) That is also the maximum amount risked If the index rises to 4,155, the fund manager can sell the option back to the market realising a profit of £137,500 (55 × 250 × £10) With over a month left to expiry there would also be some time value left, say 25 index points In this case the manager would sell the options back to the market for 180 index points, an overall profit of £200,000 (80 × 250 × £10) 308 Appendices Solution 10.1 (a) (i) An accrual is a known liability where there is no uncertainty as to either the timing or the amount of the future expenditure required in settlement By contrast, a provision is a liability of uncertain timing or amount Whilst the Companies Act 1985 contains a definition of provision, companies must also satisfy the required conditions in FRS 12 before a provision may be recognised in the balance sheet The two key conditions are: n the company has an obligation which it will probably be required to settle, and n a reliable estimate can be made of the amount of the obligation (ii) Income in advance represents income received which at the date of the balance sheet had not been earned; whereas a deposit either represents money paid by a customer/client as an earnest (or a sign) of good faith or, in the case of a financial institution, customers’ money which earns interest for them (iii) A commitment is a financial obligation which a company has already contracted for but which does not satisfy the criteria to be recognised as a provision A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events that are not wholly within the company’s control A contingent liability may also relate to a present obligation that arises from a past event but which is not recognised in the balance sheet because it does not satisfy all the conditions set out in FRS 12 (b) Examples: (i) Of an accrual: rent of £24,000 per annum payable quarterly in arrear on 31 March, 30 June etc Company makes up its accounts to 30 April 1999, having paid rent up to 31 March Rent of £2,000 (i.e one month) will be accrued Of a provision: a restructuring provision representing expenditure which is to be incurred on a major reorganisation which was publicly announced prior to the balance sheet date (ii) Of income in advance: a magazine publisher receives prepayment in respect of annual sub- scriptions to journals At the end of the year £213,000 represents journals to be supplied in future years (iii) Of a commitment: capital expenditure contracted for at the balance sheet date to the extent that this has not been provided for in the accounts; exposed foreign currency commitments; commitments under operating lease agreements Of a contingent liability: guarantee of bank borrowings; pending legal action against the company (c) In seeking to estimate the effect on a company’s future cash flows and its viability in the medium term: (i) Accruals are rarely of much significance As to provisions, their background and adequacy should be considered, as well as their size, what calls they will bring on the company and when (ii) There is a tendency for companies hard-pressed for cash to spend what is in effect other people’s money In an ideal world deposits would be banked separately in a ‘client/customer account’, and never used for purposes of the company until such times as they were earned This is not an ideal world Solicitors and travel agents may work like that; other businesses tend not to For example, a magazine publisher selling discounted three-year subscriptions would be in trouble if he spent receipts in the year they were received; he would then be relying on future receipts to provide copies to people who had already paid for them, in much the same way governments were able, in the early years of schemes, to treat pensions on a pay as you go basis; but once a large pensioner population built up, the costs escalated and there were no funds to fall back on (iii) Capital commitments require financing The wise finance director ensures that this is planned and negotiated in advance Some even explain what has been done in the financial review Solution 11.1 The effective rate of tax (i.e taxation as a percentage of pre-tax profits) might be: (a) much less, or (b) much greater, than the normal rate of UK corporation tax because of: Appendix Cause Adjustments to previous years Disallowed expenses Capital gains Loans Losses and loss relief Overseas income Exceptional items Effect (a) or (b) (b) (a) (b) (a) or (b) (a) or (b) (a) or (b) An abnormal tax charge should be explained in the note on taxation An abnormal tax charge is important because it directly affects after-tax profits, and hence earnings per share, the P/E ratio and cover And, less obviously, the effect is not proportionate For example, take a company with pre-tax profits of £100m which has 1000m 10p ordinary shares If the effective tax rate is 30%, tax is £30m and the after-tax profit £70m Were that rate to increase (because, say, a greater proportion was earned overseas and subject to higher rates of tax) to 35%, the after-tax profits would fall (on the same income) to £65m, i.e by 5/70 = 7.14% earnings provides better comparability (or because they not like hefty charges for exceptional items reducing their apparent earnings) or show earnings on an IIMR basis (for much the same reasons) Solution 13.1 The 1995 net cash inflow from operating activities of CORDIANT was less than that in 1994 because: n n Solution 12.1 Earnings per share (e.p.s.) are the amount of profit on ordinary activities, after tax and all other charges, that has been earned for each ordinary share: e.p.s = n Profit attributable to ordinary shareholders Number of ordinary