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ADVANCED FINANCIALSTATEMENT ANALYSIS
Class 1 – Introduction & Accounting analysis
CHAPTER 1: INTRODUCTON
EXAM: On exam you will be able to earn more points with questions on accounting analysis (amount
of points you can earn on the exam are in proportion on the time spent on the topic in class)
4 big questions
1 all subquestions on accounting analysis
2 financial analysis
3 prospective analysis
4 misscellaneous: all kind of questions: credit analysis, questions about the research articles,...
Slide 11
Statutory statements: statements of 1 single traditional entity
Consolidated statements: statements of a group of companies
When does a parent hold control over a company of a group: when it has voting shares of 50 + 1% :
the parent determines what happens in the company
→ in C1, the parent does not have control because they don’t have the majority of the voting shares
What is a group of companies? (zie HB! en geschreven notities)
the parent has to prepare the consolidated statement: add everything together per item on balance
sheet, BUT you have to eliminate intercompany transactions!
eg: if a parent has sold to S1, this is a transaction between companies in a group, it has to be
eliminated → the financial statements gives the picture of how the group of companies performs vs
the outside world
how to recognize consolidate statements? if there's “noncontrolling interests” in the balance sheet
you are dealing with a consolidated statement.
The value 56 of Lotus indicates the amount of the net assets that is not owned by the parent
company (because it does not hold 100% of the voting stock of its subsiduaries) but the part that is
owned by other share holders
net assets = assets – liabilities
Same thing in the income statement: bij result after taxes: net result: noncontrolling interests.
Lotte Vermaerke – AFSA 2019 - 2020 – Lecture Notes 1
,Slide 12
Market efficiency
If you believe that markets are efficient, why is it then still valuable to analyze accounting
information?
→ Markets are very efficient, but not completely efficient. It is not because they are efficient on
average, that they are correct at any given moment in time in pricing every share.
Slide 13
What is post-earnings announcement drifts?
see figure 5 p21 in the paper: the date when the earnings are announced (the vertical line). The
researchers went back in time and computed unexpected earnings: earnings that are actually
announced – the expected earnings (expected earnings: analysts make a forecast of earnings they
expect to be announced).
à E lower than expected: bad news firms
à E higher than expected: good news firms
The researchers divided the firms into percentiles, the highest
line on the left side of the graph are the firms with the highest
unexpected earnings.
Cumulative abnormal return: you add all the abnormal returns
from 60 days prior to announcement until the announcement
(cumulative thats why the line gets higher and higher)
à It seems as if the market already foresees that at
announcement day the company will announce good news and
includes that in the stock price.
à The market reacts quickly because it reacts on information even before the info is announced.
But what happens after announcement date?
The market price still reacts to the info that is announced even after the date. (until 60 trading days
after the announcement date).
à The market does not completely react on the announcement date to the info that is released à
Markets are not completely efficient so analysis of historic accounting information is relevant!
Slide 17: zie ook samenvatting!
• International Accounting Standards Committee (IASC): 41 IAS’s issued
→ 25 of the old IAS’s are still effective today. These 25 IAS’s combined with the 17 IFRS’s are the
accounting standards today.
• IFRIC: International Financial Reporting Interpretations Committee: issued some interpretations:
how should I apply the IFRS in practice?
• SIC: interpretations of the old IAS’s
Lotte Vermaerke – AFSA 2019 - 2020 – Lecture Notes 2
,Slide 18
Why were/are IFRSs developed?
If you want to invest in a company, you compare different kinds of companies.
à BUT: A German company records according to German standards, and an Italian company
records according to Italian standards: those standards may differ from the German standards!
Difficult to compare!
Daimler-Benz 1989 -1994
• They recorded all the same transactions once according to German GAAP and once according to
US GAAP: Daimler’s result according to German GAAP was higher than according to US GAAP.
à In 1992 the German GAAP recorded a profit, but according to US GAAP they had not only a
loss, but a serious loss! The stock markets were in shock.
à The only difference between these lines are the accounting standards used; the underlying
sales etc are all the same.
• The reason for the difference?
à Once you have recorded a provision/ ride-off (waardevermindering) you cannot take them
back according to US GAAP, but it permitted in German GAAP
à In German they had taken back some ride-offs and provisions, so they had some
extraordinary gains in German, but they weren’t allowed to do that in US GAAP: so there
they hadn’t an extraordinary gain à their results remained lowered by those ride-
offs/provisions (when you book a ride-off or provision, it lowers your result).
è To prevent this from happening again the IFRS were developed: One set that applies over many
countries, so that you can compare different companies from different countries. So when they differ
it is due to underlying performance and not because of the use of different accounting standards.
EXAM: sometimes an exam question to list some of the benefits of IFRS
Slide 21
Who applies the IFRSs?
à zie ook geschreven notities
• All European companies that are listed on European stock exchange have to prepare their
statements (consolidated) according to IFRS
• The company-only statements are the statutory statements.
Slide 22
See Class preparation questions – question 5 and 6
Lotte Vermaerke – AFSA 2019 - 2020 – Lecture Notes 3
, Slide 23
Belgiaan GAAP: the Financial Statements consisted of 3 parts: had 3 delen: balans,
resultatenrekening en toelichting (balance, income statement and notes)
IFRS requires 5 components
1. Statement of financial position = balance sheet
2. Statement of comprehensive income = profit and loss account + other comprehensive
income (slide 25: important slide!)
SAMENVATTING
• (Total) comprehensive income = Profit or loss + Other comprehensive income
o Other comprehensive income?
These are items of income and expense that are not recognizes in profit and loss,
and that do not influence profits and losses as we know it in Belgium (bv
herwaarderingsmeerwaarden)
o If you have to revalue assets upward or downward, some of these don’t appear in an
ordinary income statement, they are reported in stock holder equity (example of
other comprehensive income)
o So, these other incomes can’t influence profits or losses
§ Why? Profits reflect if you’re successful in aiming to do what you intended to
do with the company
§ Hedges (on sugar or flour) for example is risk management and not on how
well you sell cookies (Lotus)
• You have turnover where expenses are subtracted from, how they are subtracted is up to
you (by function or by nature)
o In IFRS you have to do it by nature (+ function is permitted)
à So you always find ‘by nature’, not always by function
à By function: the purpose of the expense (why was the cost made)
à By nature: the cause of the expense
• “Income statement”: Detail of operating expenses by function or by nature (each advantages
& disadvantages)
o If preferred classification is by function, you also have to report a classification by
nature (à compare across companies)
o So you always find ‘by nature’, but not always ‘by function’
Lotte Vermaerke – AFSA 2019 - 2020 – Lecture Notes 4
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