New Zealand Scholarship Accounting

Workshop13 October 2016Facilitator: Dr Julia Wu

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Welcome!Introduction

Topic one: New Zealand Framework (2010)

Topic two: Transactions, events and adjustments

Topic three: Preparation of Financial Statements

Topic four: Integrated Reporting, the natural capital of Sanford Limited

Topic five: Analysis and Interpretation of Financial Statements

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Introduction The exam, some details Date: Wednesday 30 NovemberTime: 9:30amThere will be five (5) questions.

Coverage: • a combination of a statement of comprehensive income and/or statement

of financial position and/or a statement of changes of equity, and accompanying notes for a company, prepared for external reporting purposes

• natural capital within Sanford Limited Annual Report 2015

• the New Zealand Equivalent to the IASB Framework for Financial Reporting 2010 (NZ Framework)

• the analysis and interpretation of financial information (Note: Formulae will not be provided).

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Introduction The context

• Accounting (bookkeeping, accounting cycle) • Financial Accounting • Generally Accepted Accounting Principles (GAAP)• Financial Reporting (reporting entities, FRA)• Accounting standards and financial reporting standards • Financial Statements

– Statement of financial position

– Statement of profit or loss and other comprehensive income

– Statement of changes in equity

– Statement of cash flows

– Notes to the financial statements

• New Developments/current issues

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The New Zealand Framework (2010)

Topic 1

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The Building Blocks of a Conceptual Framework

Objective: to provide information about the financial position and financial performance of the reporting entity that is useful to present and potential equity investors, lenders and other creditors in the capacity as capital providers.

Qualitative characteristics:

Relevance

Faithful representation

Verifiability

Timeliness

Understandability

Comparability

Basic Assumptions Accrual basisGoing ConcernAccounting EntityPeriodicity

Measurement- Monetary unit- Cost-based - Value-based - Present value

Elements:Assets Liabilities Equity Income Expenses

Constraints 1. Cost and benefit2. trade-off

Definition of elements (1) – fill in the blanks

The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

a) An asset is a resource ___________by the entity as a result of _________ and from which _______________are expected to flow to the entity.

b) A liability is a _____________of the entity arising from past events, the ___________ of which is expected to result in an outflow from the entity of resources embodying ___________________.

c) Equity is the ________________in the assets of the entity after deducting all its liabilities.

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Recognition Criteria for the Elements(Fill in the blanks)

In order to recognise an item in the financial statements …

– it must be ______________that any ________________associated with the item will flow to or from the enterprise

AND

– the item has a ___________that can be _______________

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Definition of elements (2)

The elements of income and expenses are defined as follows:

• Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

• Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

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Application Explaining the nature of accounts

See question one of 2012 scholarship exam.

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Accounting for liabilities NZ IAS 37

Payable Accrual Provision Contingent Liability

Examples Trades payables

Accrued salariesand wages

Provision for warranty

Pending lawsuit (high uncertainty)

Based on past events/transactions?

Yes Yes Yes No

Established legal obligation?

Yes Yes Yes (contractual)

No

Settlement probable? Yes Yes Yes No

Measured reliably? Yes – invoice based

Yes – based on agreement

Yes – estimated through past experience.

No

Accounting Recognised as liability

Recognised as liability

Recognised as liability, usually accompanied by notes

Only disclose if material

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Application Evaluate the accounting treatment

See question three of 2014 scholarship exam.

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Summary/Reflection• Read the question carefully and answer what is required.

• Your conclusion is important!

• Citing the definitions and recognition criteria is not sufficient.

• Give relevant examples.

• Consider the implications of double entry system.

• Common areas of discussion: – Liabilities: accruals, provisions and contingent liabilities

– Assets: intangible assets (including research and development cost) capital and revenue expenditures

– Equity: revaluation surplus (or reserve)

– Expense: depreciation, amortisation

– Income: revenue recognition/timing issue: goods in transit, percentage of completion

– Other issues: prepayment (payments and receipts) and subsequent adjustments

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Transactions, events and adjustments

Topic 2

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Basic Accounting Equation

Asset = Liabilities + Equity Expanded Accounting Equation

Assets + Expenses + Distributions = Liabilities + Capital + Retained Earnings + Income

Debit (Dr) Credit (Cr) Debit (Dr) Credit (Cr)

Accounting equation

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JournalisingTransactions • Daily operations • Based on source documents • Examples: sales, purchases, payments, receipts Events • Incidental • Evidence based • Examples: impairment of assets, acquisition and disposal of

assets Adjustments • For the purpose of financial reporting • Reliance on professional judgement • Examples: depreciation, accruals, provisions Other: closing entries, reversing entries, consolidation

Group activity 1

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Preparation of Financial Statements

Topic 3

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Statement of comprehensive

income

• Income

• Expenses

• Profit/loss

Statement of Changes in Equity

• Opening balance • Changes in equity

• Additional investment?