shares in issue Adjustments are necessary where there is a scrip (bonus) issue or share split, or n an issue of shares in an acquisition, or n a rights issue during the period These adjustments are explained on page 84 One might use the e.p.s figure: n in computing a price earnings ratio; n to compute cover or dividend payout ratio; n in assessing earnings growth; n as a basis in estimating future earnings Where dilution may arise (because of, say, convertibles, warrants or options) it may be necessary to show the fully diluted earnings Some companies compute their own preferred versions (as well) because they feel their method of calculating 309 The two principal components of cash inflow from operations tend to be: Operating profit: which was only £28.3m, against £44.5m in 1994; and Depreciation: unchanged at £25.7m But cash flow is also affected by increased working capital demands: Increase in work in progress (£9.4m in 1995; £8.0m in 1994); Increase in debtors (£54.8m in 1995, £77.8m in 1994); and while the increase in creditors £38.6m operated in the reverse direction, it was far less than the increase of £86.1m the previous year Had the increase in creditors been only £38.6m in 1994, the working capital requirement would have been £47.5m greater, and the cash generated from operations not £58.9m but £11.4m In each year property provisions were utilised (£10.3m in 1995 and £11.8m in 1994) These had already been charged against the profits of earlier years, but the cash was not spent until 1995 and 1994 respectively Solution 14.1 n n n n The first clue is the reference to ‘stores’ This is a fairly substantial store company with just over 400 stores (averaging 12,350 sq ft) It was in fact STOREHOUSE which previously owned BHS and Mothercare A major change occurred in 1993: (a) The number of stores fell from 736 to 425 (b) There were exceptional items in both 1993 and 1994 (£31.4m and £6.4m respectively) This looks like the closure or sale of stores (c) The dividend of 5p against earnings of 2.6p in 1992 suggests there was a marked drop in profitability around that time Turnover was drifting sideways (it increased in the last two years from £1,045.5m to £1,083.6m, i.e by 3.6%, 310 n n Appendices and in the last year by 0.4%, which did not keep up with inflation That was despite adding two new stores in each year and 263,000 sq ft of selling space in the last year Profit margins, however, improved markedly, year by year: 1992 1993 1994 1995 1996 % 0.85 3.77 6.24 8.08 9.41 Solution 15.1 A going concern is a company or other enterprise which does not intend or need either: n to go into liquidation or n to curtail the current level of operations significantly (a) The directors are responsible for making appropriate enquiries to satisfy themselves that company and group have adequate resource to continue in operational existence for the foreseeable future before continuing to adopt the going concern basis of accounting; (b) It is the auditors’ responsibility to form an independent opinion on the financial statements Were they to consider the company was not a going concern the accounts would present a true and fair view only if they were prepared on a ‘gone concern’ basis and provided adequate explanations – otherwise the auditors would qualify their report The matter is important to investors because the value of shares in a break-up is only a fraction of that as a going concern Typically the yield on an equity investment is far less than that on fixed-interest securities for the simple reason that equities are expected to grow in value (to provide a hedge against inflation) A business which ceases to be a going concern is certainly not a hedge against inflation It is a dead duck Solution 16.1 DIXONS Note to the Interim Statement 2003/04 Workings: deducing figures for 24 weeks to May 2003 Operating profit Depreciation Amortisation of goodwill and own shares Share of profit of associated undertaking Profit on disposal of fixed assets Net (utilization of )/additions to provisions and impairment (Increase)/decrease in stocks (Increase)/decrease in debtors Increase/(decrease) in creditors 28 weeks to 15 Nov 2003 £million 102.4 64.9 2.4 – (7.7) 28 weeks to Nov 2002 £million 89.4 60.5 2.4 (2.0) (6.3) 52 weeks to May 2003 £million 278.4 118.2 4.2 (2.0) (9.8) (6.4) (335.6) (12.3) (1.1) (230.8) (20.5) 9.2 (25.1) 17.9 10.3 205.7 38.4 320.2 104.7 (50.6) (155.3) 340.4 344.1 52 weeks to May 2003 £million 24 weeks to May 2003 £million 278.4 340.4 189.0 344.1 127.9 Solutions: (a) Operating profit (b) Net cash inflow/(outflow) 28 weeks to 15 Nov 2003 £million 102.4 127.9 (3.7) 28 weeks to Nov 2002 £million 89.4 (3.7) 24 weeks to May 2003 £million 189.0 57.7 1.8 – (3.5) s Appendix 311 Comment: It seems that in cash flow terms Dixons is highly seasonal From May to early November 2002 the net cash flow from operating activities was negative (taking the average of the two years, around £100m outflow); whereas from November to April (which of course includes Christmas) it was highly positive (in 2002/03 the cash inflow was £344.1m net) In part this is because operating profits are seasonal (£89.4m in the first half of 2002/03 against £189.0m in the second half ) But it is the stocks, debtors and creditors which create much of the cash flow seasonality: increasing sharply in the first half and falling back again in the second Solution 17.1 to draw a chart depicting the share’s price behaviour; to compare the behaviour of an individual share against (a) the FT-SE 100 or (b) the All-Share Index; n to compare the behaviour of an individual share with that of its sector index or of another share in the same sector; n to