Accounting Systems 1

Vysoká škola finanční a správní

Jaromír R. Stembergjaromir@mail.vsfs.cz

Course Layout

• Three two-hour lessons• Three credits• The course is to generalize, integrate, and broaden

the financial accounting knowledge, acquired during previous studies, by - introduction of selected accounting theories - presenting multiple views at accounting - outlining special needs of the management

- pointing out international accounting issues

Literature

• Nobes, Ch: Comparative International Accounting Harlow: Prentice Hall, Financial Times, 2008

• Roberts, C.B.: International Financial Accounting: A Comparative Approach London, San Francisco, Kuala Lumpur: Financial Times, Pitman, 1998

• Schroeder, R. G.: Financial Accounting Theory And Analysis: Text And Cases Hoboken: John Wiley and Sons, 2009

Grading

• Pass / Fail

• Attendance: 45% each two-hour lesson 15%(late arrival -5%)

• Paper: 55%correctness, presentation of facts 20%originality, own views 15%formal appearance + grammar 10%on-time submission 10%

• Minimum to pass: 65%

Paper

• Topic:Contents and usage of one of the IAS/IFRS standards (pick one of your choice that is still valid)

• Required length: 3 standard A4 pages of text, font size 10 or 11 pts.excluding cover page, footnotes and literature

• Due:December 13, 2010 at 17:30 the latesteither a MS Word file sent via e-mail or a hard copy presented before the lesson

Contents

• Introduction- history of money and accounting - the role and functions of accounting- management information systems - characteristics of accounts and balanced principle

• Accounting Statements- the nature and role of the balance sheet - theories of balance and their development- creation of the second balance - third and fourth balance, their formation and construction

Contents

• Concept of capital- preservation of the capital substance of a company- ways of addressing it

• Accounting systems in the world- characteristics of accounting systems- process of accounting harmonization- US GAAP- IAS/IFRS, link to the directives of the European Union

History of Money and Accounting

Barter Trade

• Exchange of personal possessions of value for other goods

• From 9,000-6,000 B.C., livestock was often used as a unit of exchange; as agriculture developed, people used crops for barter

• This kind of exchange started at the beginning of humankind and is still used today

Barter Trade Problems

• Finding the other party: - interest - time

• Establishing equal value of exchanged goods• Durability of the exchanged goods, potentiality to

store it• Need for a common, durable, storable, non-decaying,

generally accepted unit of exchange

Cowry Shells

• The first money (or medium of exchange)• Began to be used at about 1200 B.C. in China• Accepted in some African regions till 1950s

Metal Coins

• China, 1000 BC: Bronze and copper cowry imitations were considered the earliest forms of metal coins. They contained holes so they could be put together like a chain.

• Lydia (Turkey), 500 BC:The first coins developed out of lumps of silver and were stamped with emperors to mark their authenticity. The techniques were quickly copied by the Greeks, Persians, and the Roman Empire. Unlike Chinese coins, these were made from precious metals such as silver and gold, which had more inherent value.

Banknotes

• China, 100 BC:Leather money – pieces of painted white deerskin.

• China, 800 AD:The first paper banknotes appeared.

• China, 1450 AD:Printing money led to a soaring inflation so the use of paper money in China disappeared (this was still years to come before paper currency would be used in Europe).

Development of Accounting

• Babylon, 18th century B.C.- first organized records kept to account for assets and loans- other ancient civilizations (Roman Empire, Greek Cities, Egypt) followed

• Europe, 1st millennium A.D.fall of the Roman Empire caused serious setback in education

• Italy, 13th century A.D. - growing trade in the Mediterranean and accumulation of wealth in Italy gave grounds to the development of banking- double-entry bookkeeping was invented by Luca Pacioli

Modern Times Accounting

• 17th century France: - obligation to present bi-yearly balances of financial situation

Italy:- complete theory of accounting

Holland:- first corporation established, need for equity accounting

• 19th century- massive increase of accounting operations- perfection of accounting principles- rules for asset evaluation

Current History of Accounting in USA

• 1938: American Institute of Certified Public Accountants began to develop accounting standards (request of the Securities and Exchange Commission)

• 1959: Accounting Principles Board established, introduction of GAAP

• 1971: growing criticism of inconsistency, APB replaced by the Financial Accounting Standards Board (full-time professionals)

• 2002: Sarbanes-Oxley Act (SOX) to ensure ethics in reporting

Current Accounting History in Europe

• 1973: - the International Accounting Standards Board (IASB) formed- start of development of International Accounting Standards (IAS)

• 2001:- 41 IAS issued so far- all new standards are called International Financial Reporting Standards (IFRS)

• 2005: - all listed EU companies are required to use IFRS- IFRS becomes a standard for many non-European countries

Principles of Accounting

Accounting Systems

The term of “Accounting System” can be understood as

• Structure of recording(cash or accrual accounting)

• Purpose of record keeping(financial or managerial accounting)

• SW, ERP system(SAP, Oracle, Navision, …)

• Accounting standards(national standards, IAS/IFRS, GAAP)

Record Keeping

• Information – a basic management tool needed for - past references and reporting- present registration and evidence - future planning and management decision making

• Registered entries keep track of: - amount how much- count how many- time when- place where- person who