• Profit/loss • [Distributions]

• Closing balance

Statement of Financial Position

•Assets• Current

• cash• Non-current

•Liabilities • Current• Non-current

•Equity

Statement of Cash Flows

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Classify expenses by nature

Statement of comprehensive income

Revenue $ xxx,xxx

Other income xxx,xxx

Less expensesCost of sales xx,xxx

Depreciation xx,xxx

Amortisation xx,xxx

Employee expenses xx,xxx

Other expenses xx,xxx

Profit before tax xx,xxx

Income tax Xx,xxx

Profit after tax Xx,xxx

Comprehensive income Xx,xxx

Total comprehensive income Xx,xxx

Classify expenses by function

Statement of comprehensive income

Revenue $xx,xxx

Less: cost of goods sold x,xxx

Gross profit xx,xxx

Less: operating expensesSales and distribution xx,xxx

Administrative expenses xxx,xxx

Finance expenses x,xxx

Other income/expenseProfit before tax xx,xxx

Income tax Xx,xxx

Profit after tax Xx,xxx

Comprehensive income Xx,xxx

Total comprehensive income Xx,xxx

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Notes to the financial statementsComponents:

I. Statement of Accounting Policies Reporting entities Articulation of how relevant legislation and accounting

standards are applied in the financial statements II. Notes to the financial statement

Referring to particular accounts or balances Breakdowns Reconciliations Qualitative disclosure Methodologies of measurements Other information that will assist users’ understanding of

financial statements at entirety or any particular account(s)/balance(s)

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Notes to the financial statementsHow to prepare?

• Follow the instructions

• Based on the available information

• Consider the users’ perspective

• Reference numbers

• Concise and consistent layout

• Professional representation for qualitative information

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Integrated Reporting, the natural capital of Sanford Limited

Topic 4

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BackgroundIntegrated Reporting

• A new form of corporate reporting aimed primarily at providers of capital

• It tells an organisation’s value creation story

• It is much more than bringing together financial and sustainability reporting

• It does not replace either financial or sustainability reporting – both need to be in place for integrated reporting

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A paradigm shift? Distinguishing characteristics

• Longer-term strategic planning

• Focus on the ‘six capitals’

• Value creation – integrated thinking, integrated reporting, integrated report

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Some examples

EXAMPLES ? Capital ? Capital ? Capital ? Capital

Private Ownership

- Factories- Buildings- Securities- Cash

- Health & safety

- Training- Job Skills

- Reputation - Value chain

- Gardens- Plantations- Forests

CommunityOwnership *

- Community Centres

- Community Schools

- Traditional knowledge

- Communal education

- Community Norms andCustoms

- Culture

- Community reserves

- Greenbelts

Public Ownership *

- Infrastructure- Public facilities

- Publicdatabases

- Non-patent knowledge

- Law & Order- Taxation- Social Equity

& Inclusion

- High Seas fisheries

- NationalParks/ Forests

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Natural Capital in Sanford Limited (1)(Group Activity 2)

1. Explain the concept of ‘Natural Capital’.2. Explain why reporting on (accounting for)

‘Natural Capital’ is important.3. Explain what is regarded as ‘Natural Capital’ by

Sanford Limited in the company’s 2015 annual report.

4. Explain how Sanford Limited addresses the importance of Natural Capital in the company’s 2015 annual report.

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Natural Capital in Sanford Limited (2)Critically evaluate the reporting practice of Sanford Limited with regard to ‘Natural Capital’ in the company’s 2015 annual report.

• Your conclusions (overall evaluation) • Your arguments (for, against or both)

– Considerations (not exclusive)• Are the discussions/disclosures on natural capital aligned with the

concept specified in integrated reporting model? • Is the information sufficient for readers to understand the nature and

importance of natural capital in the context of the company? • Is the information sufficient for readers to understand how natural

capital is related to the company‘s value creation process? i.e. reflecting the ‘integrated thinking’?