value the portfolio for any purpose, e.g inheritance tax purposes or to project the capital gains tax that would be payable on the sale of a holding Four ways of obtaining share prices are: n Look up the price in the City pages of the FT or of any good daily paper Where a daily paper is already purchased or is available in a library, this involves no additional cost; but it is tiresome to keep track of a large number of prices n Look the price up on teletext (this again involves no additional cost assuming one has a TV with teletext) or use a teletext board in a PC (once purchased, with appropriate software this will update prices automatically at a stated time daily, free; and it is possible to watch prices during the day updated every couple of hours) n Download prices from a modem-based service like Prestel or watch them live using that service n Purchase data from a data source, say, weekly on disk or CD-ROM n n Four widely used ratios based on the market price(s) of equity shares are: (a) Dividend yield (%) = (Net dividend in pence per share ÷ Ordinary share price in pence) × 100 (b) Price/Earnings Ratio (P/E ratio or PER), which is the market price of the ordinary share divided by the earnings per share i.e PER = Share price ÷ e.p.s (c) Price earnings growth factor (PEG) is a yardstick introduced by Jim Slater in The Zulu Principle The PEG is a measure of whether a share looks overrated or underrated: PEG = Price/Earnings ratio ÷ Prospective growth rate of e.p.s (d) Increase (decrease) in price (normally the closing price) on the day, week, month or year: (Share price at end of period ÷ Share price at end of previous period × 100) − 100% Four other ways in which an investor or analyst might use the price history of a share are: Index ABBEYCREST, 218–20, 223 – 4, 226–8 abbreviated accounts, 231, 232 Accountancy Age, 58 accounting acquisition, 237–41 big bath, 153 current purchasing power (CPP), 269 current cost (CCA), 269 equity method, 246–8 main problem (foreign exchange), 249 practices, cause for concern, 56–9 worked example, 15–17 accounting policies, 12 changes, 89–90, 92 on foreign currencies, 255 IFRS, 18 UK GAAP, 18 accounting principles, 11–13 Accounting Standards Board (ASB), 4, 11, 209, 260, 275 Statements of Best Practice, 273 interim reports, 273 statement of principles, 11–12 accruals (accounting concept), 12, 146 acid test, 149–50 active market, 115 acquisitions, 237–41 accounting, 237–41 earnings per share, 81–2 historical summaries, 261 substantial, 240 wonder growth by, 82–3 acquisitions and disposals (cash flow), 220–1 acquisitions and mergers, 237–41 adjusting events, 215–16 administrative expenses, 52 Advance Corporation Tax (ACT), 261 advertising consultancy, 59–60 AIMCO PLC, 282 ALLDAYS, 261–3 ALLIED CARPETS, 56 Alternative Investment Market (AIM), 5, 9, 277, 282, 290 AMOCO, 241 amortisation, 18, 80 AMSTAD, 25 annual general meeting (AGM), 207 annual report, 1–2, 22–3, 34 best practice (non-mandatory) parts, 23 mandatory parts, 22 annual review and disclosure (provisions), 151 annual review and summary financial statements, 31–2 Articles of Association, 172, 197 ASB Discussion Papers, Revenue recognition, 56 asset (capital) cover, 173 asset stripping, 82 assets current, 15, 148 at date of acquisition, 239 intangible fixed, 109–15, 238, 265 monetary (forex), 250 revaluation, 104–5, 114 tangible fixed, 99–108, 238 useful economic life, 100, 104 valuation of (acquisitions), 238 ASSOCIATED BRITISH FOODS PLC, 50 – associates, 246–9 definition, 246 equity method of accounting, 246–8 investment in, 116–17 ATKINS (W.S.), 246 audit committee, (Smith report), 45, 47– Auditing Practices Board (APB), 51 auditors disclosure to, 28 remuneration, 63 auditors’ report, 50–1 auditors’ review, 274 authorised share capital, 197–8 AUTOMOTIVE PRODUCTS GROUP, 171 available for sale (AFS) financial assets, 119, 144 average life (assets), 100 AVIVA, 171 AWG, 114, 288 bad debt protection, 136 bad debts, 131–2 BAILEY (C.H.), 142 Index balance sheet, 2, 14–15, 17, 95–8 consolidated, 235–7 format, 95 parent company’s own, 73 post (events), 241 presentation, 118 bank account, 17 Bank of England, 165 bank facilities, 163 bank loans, 165–6 BARCLAYS, 191–2 BARINGS, 189, 192, 255 base rate, 164 basic earnings per share, 79 BASS, 134 BBA, 171 BELLWAY, 198 BELLWINCH, 127 BENSONS CRISPS, 261–2 bid protection, 176 big bath accounting, 153 BIG FOOD GROUP, 58 BLUE CIRCLE INDUSTRIES, 99 board committees, 45 board of directors, 45 BODY SHOP, THE, 123, 131, 145–7, 271 bonds, 169 stepped interest, 171 book value, 99 BOOSEY & HAWKES, 132–3 BOOTS, 41, 82, 222, 225, 226, 266 borrowing advantages, 167 amount company can borrow, 172 facilities, 222 fixed charge, 169 floating charge, 169 mezzanine finance, 171 powers, 172 restrictions imposed by existing, 172 risk of, 167–8 security on loans, 165 stepped interest bonds, 171 trust deed, 170 types of, 168 unsecured loan stock, 168, 169–70 for window dressing, 216 see also loans; overdrafts BP, 189, 214, 241, 256–7, 258 BP AMOCO, 241 BRANDON HIRE, 74, 75, 76, 77 break-even point, 181 BRITISH AIRWAYS, 87, 179 BRUNEL HOLDINGS, 262–3 BURMAH OIL, 263 business environment, changes in, 261 business review, 28–30 concession, 232 enhanced, 30, 35 presenting, 31 CABLE & WIRELESS, 100 Cadbury, Sir Adrian, 76, 105 Cadbury Committee Report, 43 CADBURY SCHWEPPES, 105, 172, 221, 225 CAFFYNS, 125 ‘call’ options, 188 CANARY WHARF, 171 cap, (interest rate), 190 capital allowances, 155–6, 157 -based grants, 107 -based ratios, 264 commitments, 153, 215 cover, 173 expenditure requirements, 224 loan, 167– 84 capital redemption reserve, 202 capitalisation borrowing costs, 72–3 development