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Financial Management
Paper F2
Sir Qunber Raza Rizvi
https://www.facebook.com/QunberRaza
2 2
Introduction to the Paper
3 3
Syllabus

Prepare consolidated accounts, emploin!


accountin! standards 3"#

$%aluate financial statements and analse


performance 3"#

Profit measurement 2&#

'e%elopments in e(ternal reportin! 1&#


) )
1 Session
Accounting or
Subsidiaries
" "
!hat is a "roup#
P
*
+ontrol ,roup
- -
!1 "roup Structure
Parent
#
*ubsidiar
. .
!$ "ood%ill
&
Fair value o investment in S at ac'uisition date (
Initial carrying value o non)controlling interest *see
ne+t slide,
(
-et assets o S at ac'uisition date *(,
"ood%ill . -/I share *!0, (
1otal good%ill
/ /
Initial carrying value o -/I#
2I132R
14 Fair value o S at date o ac'uisition5
6R
$4 -/I share o net identiiable assets o S at
date o ac'uisition4
.
/hoice made on an ac'uisition by
ac'uisition basis
0 0
!0 -on)controlling Interests
1nitial +arrin! 2alue of 3+1 4
3+1 share of post ac5uisition Reser%es
of * 4
4

36: 1f choice 2 made re: initial measurement of


3+1 then attributable !oodwill is zero
1& 1&
!7 Reserves
Retained 7ther
$arnin!s Reser%es
Parent 4 4
*ubsidiar
# ( post8ac5 res 4 4
1mpairment 94: 8

4 4
11 11
Provisions or 8nrealised Proits *P8P9S,
P sells !oods to * for ;)&& at mark8up of 2"#. <ll
!oods held b * at ear8end.
Profit made on sale 2"/12" ( ;)&& = ;/&
12 12
P8P9s P sells to S
1ndi%idual >*
P records profit /&
* records in%entor )&&
,roup >*
Profit &
1n%entor 32&
P?P ad@ustment
,roup profit reser%es /&
,roup in%entor /&
13 13
P8P9s S sells to P
1ndi%idual >*
* records profit /&
P records in%entor )&&
P?P ad@ustment
,roup profit reser%es 9/&# ( /&: -)
3on +ontrollin! interests 92&# ( /&: 1-
,roup in%entor /&
1) 1)
P8P Summary
P *ells to *
,roup in%entor
,roup reser%es
* *ells to P
,roup in%entor
,roup reser%es P#
3on controllin!
interests 3+1#
1" 1"
2 Session
Fair :alue
Ad;ustments
1- 1-
Fair :alue Ad;ustments
>air %alue of consideration !i%en
+ash 4
*hares issued A >2 4
'eferred consideration 9P2 of future +>:4
+ontin!ent consideration 9fair %alue: 4
'irectl attributable costs B not included 3il
4
PCs share of >2 of 3<Cs of * at '7< 9D2: 94:
,oodwill B PCs share 4
1. 1.
Initial Recognition and Measurement o -et
Assets o S
"eneral principles

For recognition as a separate asset or liability


needs to satisy the rame%or< criteria

Measurement is air value at the date o


ac'uisition . essentially e+change value in an
arms length transaction
1/ 1/
2+ceptions to the general principles

/ontingent liabilities are recognized at air


value even %here the probability o settlement
is =7>?