• Is the information presented in an integrated way across the integrated reporting model?

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Analysis and Interpretation of Financial Statements

Topic 5

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Financial Ratios - overview

• a simple approach for establishing relationships among items in the financial statements

• enables meaningful comparisons – horizontal analysis– vertical analysis– trend analysis

• a starting point for further analysis • depending on the user’s information

needs

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Financial ratio classifications

• Outlook of long term financial health

• Short term –solvency & survivability

• Utilisation of resource

• Operating success

Profitability Efficiency

GearingLiquidity

Investment ratios (share performance)

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Analysis and InterpretationUser’s perspective (1)

User / Angle Expected decision-making

Priority / Focus

Current and/or potential investors

Buy, sell, or hold shares Profitability, share market performance, dividends

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Analysis and InterpretationUser’s perspective (2)

Year Scholarship exam question (extract)

2015 Critically evaluate the measures taken by management to stabilise Pumpkin Patch Limited’s share price.

2014 Critically evaluate Mighty River Power Limited’s share price performance since the share float.

2013 Your grandparent knows you are studying Scholarship Accounting, and has asked you to explain why a company reporting losses since 2008 could show a steadily increasing share price. (XERO Limited)

2012 Using the above information, as well as Resources One–Eight in the resource booklet, critically evaluate Pumpkin Patch Limited as an equity investment. Your answer should include but not be limited to an evaluation of Pumpkin Patch Limited’s operating, investing and financing activities, as well as relating to management strategies and operations.

2011 Using the information in the table on page 10, and in Resources One to Four in Resource Booklet 93203R, evaluate Pumpkin Patch Limited as an equity investment.

2010 Using the information in the above table and in the accompanying Resource Booklet, explain to your classmate why shareholders appear to have lost confidence in Allied Farmers Limited as an equity investment.

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Analysis and InterpretationWhat is required?

Year Scholarship exam question (extract)

2015 Critically evaluate the measures taken by management to stabilise Pumpkin Patch Limited’s share price.

2014 Critically evaluate Mighty River Power Limited’s share price performance since the share float.

2013 Your grandparent knows you are studying Scholarship Accounting, and has asked you to explain why a company reporting losses since 2008 could show a steadily increasing share price. (XERO Limited)

2012 Using the above information, as well as Resources One–Eight in the resource booklet, critically evaluate Pumpkin Patch Limited as an equity investment. Your answer should include but not be limited to an evaluation of Pumpkin Patch Limited’s operating, investing and financing activities, as well as relating to management strategies and operations.

2011 Using the information in the table on page 10, and in Resources One to Four in Resource Booklet 93203R, evaluate Pumpkin Patch Limited as an equity investment.

2010 Using the information in the above table and in the accompanying Resource Booklet, explain to your classmate why shareholders appear to have lost confidence in Allied Farmers Limited as an equity investment.

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• ‘Critically evaluate’• ‘Explain why’• Address both financial and non-financial

information • Create a mind map

Analysis and InterpretationStructure your answer

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Establishing the context for ratio analysis (1)The importance of non-financial information

Economic environment

Industry

Entity specific

conditions

Financial information

and ratios

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Establishing the context for ratio analysis (2)Economic environment

Economic environment

Industry

Entity specific

conditions

Financial information

and ratios

• Political

• Economical

• Social

• Technological

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Establishing the context for ratio analysis (3)Industry

Economic environment

Industry

Entity specific conditions

Financial information

and ratios

Competition

Porter(1980) five forces analysis• Threat of new entrants• Threat of substitutes• Bargaining power of buyers• Bargaining power of suppliers• Industry rivalry

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Establishing the context for ratio analysis (4)Entity Specific Conditions (non-financial)

Economic environment

Industry

Entity specific conditions

Financial information

and ratios

SWOT Analysis

External

Internal

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Establishing the context for ratio analysis (5)Entity Specific Conditions (internal)

Economic environment

Industry

Entity specific

conditions

Financial information

and ratios

• History• Ownership structure• Governance• Public Relations and

reputation• Strategy• Value creation

(philosophy and approach)

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Sources of information

• Government statistics• Trade journals• Financial press• Financial analysts forum and databases• Specialist agencies (industrial association)• News articles • Financial Statements, including cash flows,

notes, accounting policies• Integrated report• Chairman’s statement and directors’ report

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