costs, 112–13 CARE UK, 204, 205 cash, 220 requirements, 223–4 running out of, 217 shortfall, 224 cash at bank/in hand, 143, 144 cash equivalents, 228 cash flow per share, 226 cash flow statements acquisitions and disposals, 220–1 borrowing facilities, 222 cash requirements, 223–4 cash shortfall, 224 definitions, 224–8 finance director’s viewpoint, 217 free cash flow, 224–5 limitations of, 221–2 ‘no choice’ expenditure, 217 non-cash items, 221 313 ratios, 224–8 real example, 218–19 reconciliations, 218, 219 restrictions on remittability, 221 restrictions on transfer, 221 terminology, 220 CATTLES, 120, 137– 8, 140, 193, 196, 288 ceiling, 190 CELLTECH, 239, 241 chairman, role of, 45 chairman’s statement, 34–5 changes in accounting standards, 260 in business environment, 261 in composition of group, 261 in historical summaries, 261 charges, fixed, 169 charges, floating, 169 charitable donations, 26 CHARTERHOUSE COMMUNICATIONS, 290 –5 CHARTERIS, 159, 160 chief executive, role of, 45 chief executive’s report, 35 chief executive’s review, 78 CI TRADERS, 159, 160 CINVEN, 171 closing rate (foreign exchange), 249, 251, 252 COLOROLL, 215 Combined Code on Corporate Governance, 43–4 commitment commission, 166, 222 commodity related derivatives, 188 common size statement, 75, 267–8 companies AIM listed, business (nature of), 148 control of, 197 fully listed, holding, 73 limited, limited by guarantee, limited by shares, private, public, small and medium-sized, 6, 230 –3 unlimited, 6–7 websites, 288 314 Index Companies Act 1985, 11 Companies Act 2006, 11 Companies House, 74 company law, comparability, 12, 89 comparative figures, 71 COMPUTACENTER, 23 computer software, 112 confidential invoice discounting, 136 consignment stocks, 125 consistency (accounting concept), 10, 89, 123 consolidated balance sheet, 235–7 consolidated profit and loss account, 237, 244 consolidation goodwill on, 236, 238 proportional, 245–6 construction contracts, 128, 130 Consultative Committee of Accountancy (CCAB), 11 consumption, 102 contingent liabilities, 214–15, 256 continuing operations, 71, 261–3 contracts arrangements, 39 construction, 130 for differences, 179 long-term, 127–8 control, 47, 197 congruence, convergence, 9–10 conversion premium, 176 convertible loan capital, 175–9 terms of, 176–7 with put options, 177 convertible loan stock, 85 convertible preference share, 198 convertible unsecured loan stock (CULS), 175–6 copyright, 113 CORAL, 134 CORDIANT, 117 corporate governance, 43–51 Cadbury Report, 43 Combined Code, 43–4, 45 Corporate Social Responsibility (CSR), 27 report, 34 corporation tax, 155 capital allowances, 157 comparative figures, 71 dividends, 198 timing differences, 156 cost in relation to stock, 125 cost of distribution, 52 cost of sales, 52 cost of sales/stock ratio, 129 cover capital, 172, 173 dividend, 87 fixed charges, 183 income, 172, 173 credit sale, 134–5 creditor days, 25 creditors, 145–54 trade, 146 types of, 145–7 CROWTHER, JOHN, 215 cumulative depreciation, 107–8 cumulative preference shares, 198 currency swaps, 188, 189 current asset investments, 141–2 current assets, 15, 148 current cost accounting (CCA), 269 current liabilities, 15, 148 current purchasing power (CPP) accounting, 269 current ratio, 148–9 current year profits, estimating, 40–1 DAILY MAIL AND GENERAL TRUST, 110, 113, 120, 121, 144 DAILY TELEGRAPH, 185 DAIRY CREST PLC, 288 Datastream, 75 dead stock, 122–3 debentures, 169 debt factoring, 135–7 repurchase of, 174 debt/capital employed, 180 debt/equity ratio, 180, 264 debt collection period, 132–3 debtors (receivables), 131–40 Companies Act requirements, 131 bad and doubtful, 131–2 due after more than one year, 134 importance of, 132 trade, 131 deep discount issues, 170–1 deferred income, 146 deferred shares, 199 deferred taxation, 18, 156, 157–9 deposits, 146 depreciation, 18, 99, 217 change in expected useful life, 103 changing method, 104 charge, 155 disclosure requirements, 63–4 freehold land and buildings, 104 methods, 101 rates of, 100 reducing balance, 102–3 renewals, 103 straight line (fixed instalment), 16, 101–2 where shown in accounts, 100 derivatives, 185–96 benefits of disclosure, 192 commodity related, 188 common types, 187–90 concern about, 191–2 counterparty risk, 191 definition, 185, 186–7 disclosure requirements, 187 financial, 189 narrative disclosures, 186 numerical disclosures, 186, 190 –1 reducing risk of trading, 188–9 risk management and, 187 DIAGEO, 77–8, 117, 123, 143, 184, 246 – 8, 252, 274, 275 diluted earnings per share, 84–5 directors, 45–6 board of, 45 remuneration (emoluments), 46–7, 62 share schemes for, 23–4 statement of responsibilities, 27– directors’ report, 2, 23–8 business review, 23 disclosure requirements, 23 interests in share, 23–4 non-executive, 45 post-balance sheet events, 24 principal activities, 23 principal risks, 29 research and development, 23 results and dividends, 23 disclosure, 61 Index acquisitions and mergers, 240 to auditors, 28 Combined Code, 44 derivatives and financial instruments, 186, 192 provisions, 152 related parties, 210–12 on significant holdings, 117–18 small company concessions, 230 Disclosure and Transparency Rules (DTR), 276–7 discontinued operations, 71, 79, 261–3 disposals of subsidiaries, 237 distribution costs, 52 dividends equity, 91, 197, 202 preference, 72, 93, 202 scrip, 201 yield, 87, 217 doubtful debtors, 131–2 earnings per share, 79–85, 264–5 adjustments to basic, 84 basic, 79 company’s own figures, 79–80 diluted, 84–5 effect of acquisitions, 81–2 headline, 83 normalised, 83 ‘smoothing’, 265 trends, 83–4, 267 EBOOKERS, 58 ELECO, 206 ELSON, 41 EMI GROUP, 89 emoluments, directors’, 62 employees