Module 11: Understanding and Analyzing ICT Firms’ Annual Reports

Carlo M. Rossotto, MNA Regional Coordinator, Global ICT Department, Policy DivisionMarch 11, 2009

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Module Outline

1.Introduction to Accounting

2.Special Issues in Accounting and Technology

3.Analyzing Annual Reports for Economic

Analysis: Cases

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Introduction to Accounting

1.Basic Accounting Principles and International Standards

2.Islamic Finance and AAOIFI Standards

3.What is a Balance Sheet

4.What is an Income Statement

5.What is a Cash Flow Statement

6.Financial Ratios

7.Financial Disclosure

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Introduction to Accounting

Basic Accounting Principles and International Standards

– The International Accounting Standards Board (IASB) is responsible for the development of International Financial and Reporting Standards (IFRS). www.iasb.org

– A large number of countries, including Egypt, adopts IFRS or a modified version of IFRS

– Which countries are adopting IFRS: http://www.iasplus.com/country/useias.htm

– Egypt adopts IFRS for all companies, domestic and foreign

– European Union. Adoption of virtually all IFRS, with a time lag, and certain exceptions

– United States. US SEC registrants are required to use US GAAP and are not permitted to use IFRSs. However, on 14 November 2008, the US SEC published for comment a proposed “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards” by US Issuers

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Introduction to Accounting

Islamic Finance and AAOIFI Accounting Standards

–Islamic finance is finance in according with Islamic law and jurisprudence. London, Dubai, Kuala Lumpur emerging as global hubs for Islamic finance and banking

–Islamic finance is a growing phenomenon with over US$500billion of assets (Source: Forbes). Highest growth among all managed assets

–Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) www.aaoifi.com

–London, Dubai, Kuala Lumpur: global hubs for Islamic finance and banking

–Coordination efforts between AAOIFI and IFRS. Professional certifications (example, Islamic Finance Qualification)

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Introduction to Accounting

What is a Balance Sheet

–Balance sheet summarizes the position or balance of a firm at a certain point in time.

–It is divided in three parts: assets, liabilities and equity

Assets

Current

Long-term

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Introduction to Accounting

Current Assets

– Cash and cash equivalents– Inventories– Accounts receivable– Prepaid Expenses

Long-term assets

– Property, plant and equipment– Investment Property– Intangible assets– Investment assets

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Introduction to Accounting

Liabilities

• Accounts payable

• Provisions for warranties or court decisions

• Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds

• Liabilities and assets for current tax

• Deferred tax liabilities and deferred tax assets

• Minority interest in equity

• Issued capital and reserves attributable to equity holders of the parent company

• Unearned revenue

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Introduction to Accounting

Equity

–Share capital–Capital reserves–Revaluation reserve –Translation reserve –Retained earnings

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Introduction to Accounting

http://www.google.com/finance?fstype=ii&q=GOOG

Example of a balance sheet: Google

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Introduction to Accounting

Statement that reports revenues and expenses over a certain period of time

What is an income statement

Revenues –

Cost of Revenue = Gross Profit –

- General and Administrative- R&D- Depreciation- Interest expense (revenue)- Unusual expense

Total Revenues – Total Operating Expenses = Operating Income

Operating Income +/- Interest = Income before TaxIncome before tax – tax = Income after taxIncome after tax – extraordinary items = Net income

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Introduction to Accounting

Earning per share (EPS) =

What is an income statement

EPS

Net income – preferred stock dividend

Weighted average opf common stock outstanding

Basic

Diluted

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Introduction to Accounting

http://www.google.com/finance?fstype=ii&q=GOOG

Let’s go back to the Google example -Income statement

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Introduction to Accounting

Statement that shows a company’s flow of cash over a certain period of time (IAS 7)

What is a cash flow statement

Operating activities• receipts from the sale of goods or services • receipts for the sale of loans, debt or equity instruments in a trading portfolio • interest received on loans • dividends received on equity securities • payments to suppliers for goods and services • payments to employees or on behalf of employees • tax payments • interest payments• payments for the sale of loans, debt or equity instruments in a trading portfolio

Items which are added back to [or subtracted from, as appropriate] the net income figure to arrive at cash flows from operations:•Depreciation (loss of tangible asset value over time) •Deferred tax •Amortization (loss of intangible asset value over time) •Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement)

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Introduction to Accounting

Statement that shows a company’s flow of cash over a certain period of time (IAS 7)

What is a cash flow statement

Investing activities•Purchase of an asset •Assets can be land, building, equipment marketable securities, •Loans made to suppliers or customers

Financing activities•proceeds from issuing shares •proceeds from issuing short-term or long-term debt •payments of dividends •payments for repurchase of company shares •repayment of debt principal, including capital leases •for non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes •Items under the financing activities section include:•Dividends paid •Sale or repurchase of the company's stock•Net borrowings

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Introduction to Accounting

http://www.google.com/finance?fstype=ii&q=GOOG

Let’s go back to the Google example -Cash flow

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Introduction to Accounting

Financial Ratios

Profitability Ratios - Examples

Return on Equity (ROE) =

Net Income

Average Sharehold. Equity

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Introduction to Accounting

Financial Ratios

Liquidity Ratios - Examples

Current Ratio =

Current Assets

Current Liabilities

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Introduction to Accounting

Financial Ratios

Activity Ratios - Examples

Asset Turnover =

Total Sales

Total Assets

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Introduction to Accounting

Financial Ratios

Debt Ratios - Examples

Debt Ratio =

Total Liabilities

Total Assets

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Introduction to Accounting

Financial Ratios

Market Ratios - Examples

P/E Ratio =

Market Price

Diluted EPS

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Introduction to Accounting

Financial Disclosure Obligations

Financial Disclosure

• Local securities laws and regulations• Compliance with international accounting standards• Local Stock exchange regulations• Foreign Stock exchange regulations• Statute of the corporation

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Accounting and Technology

Research and Development- Capitalisation Approach

IFRS and Technology Firms

Revenue RecognitionIFRS requires recognition of revenue on an element of a transaction, if that elements has commercial substance on its own

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Accounting and Technology

Research and DevelopmentR&D expense is capitalised once technical and commercial feasibility established

IFRS and Technology Firms: Affected Areas

MarketingRecognition of customer incentives

SalesDifferent revenue recognition methods

Taxation, Legal, CommunicationsIFRS as an opportunity to reshape business

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Accounting and ICT Analysis

How to Use Balance Sheet of Technology Firms for Economic Analysis

CASE I – BRITISH TELECOM, TELEKOM MALAYSIA AND INTERNATIONAL COMMUNICATIONS REVENUES

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Accounting and ICT Analysis

How to Use Balance Sheet of Technology Firms for Economic Analysis

CASE II – TELECOM EGYPT

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Accounting and ICT Analysis

How to Use Balance Sheet of Technology Firms for Economic Analysis

CASE III – Mobinil