Double-Entry Accounting

• Accounts- recognition of individual transactions- debit and credit to be recorded at the same time

• General Ledger (hlavní kniha)- transactions recorded in accounts, total of both sides must be equal- can be extended by subsidiary ledgers

• Journal (účetní deník)- transactions recorded in order as they occurred- both sides of the record must be equal

Management Information Systems

• Computerization of accounting- need to process high volume of transactions- financial statements change with every new transaction

• Management information systems development1960s: first civil use of computers for accounting in USA1970s: a mainframe and work stations became a standard corporate equipment, custom-made MIS 1980s: mass personal computer utilization started with standardization of HW and DOS, off-shelf accounting SW,

Microsoft, SAP and Oracle go public1990s: Y2K virus scare, mass replacement of HW+SW, internet boom, MS Windows, 2000s: development of enterprise resource planning systems

Purpose of Record Keeping

• Financial accounting- provides information for owners, investors and other stake holders- serves as a base for income tax due calculation- subject to regulations by accounting standards- must be true and honest

• Managerial accounting- serves the managers as base for strategy planning and decision making- provides specified pieces of information - outcomes don’t have to be understood by the general public

Multiple Balance Accounting Systems

Balance Sheet

Assets LiabilitiesCurrent Assets Current LiabilitiesCash and Equivalents Short-Term Accounts PayableShort-Term Receivables Current Tax PayableInventory Short-Term Loans and BorrowingsAccruals and Other S/T Assets Accruals and Other S/T Liabilities

Long-Term Assets Long-Term LiabilitiesIntangible Fixed Assets Long-Term PayablesTangible Fixed Assets ProvisionsLong-Term Receivables

Owners’ Equity Share CapitalShare Premium and Capital FundsRetained EarningsY-T-D Profit (Loss)

Single-Balance Accounting System

• Balance Sheet can be the only financial statement for accounting

- focused on expressing the structure of assets and their sources

- results of business conduct are summarized in aggregate figures

• Disadvantages of single-balance accounting system- makes it difficult to monitor and review transactions- the balance sheet must be re-done after every transaction- to keep track of changes, all previous B/Ss must be preserved for comparison

Double-Balance Accounting System

• Introduces Profit & Loss Statement - good supplement to the Balance Sheet - focuses also on result – revenues and expenses- noticeably higher explanatory ability than the single-balance

system- gives not only balances at a given time but also results over

a period of time• Disadvantages of double-balance accounting system

- accrual accounting doesn’t keep track of cash-based results over a time period

- doesn’t trace changes in equity over a time period- to keep track of these changes, all previous B/Ss would have to be preserved for comparison

RevenueMaterialProduction Exp.CommissionOther Selling Exp.

Cost of Goods Sold

Gross ProfitMarketingAdministrationOffice Exp.ConsultantsDepreciationOther Exp.

Total G&A Expenses

Profit from OperationsFinancial IncomeFinancial Exp.

Net Financial Result

Profit before TaxCorporate Income Tax

Net Profit

Triple and Quadruple Balance Systems

• The Third Balance introduces the Cash Flow Statement (or Statement of Changes in Financial Position)

• The Forth Balance introduces the Statement of Changes in Equity

• If kept truly, honestly and in accordance with the standards, the Quadruple Balance Accounting System gives, together with the Footnotes, a full picture of the accounting in a sufficient manner

Cash Flow StatementCash - Beginning of Period +Net Profit +Accounts Receivable Increase -Inventory Increase -Accounts Payable Increase +Reserves Increase +Depreciation +Cash Flow from Operations = +Fixed Assets Purchase -Fixed Assets Sale +Cash Flow from Investments = +Loans Re-Paid -Loans Taken +Cash Flow from Financial Transactions = +Cash - End of Period =

Statement of Changes in EquityShare

CapitalCapital Funds

Statutory Funds

Retained Earnings

Current Period Profit

Total Equity

Balance at 31 Dec. X-1

20 000 374 4 304 9 050 33 728

Distribution of profit or loss

26 5 024 -9 050 -4 000

Change in share capital

0

Dividends paid 4 000 4 000

Payments from capital funds

0

Profit or loss current period

9 954 9 954

Balance at 31 Dec. X

20 000 400 13 328 9 954 43 682

Quadruple Balance Principle

cash at the end of period

liabilities operational expensesrevenue from

operationscapital

(= capital at the beginning +net chngs current period)

fixed assetsnet profit current

period

cash disbursements(= dividends paid +

other cash disbursements)

cash incomecash at the end of

period

cash at the beginning

other current assets other revenueother expenses

net profit current period

net changes current period

Balance Sheet

Statement of Canges in EquityCash Flow Statement

Profit & Loss Account

net profit previous period

dividends paid

Closing Procedures

Year-End Entries

• End of the year requires to perform certain closing procedures– Depreciation– P&L Accruals and Deferrals– Closing into Income Summary account– Result recognition in the Balance Sheet– Financial Statements + Notes

Depreciation

• Straight-line depreciation: (original cost – salvage value) / periods of useful life

• Units-of-production method: (original cost – salvage value) / estimated units to be produced

• The sum-of-the-years’-digits (SYD) method(original cost – salvage value) * (remaining years / SYD) Example: 5 years = 1+2+3+4+5=15; hence 1st year (original cost – salvage value) * 5/15 2nd year (original cost – salvage value) * 4/15 etc.