consultation and involvement, 24–5 with disabilities, 24 enhanced business review, 30, 35 ENODIS, 23, 31, 111, 113 ENRON, 3, 55 ENTERPRISE INNS PLC, 47 environmental policies, 25 environmental reports, 36–7 equity issue of further, 199–202 method of accounting, 246–8 minority interests, 237 equity dividends, 91, 197, 202 equity-settled share-based payment transactions, 231–2 estimation techniques, 13 Eurobond market, 189 European Union directives, 53, 273, 276 exceptional items, 69–71, 246, 275 exchange differences, 250 exchange rate Euro, 253 floating, 249–57 fluctuations (1994 to 2004), 253 –5 movements (mitigating the effect), 253–4 US dollar, 254 Yen, 254 exercise period, 204 exercise price, 85, 201, 204 expenditure, commitments, 153 exports, 136, 41 extended warranty, 59 factoring, 135–6 fair value (in acquisitions), 120–1, 238 Federal Reserve Bank, 192 FIFO (first in, first out), 124, 126 finance, provision of (factoring), 136 finance costs, 71–3, 173 – finance leases, 153–4 financial derivatives, 189 financial ratios, 264 gearing, 180 liquidity, 148 Financial Reporting Council (FRC), Financial Reporting Exposure Drafts (FREDs), 5, 209, 278, 280 Financial Reporting Review Panel (FRRP), 3–4, 11 Financial Reporting Standards (FRSs), 5, 11 FRS 1, Cash flow statements, 76, 143, 166, 217, 219, 220, 260 FRS 2, Accounting for subsidiary undertakings, 73 FRS 3, Reporting financial performance, 53, 69–70, 71, 83, 89, 90, 106, 261 315 FRS 4, Capital instruments, 177 FRS 5, Reporting the substance of transactions, 76, 125, 136 –7, 143, 179 –80, 213 FRS 6, Acquisitions and mergers, 73 FRS 7, Fair values in acquisition accounting, 73, 238, 239 FRS 8, Related party disclosures, 209 FRS 9, Associates and joint ventures, 73, 243, 246 FRS 10, Goodwill and intangible assets, 114, 73, 76, 80, 109, 113, 238, 260 FRS 11, Impairment of fixed assets and goodwill, 73, 100, 103, 115 FRS 12, Provisions, contingent liabilities and contingent assets, 150–1 FRS 13, Derivatives and other financial instruments, 163, 184, 186, 188, 222, 256 FRS 14, Earnings per share, 79, 85 FRS 15, Tangible fixed assets, 72, 76, 99, 103, 104, 105 – FRS 17, Retirement benefits, 64, 65, 67, 158 FRS 18, Accounting policies, 12, 18, 89, 92 FRS 19, Deferred tax, 157–8, 160–1 FRS 20, Share based payment, 68, 158, 206 FRS 21, Events after the balance sheet date, 215, 216, 241 FRS 22, Earnings per share, 79, 84, 85 FRS 23, The effects of changes in foreign exchange rates, 257 FRS 25, Finance instruments: Disclosure and presentation, 12, 91, 137, 174 –5, 177, 179, 186 FRS 26, Financial instruments: Recognition and measurement, 183, 186, 257 FRS 29, Financial instruments: Disclosures, 260 316 Index Financial Reporting Standard for Smaller Entities (FRSSE), 230, 231–2 financial review, 36 financial statements, 1–3 Financial Times, 45, 55, 83 FIRST CHOICE HOLIDAYS 111, 113, 114, 183–4, 194 first in, first out (FIFO), 124, 126 fixed assets 15 Companies Act requirements, 99 expected useful life, (changes in), 103 intangible, 109–15, 238, 265 investment properties, 106 investments, 116–21 ratios, 107–8 revaluation, 104–6 sales and other disposals, 106 tangible, 99–108, 238 valuation of, 104–5 fixed charge, 169 fixed charge cover, 265, 266 fixed instalment method (depreciation), 101–2 floating charge, 169 floor, 190 FOCUS SOLUTIONS, 85 foreclosure, 169 foreign currency, 18 accounting policies, 255 swaps, 189 foreign currency translation group accounts, 251–2 individual companies, 249–51 temporal method, 252–3 UK accounting standard, 249 foreign equity investments, 250 foreign exchange, 249–57 accounting problems, 249 current UK practice, 253 hyperinflation, 252 mitigating the effect of currency fluctuations, 253–4 recent fluctuations, 253–5 temporal method, 252–3 UK accounting standard, 249 what analyst should study, 255–7 forward contract, 187, 188 FRC (Financial Reporting Council), FREDs (Financial Reporting Exposure Drafts), 5, 209, 278, 280 free cash flow (FCF), 217, 224–5, 226 freehold land and buildings, 104 FROGMORE ESTATES, 207 FRSSE (Financial reporting standard for smaller entities), 230, 231–2 fully listed companies, 8–9, 282 funded pension scheme, 64 futures contract, 188 gearing effect of, 168 financial, 180, 181 operational, 181, 182 ratios, 180–3 GENMAB, 79 Generally Accepted Accounting Principles see UK GAAP GKN, 152 GLAXOSMITHKLINE, 41, 141, 142, 187, 189, 258 GLENMORANGIE, 122 GLOBAL CROSSING, 55 going concern, 12, 27, 49 golden shares, 197 goodwill, 109–11 on acquisition of associates, 247 on consolidation, 236, 238 immediate write-off, 260, 264 negative, 111 old, 110 positive, 110 purchased, 114, 238 government grants, 107 GREAT PORTLAND ESTATES, 176 Greenbury Committee Report, 43 gross equity method, 244–5 gross redemption yield, 171–2 gross turnover, 246 group, 234 changes in composition of, 261 group accounts, 234–5 foreign exchange in, 251–2 profit and loss account, 73, 252 GROUPE CHEZ GERARD, 108 GUS, 135, 244 –5 half year on half year comparisons, 275 HALMA, 101, 200, 201 Hampel Committee, 43 HANSON, 201 headline earnings, 70, 83 hedge accounting, 188, 194 –5 hedging, 188 held for trading (HFT), 143 – held-to-maturity investments, 119 –20 hidden gearing, 153 Higgs Report, 43 hire purchase, 18, 134–5 historical cost, 100 historical cost (HC) accounting, 100, 270–2 inflation and, 270–1 historical PER, 86 historical (spot) rate of exchange, 249 historical summaries, 258–63 accounting changes made by company, 261 acquisitions, 261 changes in accounting standards, 260 changes in business environment, 261 changes in composition of group, 261 continuing/discontinued operations, 261–3 inflation, 260 holding (parent) company, 73 holdings