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Balance Sheet by Binam Ghimire

Balance Sheet by Binam Ghimire. Learning Objectives. The Finance Decision The Investment Decision The Recognition of Items in the Balance Sheet IAS1 Presentation of The Balance Sheet Analysis of the Financial Position. Introduction. Two important decisions in Business are:

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Balance Sheet by Binam Ghimire

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  1. Balance Sheet by Binam Ghimire

  2. Learning Objectives • The Finance Decision • The Investment Decision • The Recognition of Items in the Balance Sheet • IAS1 Presentation of The Balance Sheet • Analysis of the Financial Position

  3. Introduction • Two important decisions in Business are: • The Financing Decision and • The Investment Decision • What are these ?

  4. The Finance Decision • The Type and Amount of Finance to raise. • Long Term Finance • Equity, e.g. • Ordinary • Preferred • Debt, e.g. • Bonds • Loans • Short Term Finance (repayable within 1 year) • Bank Overdraft • Trade Creditors/Accounts Payable • Organisations raise finance to fund investment

  5. The Investment Decision • Which Assets to buy • Long Term (Non Current Assets) • Land & Buildings • Equipment • Etc • Short Term (Current Assets) • Inventory • Bank • Cash

  6. The Balance Sheet • The Balance Sheet brings the Finance & Investment Decisions together to present a Statement of the Financial Position as at a certain date. • Let’s start by looking at a very simple example…

  7. Balance Sheet of F Clothes UK as at 31st December 20xx. Non Current Assets Land & Buildings 100,000 Capital 500,000 Fixtures 20,000 + Net Profit 3,000 120,000 503,000 Non Current Liabilities Bank Loan 30,000 Current Assets Current Liabilities Inventory 10,000Accounts Payable 75,000 Accounts Rec 120,000 Bank 358,000488,000 608,000608,000

  8. Investment Decisions = Finance Decisions Non Current Assets Equity + + Current Assets Non Current Liabilities + Current Liabilities

  9. Balance Sheet of F Clothes UK as at 31st December 20xx. Non Current Assets Land & Buildings 100,000 Capital 500,000 Fixtures 20,000 + Net Profit 3,000 120,000 503,000 Non Current Liabilities Bank Loan 30,000 Current Assets Current Liabilities Inventory 10,000Accounts Payable 75,000 Accounts Rec 120,000 Bank 358,000488,000 608,000608,000 What does this tell you about the Finance & Investment Decisions ?

  10. Balance Sheet Definitions • Asset. • An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. • Liability. • A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. • What about Off Balance Sheet Finance? • Equity. • Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

  11. Recognition of the Elements of Financial Statements • Recognition is the process of incorporating in the balance sheet (or income statement) an item that meets the definition of an element and satisfies the following criteria for recognition: • An asset • when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably. • A liability • when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. • What about the value of your brands (goodwill) ?

  12. IAS 1 Presentation of Financial Statements The Balance Sheet • An entity must present a classified balance sheet, separating the following, unless it is based on liquidity which is deemed more reliable and more relevant, e.g. Financial Institutions: • Current assets • Non-Current assets • Current liabilities • Non-Current liabilities

  13. Balance Sheet of F Clothes UK as at 31st December 20xx. Non Current Assets Land & Buildings 100,000 Capital 500,000 Fixtures 20,000 + Net Profit 3,000 120,000 503,000 Non Current Liabilities Bank Loan 30,000 Current Assets Current Liabilities Inventory 10,000Accounts Payable 75,000 Accounts Rec 120,000 Bank 358,000488,000 608,000608,000 How would a Financial Institution differ ?

  14. Current assets • cash; • cash equivalent; • assets held for collection, sale, or consumption within the enterprise's normal operating cycle; or • assets held for trading within the next 12 months. •  Non- Current assets • All other assets are non-current • Current liabilities • Are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. • Non- Current liabilities • Other liabilities are non-current.