• The double declining-balance methodtwice the straight-line rate applied to the remaining book value

World‘s Accounting Models

Anglo-Saxon Model

• Great Britain + its former colonies USA, Canada, Jamaica, India, Australia, New Zealand, English-speaking Africa; also Mexico, the Netherlands, and others

• Historically formed by impact of international trade, capital financial markets and investors

• Accounting it is oriented towards capital investors and influenced by their information needs

• Linked to US GAAP

Continental Model

• Germanic (German-speaking countries), Roman and Francophone (Italy, France, Belgium, Spain, Portugal, French-speaking Africa), Nordic (Scandinavian countries), and mixed (post-communist Europe) sub-models

• Heavily influenced by the government, legislation and taxation, oriented towards government reporting requirements

• Tightly linked to the banking system• Conservative approach, limited willingness to adopt

to requirements of new economic processes

Central Planning Model

• Used in Soviet Union, East Germany, Poland, Czechoslovakia, Hungary, Romania, Bulgaria, China, Vietnam and other communist countries in 2nd half of 20th century

• Still occasionally used (Cuba, North Korea)• Based on needs of planned economy, oriented

towards budget and reporting of accomplishment of budgeted goals

South American Model

• Most of Latin-American countries except of Mexico• Influenced by heavy government regulations and

high inflation• Inflationary accounting calculates with inflation and

reflects it in financial reports• The same financial reports for reporting and tax

purposes, taxation affected by inflation

Financial Reports

Income Statement by KindPROFIT AND LOSS ACCOUNT For The Year Ending 31.12.2009 (in CZK thousand)

31.12.09 31.12.08 31.12.09 31.12.08I. Sales of goods VI. Proceeds from the sale of securities and investmentsA. Costs of goods sold J. Cost of securities and investments sold + Gross margin VII. Income from non-current financial assetsII. Production VII.1. Income from subsidiaries and associates

II.1. Sales of own products and services VII.2. Income from other non-current securities and investmentsII.2. Change in internally produced inventory VII.3. Income from other non-current financial assetsII.3. Own work capitalized VIII. Income from current financial assetsB. Purchased consumables and services K. Costs of financial assets

B.1. Consumed material and energy IX. Income from the revaluation of securities and derivatesB.2. Services L. Costs of the revaluation of securities and derivates + Added value M. Change in reserves and provisions relating to financial activitiesC. Staff costs X. Interest income

C.1. Payroll costs N. Interest expensesC.2. Remuneration to members of statutory bodies XI. Other financial incomeC.3. Social security and health insurance costs O. Other financial expensesC.4. Social costs XII. Transfer of financial incomeD. Taxes and charges P. Transfer of financial expensesE. Depreciation of intangible and tangible fixed assets * Financial profit or lossIII. Sales of fixed assets and material Q. Income tax on ordinary activities

III.1. Sales of fixed assets Q 1. - dueIII.2. Sales of material Q 2. - deferred

F. Net book value of fixed assets and material sold ** Profit or loss from ordinary activitiesF.1. Net book value of sold fixed assets XIII. Extraordinary incomeF.2. Book value of sold material R. Extraordinary expensesG. Change in reserves and provisions relating to operating activities S. Income tax on extraordinary activitiesIV. Other operating income S.1. - dueH. Other operating expenses S.2. - deferredV. Transfer of operating income * Extraordinary profit or lossI. Transfer of operating expenses T. Transfer of share of profit or loss to partners (+/-)* Operating profit or loss *** Profit or loss for the current period (+/-)

**** Profit or loss before tax

Period to Period to

Income Statement by FunctionSales Gross Profit

Cost of Goods Slod: Marketing MaterialsBeginning Inventory of Goods Promotion AgenciesPurchases P/R & CommissionLess: Ending Inventory Travel

Cost of Goods Slod Other Marketing & SalesMarketing and Selling Expenses

Cost of Goods Manufactured: Office ExpensesBeginning Inventory of Raw Materials Administration P/RRax Materials Purchases Office EquipmentLess: Ending Raw Materials Inventory Legal

Raw Materials Used Administrative ExpensesManufacturing Labor Operating Profit

Factory DepreciationUtilities Research and DevelopmentInsurance Financial Income/ExpensesIndirect Labor Profit Before TaxOther Factory Overhead