interlocking, 118 significant, 117–18 HOME RETAIL GROUP, 120, 121, 139, 144 horizontal analysis, 74 Hutchings, Greg, 45 hybrid grants, 107 hyperinflation, 252 ICELAND, 58 ICI, 150, 163 – 4, 214 IDEAL SHOPPING DIRECT, 158 –9 immediate write-off, 76, 260, 264 Index impairment of fixed assets, 115, 103–4 subsequent to acquisition charge, 110 review, 110 income cover, 173 inflation, 269–72 effect on share schemes, 206–7 historical cost accounting with, 270–1 historical summaries, 260 impact of modest level, 271–2 Retail Price Index (RPI), 259, 267, 272 information auditors’ access to, 28 on quality of management, 42 on subsidiaries, 73 users and, 2–3 infrastructure assets, 104 Institute of Investment Management and Research (IIMR) see UKSIP intangible fixed assets, 109–15, 238, 265 interest, 169–70 held on long-term basis, 249 paid, 71–2 participating, 116 interest rate caps, 190 collar, 190 sensitivity, 181 swaps, 188, 189–90 interim reports, 273–7 interlocking holdings, 118 internal controls, 47 internally-developed tangibles, 114 International Accounting Standards (IAS), IAS Presentation of financial statements, 53, 70–1, 93, 95, 139 IAS 2, Inventories, 130 IAS Cash flow statements, 213, 228 IAS Accounting policies, changes in accounting estimates and errors, 90, 93 IAS 11 Construction contracts, 130 IAS 12 Income taxes, 160 IAS 14 Segment reporting, 79 IAS 16 Property, plant and equipment, 160 IAS 17 Leases, 154 IAS 18 Revenue, 60–1 IAS 19 Employee benefits, 65, 67 IAS 21 The effect of changes in foreign exchange rates, 257 IAS 23 Borrowing costs, 73 IAS 24 Related party disclosures, 212 IAS 31 Financial reporting of interests in joint ventures, 245 IAS 32 Financial instruments: Disclosure and presentation, 183, 184 IAS 33 Earnings per share, 85 IAS 34 Interim financial reporting, 276, 277 IAS 37 Provisions, contingent liabilities and contingent assets, 154 IAS 38 Intangible assets, 69, 109, 110, 112, 114 IAS 39 Financial instruments: Recognition and measurement, 119, 120, 138, 139, 143, 194 – IAS 40 Investment property, 160 International Accounting Standards Board (IASB), 12, 232 international factoring, 136 International Financial Reporting Standards (IFRS), 5, 8, 12, 53, 90, 93 – 4, 95 IFRS First-time adoption of IFRS, 54, 282–3, 288 IFRS Share-based payment, 68 IFRS Business combinations, 109, 110, 114, 242 IFRS Non-current assets held for sale and discontinued operations, 71 IFRS Financial instruments disclosures, 183, 184 IFRS Operating segments, 79 compared with UK GAAP, 278 – 80 impact of change from UK GAAP, 281 timing of implementation, 281–2 317 interpretation and ratio analysis, 74 –7 investment in associates, 116–17 balance sheet presentation, 118 disclosure requirements, 143 fixed asset, 117 income, 73 in joint ventures, 117 properties, 104, 106 significant holdings (disclosure), 117–18 in subsidiaries, 116 types of, 141 unlisted, 120 investment ratios, 85–7, 264 Investors Chronicle, 150, 180, 292–5 invoice discounting, 136 JARVIS, 57–8 JERSEY ELECTRIC COMPANY, 100 joint arrangement (not an entity), 243 – joint ventures, 117, 243, 244 –6 KBC ADVANCED TECHNOLOGIES, 128 Keegan, Mary, 56 key performance indicators (KPIs), 28, 40 financial, 30 non-financial, 30, 232 KINGFISHER, 79–80, 117, 200 LAING (JOHN), 128 land and buildings, 102, 104 LAND SECURITIES, 73 LASTMINUTE.COM, 58–9 LAW DEBENTURE CORPORATION, 170 LEADING LEISURE, 32 leases finance, 153–4 operating, 153 leverage effect, 180–1 liabilities contingent, 214–15, 256 current, 15, 148 licences, 113 318 Index LIFFE (London International Financial Futures Exchange), 188 limited liability partnerships (LLPs), liquid resources, 220 liquidity ratios, 148–50 Listing Rules, see ‘Purple Book’ loan capital, 167–84 loan notes, 32–3 loans flexible facilities, 166 receivable, 138 security given to the lender, 168 LOCKER GROUP, 107–8, 275 London Inter-Bank Offer Rate (LIBOR), 165 London International Financial Futures Exchange (LIFFE), 188 LONDON MERCHANT SECURITIES, 199 long-term contracts, 127–8 Long Term Credit Management (LTCM), 192 Long Term Incentive Plans (LTIPs), 204 LONMIN, 222, 252, 255–7, 258 LONRHO, 252, 258 loss-makers (estimating current year profits), 40 LOWSON GROUP, 118 LTIPs (Long Term Investment Plans), 204 MANAGEMENT CONSULTING GROUP, 26, 27, 68, 113, 161–2, 285–7 manufacturing companies, 122 margins (profit), 75, 41 market rating, 82 marking to market, 141 MARKS & SPENCER, 24–5, 26, 29, 82, 134, 135, 174 matching principle, 122 materiality, 13 Maxwell, Robert, 80–1, 118, 210 MAXWELL COMMUNICATION CORPORATION, 80–1, 118, 197 MEDEVA, 216 medium-sized companies, 232 Memorandum of Association, 197 MERCHANT RETAIL GROUP, 58 merger accounting, 241 mezzanine finance, 171 MFI, 57 minority interests, 236, 237 MITIE GROUP, 83–4, 201, 267–8 ML LABORATORIES, 251 modified historical cost, 100 monetary assets/liabilities, (in foreign currencies), 250 mortgage debenture, 169 MORRISONS SUPERMARKETS, 31 Nadir, Asil, 42 narrative disclosures, 187 narrative reporting, NATIONAL GRID, 38, 46, 48, 163, 184, 241 negative goodwill, 111 negative pledge, 165 net assets, 15–16 net book value, 99, 102 net debt (reconciliation), 219, 220 net realisable value, 124, 125 net redemption yield, 172 NETCALL, 57, 90 new product development, 41 NEXT, 177 nomination committees, 45–6 non-adjusting events, 216 non-audit services, 48 non-cash items, 221 non-disclosure (segmental information), 78 non-equity shares, 198 non-executive directors, 45 non-mandatory statements (ASB), 23 non-monetary assets (foreign), 250 non-recourse financing, 136 normalised earnings, 70, 83 notes (and loan notes), 32–3 numerical disclosures, 190–1 OFEX, off-balance sheet