  15. Minimum Balance Sheet Items • a. property, plant and equipment; • b. investment property; • c. intangible assets; • d. financial assets (excluding amounts shown under (e), (h) and (i)); • e. investments accounted for using the equity method; • f. biological assets; • g. inventories; • h. trade and other receivables; • i. cash and cash equivalents; • j. trade and other payables; • k. provisions; • l. financial liabilities (excluding amounts shown under (j) and (k)); • m. liabilities and assets for current tax, as defined in IAS 12; • n. deferred tax liabilities and deferred tax assets, as defined in IAS 12; • o. minority interest, presented within equity; and • p. issued capital and reserves attributable to equity holders of the parent.   • Additional line items may be needed to fairly present the entity's financial position.

  16. Issued Share Capital and Reserves • The following disclosures are required: • numbers of shares authorised, issued and fully paid, and issued but not fully paid • par value • reconciliation of shares outstanding at the beginning and the end of the period • description of rights, preferences, and restrictions • treasury shares, including shares held by subsidiaries and associates • shares reserved for issuance under options and contracts • a description of the nature and purpose of each reserve within owners' equity

  17. Balance Sheet Format • IAS 1 does NOT prescribe the format of the balance sheet. • Assets can be presented current then non-current, or vice versa. • Liabilities and equity can be presented current then non-current then equity, or vice versa. • A net asset presentation (assets minus liabilities) is allowed. • The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short term payables = long-term debt plus equity – is also acceptable.

  18. Alternative Presentations Non Current Assets 100 Equity 150 Current Assets 80 Non Current Liabilities 20 Current Liabilities 10 180180 Non Current Assets 100 Current Assets 80 Less Current Liabilities 10 Net Current Assets 70 170 Less Non Current Liabilities 20 Net Assets 150 Equity 150

  19. Example • Let’s examine Exhibit 2.2 • What does it show ?

  20. Company Value • Let us examine two other companies • BP (an Oil Company) & • Tesco (a Supermarket) • Have a look at their Balance Sheet’s, • BP as at 31st December 2010 & • Tesco as at 26th February 2011. • What is the value of each company ?

  21. BP Group Balance Sheet Extract 31st December 2010 $M 2009 $M Net assets 95,891102,113 Equity Share capital 5,183 5,179 Reserves 89,804 96,434 BP shareholders’ equity 94,987 101,613 Minority interest 904 500 Total equity 95,891102,113

  22. Tesco PlcBalance Sheet Extract 26th February 20112011 £M 2009 £M Net assets 16,62314,681 Equity Share capital 402 399 Share premium account 4,896 4,801 Other reserves 40 40 Retained earnings 11,197 9,356 Equity attributable to owners 16,535 14,596 Non-controlling interests 88 85 Total Equity 16,62314,681

  23. Market Value • On 26th February the Market Value of Tesco Plc (Market Capitalisation) was £32.20 bn • The Book Value as shown above as at that date was only £ 16.62 bn • Why the difference ?

  24. Book Value • The Book Value as measured by the Balance Sheet is the Net Assets: Total Assets (Non Current + Current) less Total Liabilities (Non Current + Current) • But Tesco, like most businesses is worth more than that. • If you were the owner you would own the Net Assets and all the Future Earnings (or losses). Clearly these are not part of the Book Value. • Whether the future earnings are accurately captured by the market is another matter ! • Can you think of any other reason why Book Value and Market Value may be different ?

  25. Net Current Assets Before leaving Tesco and the Balance Sheet, what do we mean by Net Current Assets ? Current Assets less Current Liabilities In Tesco’s case it was: Current Assets less Current Liabilities £11,869 M less £ 17,731 M = (£5,862M) This is also known as Working Capital Do you feel it is adequate ?

  26. Summary • The Balance Sheet brings the Finance & Investment Decisions together to present a Statement of the Financial Position as at a certain date. • The Book Value as measured by the Balance Sheet is the Net Assets: Total Assets (Non Current + Current) less Total Liabilities (Non Current + Current) • The Market Value may well differ from the Book Value as, amongst other things, the market seeks to capture the value of Future Earnings

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