Factory Overhead Corporate TaxCost of Goods Manufactured Net Income

Gross Profit Net Income per Share

Specialized Income Statement

Specialized Income Statement

Corp. GOV HEA NET TEL ECZ SEC OVHRecurring revenue 298 449 104 155 56 424 76 347 176 29 863 31 079 405Non-Recurring revenue 1 034 716 133 433 51 554 733 590 21 662 51 046 36 216 7 216Revenues 1 333 165 237 588 107 978 809 936 21 838 80 909 67 295 7 621Services 209 587 66 581 22 511 93 770 4 974 14 389 7 352 10Goods & Material 635 465 23 330 7 507 583 223 10 574 1 027 3 273 6 532COGS 845 053 89 911 30 018 676 992 15 548 15 416 10 625 6 542Interdivisions 38 -1 254 -1 055 1 934 31 621 1 497 -1 735Gross Profit 488 151 146 423 76 905 134 878 6 321 66 114 58 166 -656Gross Margin 37% 62% 71% 17% 29% 82% 86% -9%Personnel 273 402 57 648 51 072 52 133 7 909 31 679 29 284 43 677Car & Travel 28 456 5 915 6 684 7 030 943 2 800 2 765 2 319Marketing 13 136 1 534 660 1 705 297 619 527 7 794Office 45 892 8 702 10 311 1 528 1 241 4 360 6 053 13 697Professional Fees 25 486 240 78 771 101 703 146 23 447Other Expenses 7 531 85 114 550 -284 16 -2 7 051Total OPEX 393 902 74 126 68 919 63 716 10 208 40 176 38 772 97 986Operating Profit 94 249 72 298 7 986 71 162 -3 887 25 937 19 395 -98 642Operating Margin 7% 30% 7% 9% -18% 32% 29% -1294%Financial & Extraordinary -1 263 0 0 0 0 0 0 -1 262Allocated OVH -136 34 865 18 888 25 557 59 9 996 10 404 -99 904EBT 93 122 37 432 -10 902 45 605 -3 946 15 941 8 991 0EBT margin 7% 16% -10% 6% -18% 20% 13% 0%

Flash Report

Flash Forecast Flash Budget

Revenue 80 686 86 096 143 496 100 297

Cogs 48 125 53 823 80 946 41 552

GP 32 561 32 274 62 550 58 745

GP margin 40% 37% 44% 59%

Opex 33 138 35 086 64 704 73 069

OP -577 -2 812 -2 154 -14 324

OP margin -1% -3% -2% -14%

Feb 2009 YTD

BALANCE SHEET as of 31.12.200931.12.2008 31.12.2009 31.12.2008

Gross Adjustment Net NetTOTAL ASSETS 37 585 3 390 34 195 23 284 TOTAL LIABILITIES & EQUITY 34 195 23 284

A. Receivables for subscribed capital A. Equity 24 396 17 572B. Fixed assets 12 889 2 836 10 053 2 964 A.I. Share capital 2 000 2 000B.I. Intangible fixed assets 9 782 892 8 890 1 509 A.I.1. Share capital 2 000 2 000B.I.1. Start-up costs A.I.2. Treasury shares and holdings (-)B.I.2. Research and development A.I.3. Changes in share capitalB.I.3. Software 9 782 892 8 890 1 509 A.II. Capital fundsB.I.4. Valuable rights A.II.1. Share premiumB.I.5. Goodwill A.II.2. Other capital fundsB.I.6. Other intangible fixed assets A.II.3. Gains or losses from the revaluation of assets and liabilitiesB.I.7. Intangible fixed assets under construction A.II.4. Gains or losses from the revaluation upon transformationsB.I.8. Prepayments for intangible fixed assets A.III. Statutory funds 400 400B.II. Tangible fixed assets 3 107 1 944 1 163 1 455 A.III.1. Statutory reserve fund / Indivisible fund 400 400B.II.1. Land A.III.2. Statutory and other fundsB.II.2. Structures A.IV. Retained earnings 15 172 13 328B.II.3. Individual movable assets and sets of movable assets 3 107 1 944 1 163 1 455 A.IV.1. Accumulated profits brought forward 15 172 13 328B.II.4. Perennial crops A.IV.2. Accumulated losses brought forwardB.II.5. Breeding and draught animals A.V. Profit or loss for the current period (+ -) 6 824 1 844B.II.6. Other tangible fixed assets B. Liabilities 9 483 1 745B.II.7. Tangible fixed assets under construction B.I. ReservesB.II.8. Prepayments for tangible fixed assets B.I.1. Reserves under special legislationB.II.9. Valuation difference on acquired assets B.I.2. Reserve for pensions and similar liabilitiesB.III. Non-current financial assets B.I.3. Income tax reserveB.III.1. Equity investments in subsidiaries B.I.4. Other reservesB.III.2. Equity investments in associates B.II. Long-term liabilities B.III.3. Other securities and investments B.II.1. Trade payablesB.III.4. Loans and borrowings - controlling entity B.II.2. Payables - controlling entityB.III.5. Other non-current financial assets B.II.3. Payables - substantial influenceB.III.6. Acquisition of non-current financial assets B.II.4. Payables to partners and association membersB.III.7. Prepayments for non-current financial assets B.II.5. Long-term prepayments receivedC. Current assets 24 294 554 23 740 20 320 B.II.6. Bonds issuedC.I. Inventories 4 490 554 3 936 457 B.II.7. Long-term bills of exchange to be paidC.I.1. Material 2 119 10 2 109 9 B.II.8. Estimated payablesC.I.2. Work in progress and semifinished goods 857 857 200 B.II.9. Other payablesC.I.3. Products 332 332 B.II.10. Deferred tax liabilityC.I.4. Animals B.III. Short-term liabilities 9 483 1 745C.I.5. Goods 1 182 544 638 248 B.III.1. Trade payables 3 533 162C.I.6. Prepayments for inventory B.III.2. Payables - controlling entity 3 188C.II. Long-term receivables B.III.3. Payables - substantial influenceC.II.1. Trade receivables B.III.4. Payables to partners and association membersC.II.2. Receivables - controlling entity B.III.5. Payables to employees 801 645C.II.3. Receivables - substantial influence B.III.6. Social security and health insurance payables 531 457C.II.4. Receivables from partners and association members B.III.7. State - tax payables and subsidies 230 199C.II.5. Long-term prepayments made B.III.8. Short-term prepayments receivedC.II.6. Estimated receivables B.III.9. Bonds issuedC.II.7. Other receivables B.III.10. Estimated payables 1 200 282C.II.8. Deferred tax asset B.III.11. Other payablesC.III. Short-term receivables 18 826 18 826 10 098 B.IV. Bank loans and borrowingsC.III.1. Trade receivables 4 479 4 479 1 255 B.IV.1. Long-term bank loansC.III.2. Receivables - controlling entity 8 516 8 516 2 433 B.IV.2. Short-term bank loansC.III.3. Receivables - substantial influence B.IV.3. Short-term borrowingsC.III.4. Receivables from partners and association members C. I. Other liabilities 316 3 967C.III.5. Social security and health insurance contributions C.I.1. Accrued expenses 283 385C.III.6. State - tax receivables 5 644 5 644 6 348 C.I.2. Deferred income 33 3 582C.III.7. Short-term prepayments made 125 125 62C.III.8. Estimated receivables 62 62C.III.9. Other receivablesC.IV. Current financial assets 978 978 9 765C.IV.1. Cash on hand 37 37 17C.IV.2. Cash at bank 941 941 9 748C.IV.3. Short-term securities and investmentsC.IV.4. Acquisition of current financial assetsD. I. Other assets 402 402D.I.1. Deferred expenses 282 282D.I.2. Complex deferred expensesD.I.3. Accrued income 120 120