financing, 153 open offer, 200 operating and financial review (OFR), 11, 35–42 operating lease rentals, 64 operating leases, 18, 213–14 operating profit, 52–3 operating ratios, 75–6, 264 operational gearing, 181, 182 options (put), 177 options, granting of, 204 options contract, 188 ordinary shareholders, profit attributable to, 199 OUR PRICE, 41 over-the-counter (OTC) market, 188 overdrafts, 164–5 cost of borrowing on, 164 fluctuations in amount, 164–5 vulnerability, 165 overheads in cost of stock, 124 overseas opportunities for growth, 41 overtrading, 76 P/E ratio see PER P&O, 128 parent company, 73 partially owned subsidiary, 234 participating interest, 116 participating preference share, 198 patents, 113 payments received on account, 147 PEARSON, 169 PEG (price earnings growth factor), 86 pension schemes, 18 accounting for costs, 64 defined benefit, 64–5 defined contribution, 64 disclosure of information, 65 types of schemes, 64 PENTRE, 108 PER (price earnings ratio), 82, 85–6 PER Relative, 86 performance share plans, 204–5 PERGAMON, 118 phantom share schemes, 206 PIC INTERNATIONAL, 137 PILKINGTON, 41 placing (of shares), 200 plant and machinery, 100, 102 PLUS Markets, 5, 6, 282 political donations, 26 POLLY PECK, 42, 88, 221, 256 POLYGON HOLDINGS PLC, 40 positive goodwill, 110 Index post balance sheet events, 241 pre-despatching, 56 pre-tax profit, 53 preference dividends, 72, 93, 202 preference shares, 198 price earnings growth factor (PEG), 86 price earnings ratio (PER), 82, 85–6 price earnings ratio (PER) Relative, 86 pricing issues from stock, 124 prior period adjustments, 89 prior period items, 89 private company, profit attributable to ordinary shareholders, 199 estimating current year, 40–1 operating (trading), 52–3 pre-tax, 53 retained, 41–2 taking (timing), 135 trading, 75, 77 profit/volume (P/V) chart, 181, 182 profit and loss account, 2, 13–14, 17, 74–87 consolidated, 237, 244 exceptional items, 69–71 formats, 52–3 group, 73, 252 parent company’s, 73, 235 ratios, 75–6 retirement benefits, 64–7 segmental reporting, 73 profit margin, 75 profit taking (timing), 135 profitability, analysis of segments, 77–8 property sector (PER), 86 proportional consolidation, 245–6 prospects, longer-term, 41–2 prospective PER, 85 PROTHERICS, 258, 57 provisional fair values (acquisitions), 239 provisions, 150–3 prudence concept, 92 public company, publishing rights, 113 purchase intangibles, 113 purchased goodwill, 114, 238 Purple Book (UKLP’s listing rules), 207, 209 ‘put’ option, 177, 188 putting it all together (Charterhouse Communications), 290–5 quasi-subsidiaries, 179 QUEENS MOAT HOUSES, 105 quick ratio, 149–50 quoted investments, 238 QWEST COMMUNICATIONS, 55 RANK, 81, 215 ratios, 264 capital-based, unreliable, 264 capex per share/cash flow per share, 226–7 cash flows, 226–7 choice of, 264 costs of sales to stock, 129 cumulative depreciation to cumulative cost, 108 current, 148–9 debt/equity, 180 debt collection period, 132–3 financial, 180, 264 fixed asset, 107–8 fixed charges cover, 183, 265, 266 gearing, 180–3 horizontal analysis, 74 investment, 85–7, 264 leverage effect, 181 liquidity, 148–50 main ratios, index, 264 operating, 75–6, 264 operational gearing, 181, 182 payout, 87 price earnings (PER), 82, 85–6 profit margin, 75 quick, 149 –50 return on capital employed, 75– 6, 167, 181, 264 sales to capital employed, 76 stocks to cost of sales, 129 stocks to turnover, 129 tangible fixed assets, 107–8 total returns to shareholders, 265, 266 trade creditors/sales ratio, 148 trade debtors to sales, 132 trading profit to sales, 75 319 vertical analysis, 75 working capital, 147–8 working capital to sales, 148, 223 reconciliation net cash flow to net debt, 219 recoverable amount, 115 redeemable preference share, 198 redemption date, 172 yield to, 171–2 reducing balance method of depreciation, 102–3 REGENT INNS, 200 related parties, 210–12 Remuneration Committee, 45, 46 remuneration report, 46–7 renewals method (depreciation), 103 replacement cost, 238 report and accounts, 1–2 sequence of study, 32 research and development, 23, 41 expenditure, 69 reserves, 202–3 capital redemption, 203 capital and revenue, 202 revaluation, 203 share premium account, 202 undistributable, 93, 202 write-off against (goodwill), 260 residual goodwill, 114 RESORT HOTELS, 33 rest period (convertibles), 176 Retail Price Index (RPI), 259, 267, 272 retirement benefits, 64–7 return on capital employed (ROCE), 75–7, 181, 260, 264 REUTERS, 142, 191 revaluation assets, 104–5, 114 reserve, 203 revenue-based grants, 107 revenue recognition, 55, 56, 60–1 revolving credit facility, 166 rights (intangible assets), 113 rights issues, 199–200 ‘ring fence’ clause, 170 RIO TINTO, 192, 223–4, 246 risk management, 27, 38 RMC GROUP, 107, 116, 222, 237, 238, 274 rogue traders, 188 320 Index ROK PLC, 19–21 round tripping, 222 Rowland, Tiny, 258 ROYALBLUE GROUP, 112, 120, 283–4 SAATCHI & SAATCHI, 117 SAINSBURY, 48, 75, 132 ST IVES, 147 sale and leaseback, 179–80 sales (turnover) cost of, 52 of fixed assets, 104 sales to capital employed in trading, 76 Sandilands, Francis, 269 Save-As-You-Earn (SAYE) share option schemes, 204 SCHRODER ASIA PACIFIC FUND, 202 SCHRODERS, 204 scrip dividends, 201 scrip issues, 200–1 seasonal businesses, 275–6 security (bank loans), 165 segment reporting, 73 segment analysis, 77–9 share-based payment, 68, 208 share capital, 197–9, 174–5 authorised, 197–8 control, 197 cumulative preference, 198 deferred, 199 issue of further equity, 199–202 issued (called up), 197–8 non-voting, 199 options, 85 ordinary, 199 participating preference, 198 preference, 198 redeemable preference, 198 reduction of, 207–8 of subsidiaries, 