Analysing Financial Statements 2

August 2010
Kevin Stevenson, Chairman and CEO, Australian
Accounting Standards Board
Executive in Residence & Fellow, Department of
Accounting and Business Information Systems
Disclaimer
My views only
Cant comment on individual
reporting entities
Learning from design
What are the objectives of financial
reporting?
How is the Framework for financial
reporting trying to serve those
objectives?
What are the critical informational
categories that might serve the
objectives?
Where does financial reporting not
do? Place in the overall picture?
Conceptual Framework
Objectives
Means of serving objectives
Informational Categories
Objectives
Economic decision making
Allocation of scarce resources
For a reporting entity
In a financial reporting context
Not necessarily oriented to other dimensions
E.g. social responsibility, except that financial
consequences of an entitys activities of that
nature need to be reported
Other frameworks needed to explore those
dimensions
Grey area: relating frameworks
E.g. outcomes may not be financially oriented but
the two need to be related.
Relationship to other sources of
information
Financial reporting
Relationship of financial reports
to annual reports
Composition
Financial statements
Notes to statements
Audited?
Attestation of management
Consistency with other
information in annual reports
Means of meeting objectives
Qualitative characteristics
filters
Relevance and reliability
Materiality
Recognition
When and what should be
recognised
Measurement
Bases e.g., fair value or cost
Methods e.g. valuation method
Informational categories
Financial Position
Financing and investing Performance
Future cash flows
High level informational
objective: timing, uncertainty
and amounts of future cash
flows
How can this objective be made
operational?
Financial position
Wealth
Solvency
Liquidity
Financial flexibility
Financial sustainability
Performance
Changes in financial position
All aspects not just profit or loss
Components of each
Risks and how managed
J udgements and how exercised
Components of profit
Operational
Predictive
Presumptuous
Financing
Predictive
Presumptuous
Financing and investing?
Sources of funds?
Future needs for funds?
How were raised funds
invested?
Matching of funds with needs
Sustainable?
Flexible?
Stress resistance?
Compliance and governance
Usually presumed unless a red
flag exists
How close to the limits of;
Trust deeds
Industry requirements (e.g.
regulatory capital in a bank)
Ramifications for financial position
Governance angle
Pushing the envelope?
Through the eyes of management -
impressive?
A changing world
Accounting standards
globalising
Convergence between IFRS and
US GAAP
GFC questions being asked and
answered
Avalanche of change coming
In an information science that is
still very young
In summary, for reports you
review
Broadly, how would you judge their financial
position their wealth, liquidity, solvency, flexibility,
sustainability?
How well have they performed over the periods
included in the financial report? Re above and re
components of profit.
How are they financing and investing?
What is your view of their compliance and
governance?
How will changes in reporting requirements affect
them?
How does the financial reporting information relate
to that from other sources?
Analysing Financial
Statements
Kevin Stevenson, Chairman and CEO, Australian
Accounting Standards Board
Executive in Residence & Fellow, Department of
Accounting and Business Information Systems