31.12.2009

COMPANY NAME

BALANCE SHEET as of 31.12.200931.12.08 31.12.09 31.12.08

Gross Adjustment Net NetTOTAL ASSETS 37 585 3 390 34 195 23 284 TOTAL LIABILITIES & EQUITY 34 195 23 284

A. Receivables for subscribed capital A. Equity 24 396 17 572B. Fixed assets 12 889 2 836 10 053 2 964 A.I. Share capital 2 000 2 000

B.I. Intangible fixed assets 9 782 892 8 890 1 509 A.II. Capital fundsB.I.2. Research and development A.III. Statutory funds 400 400B.I.3. Software 9 782 892 8 890 1 509 A.IV. Retained earnings 15 172 13 328B.I.4. Valuable rights A.IV.1. Accumulated profits brought forward 15 172 13 328B.I.5. Goodwill A.IV.2. Accumulated losses brought forwardB.I.6. Other intangible fixed assets A.V. Profit or loss for the current period (+ -) 6 824 1 844B.II. Tangible fixed assets 3 107 1 944 1 163 1 455 B. Liabilities 9 483 1 745

B.II.1. Land B.I. ReservesB.II.2. Structures B.II. Long-term liabilities B.II.3. Individual movable assets and sets of movable assets 3 107 1 944 1 163 1 455 B.II.1. Trade payablesB.II.6. Other tangible fixed assets B.II.9. Other payablesB.III. Non-current financial assets B.II.10. Deferred tax liability

C. Current assets 24 294 554 23 740 20 320 B.III. Short-term liabilities 9 483 1 745C.I. Inventories 4 490 554 3 936 457 B.III.1. Trade payables 3 533 162

C.I.1. Material 2 119 10 2 109 9 B.III.2. Payables - controlling entity 3 188C.I.2. Work in progress and semifinished goods 857 857 200 B.III.3. Payables - substantial influenceC.I.3. Products 332 332 B.III.4. Payables to partners and association membersC.I.4. Animals B.III.5. Payables to employees 801 645C.I.5. Goods 1 182 544 638 248 B.III.6. Social security and health insurance payables 531 457C.II. Long-term receivables B.III.7. State - tax payables and subsidies 230 199C.III. Short-term receivables 18 826 18 826 10 098 B.III.8. Short-term prepayments received

C.III.1. Trade receivables 4 479 4 479 1 255 B.III.10. Estimated payables 1 200 282C.III.9. Other receivables B.III.11. Other payablesC.IV. Current financial assets 978 978 9 765 B.IV. Bank loans and borrowings

C.IV.1. Cash on hand 37 37 17 B.IV.1. Long-term bank loansC.IV.2. Cash at bank 941 941 9 748 B.IV.2. Short-term bank loansC.IV.3. Short-term securities and investments B.IV.3. Short-term borrowings

D. I. Other assets 402 402 C. I. Other liabilities 316 3 967D.I.1. Deferred expenses 282 282 C.I.1. Accrued expenses 283 385D.I.3. Accrued income 120 120 C.I.2. Deferred income 33 3 582

31.12.2009

COMPANY NAME

Balance Sheet

(in CZK thousand) 30.4.2009 31.3.2009 30.4.2008 30.4.2009 31.3.2009 30.4.2008

CURRENT ASSETS CURRENT LIABILITIES

Cash and Cash Equivalents 96 101 80 943 69 682 Short-term payables 128 870 103 512 97 926

Short Term Receivables 153 567 153 271 131 487 Current tax payable 13 554 13 554 0