235 types of, 198–9 warrants, 201–2 share issues rights, 199–200 scrip, 200–1 share option charges, 68 share option schemes, 204, 205–6 share premium account, 202–3 share schemes, types of, 203–4 share splits, 201 shareholders profit attributable to ordinary, 199 relations with, 49 total shareholder return, 204, 265 shares company purchasing own, 207 further information on, 199 golden, 197 ordinary, 199 own, purchase of, 26 potential ordinary, 85 rights issues, 199–200 scrip dividends, 201 splits, 201 SHELL, 152, 187, 190, 192, 213 ‘shell’ company, 82 Sherlock Holmes approach (to cash flow), 227 short-term investments, 142 significant holdings, 117–18 significant influence, 249 small and medium-sized companies, 6, 230 –3 concessions, 230–1 SMITH (W.H.), 41, 183, 207, 225, 266 SMITHS GROUP, 151 SOCK SHOP, 63 SORPs (Statement of Recommended Practice), 5, 11 SOUTH STAFFORDSHIRE GROUP, 103 spot rate, 249 SPRING RAM, 126–7, 149 SSAPs see Statements of Standard Accounting Practices SSL International, 185 ST IVES, 62–3 staff costs, 52, 62 particulars of, 63 STAGECOACH GROUP, 225 State Earnings-Related Pension Scheme (SERPS), 64 statement of directors’ responsibilities, 27–8 Statement of Principles (StoP), 11–12 Statement of Total Recognised Gains and Losses (STRGL), 88, 247 Statements of Recommended Practice (SORPs), 5, 11 Statements of Standard Accounting Practice (SSAPs), 11 SSAP Accounting for government grants, 107 SSAP Stocks and long-term contracts, 122, 124, 127– SSAP 13 Accounting for research and development, 69, 109, 112, 157 SSAP 19 Accounting for investment properties, 106 SSAP 20 Foreign currency translation, 249, 250, 255 SSAP 21 Accounting for leases and hire purchase contracts, 64, 153, 213 SSAP 22, 110 SSAP 24 Accounting for pension costs, 64 SSAP 25 Segmental reporting, 73, 77 stock, 18, 122–30 average prices, 124 change, 52 consistency in valuing, 123 dead, 122–3 different classes, 122 dividends, 201 fair value rules, 238 FIFO, 124 long-term contracts, 127–8 manufacturing business, 124 matching principle, 122 pricing issues from, 124 ratios, 128–9 replacement cost, 238 of retail business, 123–4 rising (dangers), 125–7 sub-classification, 122 valuation, 123 stocks/cost of sales ratio, 129 stocks/turnover ratio, 129 stockturn, 129 STORM GROUP, 103 straight line method of depreciation, 16, 101–2 Index strike rate, 190 subsidiaries disposal of, 237 foreign exchange and, 252, 253 holding company, 234 investment in, 116 partially owned, 234 statutory requirements, 73 wholly owned, 234 year of acquisition/disposal, 237 subsidiary undertaking, 73, 116, 235 substance over form, 12 substantial acquisitions, 240 substantial shareholdings, 26 supplier payment policy, 25–6 swaps currency, 188, 189 interest rate, 189–90 to reduce borrowing costs, 189–90 SYGEN, 53, 63, 69–70, 72, 253 tangible fixed assets, 99–108, 238 TARSUS GROUP, 210–12 TATE & LYLE, 37, 39, 142, 188, 191, 192 tax reconciliation note, 159–60 taxation, 155–62 in balance sheet, 155–62 deferred, 18, 156, 157–9 permanent differences, 156, 160 in profit and loss account, 73, 156–7 timing differences, 157, 160 temporal method (foreign exchange), 252–3 TESCO, 49, 75, 106, 124, 146, 223, 258, 259, 260 THORNTONS, 261, 265, 275–6 ‘Tickler’ clause, 170 TOMKINS, 45 TOROTRAK, 29 total return, 171 total return to shareholders, 265, 266 total transaction value (TTV), 58, 59 trade creditors, 146, 148 trade creditors/sales ratio, 148 trade debtors, 131–4, 136 trade receivables, 139 trademarks, 113 trading profit, 75, 77 trends, 267 true and fair override, 110 trust deed, 170 TT ELECTRONICS, 117, 221, 235, 256 Turnbull Report, 43 turnover, 18, 55, 246 Tweedie, Sir David, 105, 153, 264 –5 UK GAAP, 12, 90, 95 – main components, compared with IFRS, 278–80 UK Listing Authority (UKLA) listing rules, 43, 62, 207, 209, 273 ULS (unsecured loan stock), 168, 169–70 undertakings, associated, 73 undistributable reserves, 202 unfunded pension scheme, 64 uniform dollar concept, 260 UNIQ, 166 UNILEVER, 150, 152, 264, 265 unit cost, 125 unlimited company, 6–7 unlisted companies, 9, 282 unsecured loan stock (ULS), 168, 169 –70 Urgent Issues Task Force (UITF), –5, 11, 60, 252 useful economic life, 100 321 valuations, 99 of assets, 104–6 of stock, 123 value added tax (VAT), 132, 155 vertical analysis, 75 VODAFONE, 48, 146, 184 voting rights, 249 vulnerability to interest rates, 165 ‘war chest’, 222 warrants, 177, 201–2 WASTE RECYCLING GROUP, 80, 240 WATERMARK, 78, 260 WEARWELL, 42 weighted average price, 124 WEIR, 255 whistleblowing, 48 WHITBREAD PLC, 288 wholly owned subsidiary, 234 WIGGINS, 4, 56 WILMINGTON GROUP, 27–8, 31, 65 –7 WIMPEY (GEORGE), 34, 43, 44, 48, 49 window dressing, 216 with recourse (factoring), 136 without recourse (factoring), 136 wonder growth by acquisition, 82–3 work in progress, 122 working capital, 147–8, 219 additional, for expansion, 223 working capital/sales ratio, 148, 223 WORKSPACE GROUP, 24, 25, 27 WORLDCOM, WYEVALE GARDEN CENTRES, 212–13 year of acquisition or disposal, 237 yields gross redemption, 171–2 redemption, 171–2 running, 171 ... Holmes, Geoffrey Andrew Interpreting company reports and accounts / Geoffrey Holmes, Alan Sugden, Paul Gee -10th ed p cm ISBN-13: 978-0-273-71141-4 Financial statements Corporation reports I Sugden,... visit us on the World Wide Web at: www.pearsoned.co.uk www.ebook3000.com Interpreting Company Reports and Accounts TENTH EDITION Geoffrey Holmes Alan Sugden Paul Gee www.ebook3000.com Pearson Education... major shareholder(s), whether the company has future plans for ‘going public’ and its relations with suppliers and customers outside the UK 10 Interpreting company reports and accounts Convergence