Financial Accounting & Reporting

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The Comprehensive Income

Comprehensive income = net income + other comprehensive income (also called OCI, dirty surplus accounting or direct to equity items).

In PUFER, the R stands for Revaluation of Assets. The IFRS give companies the option to revaluate its assets. For example, let’s say LVMH bought a building 10 years ago for Euro15m and that now it is worth Euro50m. Then LVMH can revaluate it.

ASSETS

EQUITY & LIABILITIES

Property: 15,000,000 + 35,000,000

OCI: +35,000,000

PUFER is a convention set by IASB. They invented these 5 categories. We must take it for granted. The objective is to make sure that the net income is not polluted by non-activity related gains and losses. They admit that net income is the core measure of performance and OCI are some form of accounting adjustment.

Answer the questions related to audit and balance sheet on the LVMH case.

(P) Pension (some of adjustments are reported in OCI).

(U) Some financial assets are classified in the AFS (Available for Sale) category → unrealized gains/losses are part of OCI. This is very important for banks/insurance companies.

(F) Foreign operations. Let’s take the example of LVMH. LVMH SA (French company) olds LVMH US (US company). Normally, when company A holds company B, the equity amount of company B is reported in the assets of company A. But in the case of LVMH, LVMH US is abroad and its equity may be in dollars. So the figure in the assets of LVMH SA is dependent on the EUR/USD exchange rate. This part dependent on the exchange rate appears in OCI.

Comprehensive Income = Net Income + Other Comprehensive Income.

Unrealized gains and losses on re-measuring the value of AFS securities are really important for banks. We could compute the ROE of a bank this way:

ROE1 = Net Income / Equity

ROE2 = (Net Income + Variation of AFS) / Equity.

No need to adjust Equity (see why on the “polycopié”).

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The Statement of Changes in Equity

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The Statement of Cash Flows

Some firms can have large earnings but actually little cash flows.

Earnings = Variation of Cash + Accruals.

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The Notes to the Financial Statements

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Inter-corporate investments

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Minority passive investments

Minority passive investments → no influence over the investee. Control is less than 20% of a company.

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Loans and receivables

We consider loans and receivables as « investments » because it is money the company we lend to owes us. It is a debt the company has for us, so we consider that we did an investment in this company.

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Held to Maturity

No gains in the income statement if the value of the asset to be held to maturity changes at a point. We consider only the historical value.

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Held for Trading

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Avalaible for Sale

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Minority active investments

Prepare for next class “The Income Statement”, “The Statement of Changes in Equity” and Case 1.

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Controlling interest

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Joint arrangements

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Comparison Equity / Proportionate / Full

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The notes to the Financial Statements

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Accounting policies

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Segment reporting

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Leases

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Provisions

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Retirement benefits

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Income taxes