Inventory 25 647 9 055 11 340 Short-term loans and borrowings 0 0 0

Other Current Assets 20 674 24 122 27 825 Accruals and Other Liabilities 14 911 14 082 17 780Total Current Assets 295 989 267 391 240 334 Total Current Liabilities 157 335 131 148 115 706

NON-CURRENT ASSETS NON-CURRENT LIABILITIES

Intangible Fixed Assets 20 767 20 134 24 917 Long-term payables 16 732 16 885 18 074

Tangible Fixed Assets 24 215 24 105 33 827 Provisions 0 0 0

Long term receivables 66 166 65 891 67 091Total Non-Current Assets 111 148 110 130 125 835 Total Non-Current Liabilities 16 732 16 885 18 074

EQUITY

Share capital 154 869 154 869 154 869

Share premium and capital funds 77 340 79 125 79 126

Retained earnings 861 -4 506 -1 606Total equity 233 070 229 488 232 389

TOTAL ASSETS 407 137 377 521 366 169 TOT LIABILITIES AND EQUITY 407 137 377 521 366 169

Consolidated Balance Sheet as of Apr 30, 2009

(in CZK thousand)

CASH FLOW For the Year ending

STATEMENTPeriod to Period to31.12.09 31.12.08

P. Opening balance of cash and cash equivalents 9 765 19 948Cash flows from ordinary activities

Z. Profit or loss from ordinary activities before tax 9 117 2 713A.1. Adjustments for non-cash transactions 1 217 1 054A.1.1. Depreciation of fixed assets 1 566 888A.1.2. Change in provisions and reserves -203 290A.1.3. Profit/(loss) on the sale of fixed assets -18A.1.5. Interest expense and interest income -128 -124A.* Net operating cash flow before changes in working capital 10 334 3 767A.2. Change in working capital -3 250 -2 452A.2.1. Change in operating receivables and other assets -873 256A.2.2. Change in operating payables and other liabilities 899 -2 527A.2.3. Change in inventories -3 276 -181A.** Net cash flow from operations before tax and extraordinary items 7 084 1 315A.3. Interest paid A.4. Interest received 128 124A.5. Income tax paid from ordinary operations -2 034 -5 603A.*** Net operating cash flows 5 178 -4 164

Cash flows from investing activitiesB.1. Fixed assets expenditures -8 662 -3 586B.2. Proceeds from fixed assets sold 25B.3. Loans provided to related parties -8 516 -2 433B.*** Net investment cash flows -17 153 -6 019

Cash flow from financial activitiesC.1. Change in payables from financing 3 188C.2. Impact of changes in equityC.2.1. Cash increase in share capitalC.2.2. Capital payments to partners C.2.3. Other cash contributions made by partners C.2.6. Dividends paidC.*** Net financial cash flows 3 188F. Net increase or decrease in cash and cash equivalents -8 787 -10 183R. Closing balance of cash and cash equivalents 978 9 765

31.12.2009

Staement of Changes in Equity

STATEMENT OF As of 31.12.2009

CHANGES IN EQUITY (in CZK thousand)

Share capital Capital fundsStatutory

funds

Accumulated profits brought

forward

Accumulated losses brought

forward

Profit or loss for the current

periodTOTAL EQUITY

Balance at 31 December 2002 2 000 374 4 304 9 050 15 728Distribution of profit or loss 26 9 024 -9 050Change in share capitalDividends paidPayments from capital fundsProfit or loss for the current period 1 844 1 844Balance at 31 December 2003 2 000 400 13 328 1 844 17 572Distribution of profit or loss 1 844 -1 844Change in share capitalDividends paidPayments from capital fundsProfit or loss for the current period 6 824 6 824Balance at 31 December 2004 2 000 400 15 172 6 824 24 396

Accounting Systems 2

Vysoká škola finanční a správní

Jaromír R. Stembergjaromir@mail.vsfs.cz

Literature

McEwen, Ruth Ann: Transparency in Financial Reporting: A concise comparison of IFRS and US GAAP Harriman House ltd., Hampshire UK 2009 ISBN-13: 978-1-906659-13-4

Layout of the Course

• Basic principles of IFRS/IAS• Conceptual Framework and reporting requirements• Financial statements: items, recording by IFRS,

US GAAP differences– Assets– Liabilities– Equity– Profit and Loss– Cash Flow

Grading

• Attendance: 30% (6% for each lesson)Short Test: 20% (3rd lesson)Final test: 50%

• Minimum to pass: 60%• 90-100% A (excellent)

85-89% B (excellent minus)75-84% C (very good) 70-74% D (very good minus)60-69% E (good)<60% F (failed)

IFRS and US GAAP

Why do differences exist?

• US Financial Accounting Standards Board (FASB) developed the first set of standards

• International Accounting Standards Board (IASB) had the advantage of being inspired by some of the perceived problems in the FASB standard

• Differences: - in standards themselves- in interpretation

Will the differences ever be eliminated?

• “Norwalk Agreement” in 2002: Both Boards (FASB and IASB) publicly declared their commitment to the convergence of IFRS and US GAAP

• US Securities and Exchange Commission (SEC) eliminated the requirement for foreign issuers to reconcile their IFRS results to US GAAP

• Unless the wording of the standards is totally unified, interpretational differences will almost certainly stay

• Depends on willingness of national regulators and industry groups to cooperate

IAS/IFRS

Standards

• International Accounting Standards (IASs) were issued by the IASC from 1973 to 2000. In 2001, the IASC was replaced by the IASB.

• Since then, the IASB has:

– amended some IASs – replaced some IASs with new International

Financial Reporting Standards (IFRSs)– adopted new IFRSs on topics for which there was

no previous IAS – issued Interpretations of Standards

Compliance with Standards

Financial statements may not be described as complying with IFRSs unless they comply with all of the requirements of each applicable standard and each applicable interpretation

IASB Conceptual Framework

• “IASB Framework for the Preparation and Presentation of Financial Statements” was Adopted by the IASB in April 2001

• Not a standard, serves as a guide • Resolves accounting issues that are not addressed

directly in a standard• If no standard or interpretation applies to a

transaction, an entity must use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable

IAS

IAS 1 Presentation of Financial StatementsIAS 2 InventoriesIAS 7 Statement of Cash FlowsIAS 8 Accounting Policies, Changes in Accounting Estimates and ErrorsIAS 10 Events After the Reporting PeriodIAS 11 Construction ContractsIAS 12 Income TaxesIAS 14 Segment ReportingIAS 16 Property, Plant and EquipmentIAS 17 Leases

IAS

IAS 18 RevenueIAS 19 Employee BenefitsIAS 20 Government Grants and Disclosure of Government AssistanceIAS 21 The Effects of Changes in Foreign Exchange RatesIAS 23 Borrowing CostsIAS 24 Related Party DisclosuresIAS 26 Accounting and Reporting by Retirement Benefit PlansIAS 27 Consolidated and Separate Financial StatementsIAS 28 Investments in AssociatesIAS 29 Financial Reporting in Hyperinflationary Economies

IAS

IAS 31 Interests In Joint VenturesIAS 33 Earnings Per ShareIAS 34 Interim Financial ReportingIAS 36 Impairment of AssetsIAS 37 Provisions, Contingent Liabilities and Contingent AssetsIAS 38 Intangible AssetsIAS 39 Financial Instruments: Recognition and MeasurementIAS 40 Investment PropertyIAS 41 Agriculture

IFRS

Preface to International Financial Reporting StandardsFramework for the Preparation and Presentation of Fin. StatementsIFRS 1 First-time Adoption of International Fin. Reporting StandardsIFRS 2 Share-based PaymentIFRS 3 Business CombinationsIFRS 4 Insurance ContractsIFRS 5 Non-current Assets Held for Sale and Discontinued OperationsIFRS 6 Exploration for and Evaluation of Mineral AssetsIFRS 7 Financial Instruments: DisclosuresIFRS 8 Operating SegmentsIFRS 9 Financial Instruments

Conceptual Framework

• Preparation and Presentation of Financial Statements is to be based on– Accrual principles– Continuity and consistency

• Quality requirements– Understandable– Relevant– Reliable– Comparable

Conceptual Framework

• Basic elements of financial statements– Assets– Liabilities– Owners’ Equity– Revenue– Expenses

• Presentation of Financial Statements – Balance sheet– Income statement– Cash flow statement– Statement of changes in equity– Notes

Reporting Requirements

Financial Statements

No given template nor detail contents of financial statements except of:

• Basics classification of assets, liabilities and equity• Distinction of revenue/expenses and gains/losses• Required items• Notes

Principle of relevance - items must be listed separately if they account for:

• 2% of total assets (B/S)• 5% of total revenue or expenses (P&L)

Classification of Balance Sheet Items

• Assets:– Criteria for long and short-term assets distinction– Assets can be sorted also by liquidity – Both systems are equally acceptable– So is a combination of both

• Liabilities– Use the same distinction as in assets

• Equity– Must be listed separately form liabilities

Assets Required in Reporting

– Property, Plant & Equipment– Investment Property – Intangible Assets– Investment Accounted for Using Equity Method

(investment in companies with capital holding of 20-50%)– Financial Assets– Receivables for Current Tax– Biological Assets– Assets Held for Sale– Inventories– Trade and Other Receivables– Cash and Cash Equivalents

Liabilities Required in Reporting

– Trade and Other Payables– Provisions (must be certain and measurable)– Financial Liabilities– Liabilities for Current Tax– Liabilities for Deferred Tax– Minority Interests

Equity Required in Reporting

Issued Capital and Reserves Attributable to Equity Holders of the Parent

Except of relevancy, IFRS has no other requirements - structure depends on local rules; typically consists of following items:

– Common Stock– Share Premium Account– Additional Paid-in Capital– Funds– Retained Earnings– Net Earnings of current period

P&L Items Required in Reporting

– Revenue– Financial Expenses– Participation on Profit or Loss of Affiliated Enterprise– Profit or Loss on Discontinued Business– Profit or Loss on Revaluation of Assets– Net Earnings for Current Period

P&L Statement has no given structure, can be – vertical or horizontal– by function or by kind

Cash Flow Statement Items Required in Reporting

Cash Flow Statement – is to give clear understanding of sources and usage of cash– has no given structure– can use direct or indirect method

It lists separately– Cash at the Beginning of Period– Cash Flow from Operations– Cash Flow from Investment Activities– Cash Flow from Financial Activities– Cash at the End of Period

Assets

Asset Classification

• Assets are result of completed transactions and occurrences (purchase, production, exchange)

• Expected or unfinished transactions don’t classify• Asset books who has disposability rights and

economical benefit• Ownership is not important• Current / long-term

Current Assets

Definition:• Are expected to be disposed within 12 months• Will be disposed within 1 operational cycle (form raw material

purchase to collection of A/R)• Cash

Typical Current Assets:• Cash and equivalents• Accounts receivable• Current part of long-term receivables• Inventories• Current financial assets• Accruals and deferrals• Assets Held for Sale

Accounting Transactions

Cash purchase of merchandise: Inventory 100.00Cash 100.00

Non-cash purchase of merchandise: Inventory 100.00

Accounts payable 100.00Payment of debt:

Accounts payable 100.00Cash 100.00

Each transaction must be recorded with additional information (date, transaction number, description, person who entered it) that are here for simplicity reasons omitted

Accounting Transactions

Production of a current assetInventory of finished goods 100.00Inventory of raw materials (B/S) 40.00Production expense (P&L) 60.00

Sale of finished goodsAccounts receivable (B/S) 150.00Revenue (P&L) 150.00Cost of goods sold (P&L) 100.00 Inventory of finished goods (B/S) 100.00Bank account (B/S) 150.00 Accounts receivable (B/S) 150.00

Evaluation of Current Assets

Accounts receivable• Provision for bad debts

Inventory• Manufactured: cost of material, direct labor and allocated

production cost• Purchased: cost method (purchase price + transport, customs,

etc.) or retail method (retail price – sales margin)• Inventory: lower cost or market (LCM – the lower of original

price and net realizable value)• FiFo, weighted average

Current Assets in US GAAP

ARB 43 Chapter 4 Inventory Pricing and IAS 2 Inventories are both based on similar principles:

• Inventory are assets held for sale in the ordinary course of business

• Primary basis of accounting for inventory is cost• Both standard cost method or retail method can be used• Cost of inventory includes all direct expenditures to ready

inventory for sale, including allocable overhead • Selling costs are excluded from the cost of inventories, as are

most storage costs and general administrative costs

Current Assets in US GAAP

Differences:

• LIFO: - US GAAP: acceptable- IFRS: prohibited

• Reversal of write-downs of inventory to the lower of cost or market: - US GAAP: creates a new cost basis that cannot be reversed - IFRS: reversal can be done max. to the original value if reasons for write-downs no longer exist

Long-Term Assets

Definition:• Are expected to be held for 12 months or longer• Will not be disposed within 1 operational cycle (spare parts)• Tangible / Intangible• Extended use regardless of value

Typical Long-Term Assets:• Property, plant and equipment• Long-term receivables• Biological assets• Licenses, SW, copy rights

• Goodwill (must be purchased)

Depreciation

• To show true and honest value of the fixed asset status

• Straight line or accelerated• Residual value• Early retirement, change in accounting estimate• No major differences between IFRS and US GAAP

Depreciation

• Straight-line depreciation: (original cost – salvage value) / periods of useful life

• Units-of-production method: (original cost – salvage value) / estimated units to be produced

• The sum-of-the-years’-digits (SYD) method(original cost – salvage value) * (remaining years / SYD) Example: 5 years = 1+2+3+4+5=15; hence 1st year (original cost – salvage value) * 5/15 2nd year (original cost – salvage value) * 4/15 etc.

• The double declining-balance methodtwice the straight-line rate applied to the remaining book value

Accounting Transactions

Fixed asset purchase: Crain purchase 148 000.00

Transportation 1 000.00Assembly costs 2 000.00

Accounts payable 151 000.00

Depreciation: Depreciation Expense 30 000.00

Accumulated Depreciation 30 000.00

Leasing of Long-Lived Assets

• Leasing contract: temporarily transferred disposability rights and economical benefits

• To be recorded as long-lived assets of the entity (except of real estate)

• Capital/finance leases, operational leasesthe criteria of a capital lease include - the transfer of ownership to the lessee at the end of the lease term - a purchase option that is reasonably expected to be exercised- the lease term duration is for most of the asset’s economic life

Leasing of Long-Lived Assets

Accounting transactions:• Leasor:

the asset is taken of the long-lived asset and becames a note payable from the lasee

• Leasee: - the leased asset is recognized as an long-lived asset and liability to the leasor- use the lower of the present value of the outgoing payments or the fair market value- the asset is to be depreciated

Leasing of Long-Lived Assets

Differences in accounting standards:• Only minor or less important differences between

IFRS and US GAAP - terminology: capital lease vs. financial lease- the lease term is a “major part” or “75%” of the asset’s economic life- recognition of gain/loss when only a minor part of the right to use the asset is exercised (IFRS immediately, US GAAP over the lease term)

• Major difference in Czech standards:- leased asset is to be kept and depreciated in the owners books

Intangible Assets

Nonmonetary assets without physical substance, there are probable future economic benefits that can be reliably measured• SW, licenses, copy rights, trade marks

- amortization over its useful life- development costs can be included only when demonstrating technical feasibility and ability to complete and sell the asset in the future- if there is no foreseeable limit to the period over which it is expected to generate net cash inflows, the useful life is considered to be indefinite and the asset is not amortized

• Goodwill (in business combinations only)