/ertain assets and liabilities *e4g employee


beneit liabilities and assets held or sale, are
measured using the bases laid do%n in the
relevant IFRSs
10 10
$ Session
/onsolidated Income
Statement@Statement
o /omprehensive
Income
2& 2&
/onsolidated Income Statement
1ncome
*tatements
Eid8ear
ac5uisitions
1ntra ,roup
Fransactions
3on8controllin!
1nterest
>air 2alue
<d@ustments
1mpairments P?PCs
21 21
0 Session
Associates and Aoint
:entures
22 22
Associates and Aoint :entures
Parent
*ubsidiar
+ontrol
*i!nificant 1nfluence
2&8"&# 2otin! Ri!hts
1<* 2/ $5uit <ccountin!
<ssociate
23 23
2'uity Accounting
+onsolidated *tatement of >inancial Position
3on8current assets
1n%estment in associate
+ost of in%estment 4
PCs share of post8ac5uisition chan!e 4
in net assets of <
1mpairment of in%estment 9if an: 94:
4
2) 2)
2'uity Accounting
+onsolidated 1ncome *tatement
*hare of associates profits
9<# ( <Cs P<F: 4
Profit before ta( 4
2" 2"
Proportional /onsolidation
+onsolidated 6alance *heet
,oodwill 4
3on8current assets 9P G 9# ( H2:: 4
+onsolidated 1ncome *tatement
Re%enue 9P G 9# ( H2:: 4
2- 2-
Associates and P8P9s
P?P = <# ( ?nrealised Profit on ,oods in 1n%entor
= )&# ( 92"/12" ( 2&& ( -&#:
= 0.-
2. 2.
Associates and P8P9s
+onsolidated 6alance *heet
,roup sells to <
1n%estment in < 0.-
,roup reser%es 0.-
< sells to ,roup
,roup in%entor 0.-
,roup reser%es 0.-
2/ 2/
Associates and P8P9s
+onsolidated 1ncome *tatement
,roup sells to <
Re%enue 9)/:
+ost of sales 3/.)
,ross profit 90.-:
< sells to !roup
*hare of <Cs profits 90.-:
20 20
7 Session
/hanges in "roup
Structure
3& 3&
/hanges in "roup Structure
*tep8b8step 9Piecemeal: <c5uisition
*imple 1n%estment
<ssociate
*ubsidiar
31 31
Step by step ac'uisition . the detail

Bate o ac'uisition C date control gained

Re)measure any prior interest in S to F: at


B6A . gain or loss to proit and loss

Include F: o any prior interest as part o


Dcost o investment in S9 or good%ill
purposes
32 32
Step by step ac'uisition . urther purchases
ater control gained

-o not re)compute good%ill

-et assets o S already being consolidated so


only change is to -/I ?age

Bierence bet%een additional cost o


investment and change in -/I ta<en to e'uity
33 33
/hanges in "roup Structure
'isposal of *ubsidiar B Ioss of control
Proceeds 4
>2 of retained interest 9if an: 4
3< of * at disposal 94:
,oodwill of * at disposal 94:
3+1 in * no lon!er reco!nized 4
,ain/Ioss for !roup 4
3) 3)
/hanges in "roup Structure

'isposal of *ubsidiar B no loss of control

3o chan!e to !oodwill reco!nized

3< of * still consolidated

3+1 in * increases

'ifference between disposal proceeds and


increase in 3+1 taken to e'uity
3" 3"
E Session
/omple+ "roups
3- 3-
/omple+ "roups
2ertical ,roup
Parent
*ubsidiar
*ub8*ubsidiar
+ontrols
+ontrols
3. 3.
:ertical "roup
P
*
/&#
/&#
Q
3/ 3/
:ertical "roup
P
*
-&#
-&#
Q
30 30
:ertical "roup
P
*
/&# 31.1.&2
.&# 3&.).&1
Q
)& )&
:ertical "roup
P
*
-&# 31...&2
.&# 3&.0.&2
Q
)1 )1
F Session
Foreign /urrency
1ranslation
)2 )2
Foreign /urrency 1ranslation
>orei!n +urrenc Franslation
>orei!n +urrenc
Fransactions
>orei!n
7perations
)3 )3
Foreign /urrency 1ransactions
1nitial reco!nition A spot rate 9date of transaction:
*ubse5uent measurement:
Eonetar items +losin! rate
3on8monetar items Jistoric rate
$(chan!e !ains/losses1ncome *tatement
)) ))
/losing Rate Method
Franslation of forei!n operation:
6alance *heet +losin! Rate
1ncome *tatement <%era!e Rate
$(chan!e !ains/losses 7ther comprehensi%e
income
)" )"
Grea<do%n o e+change gains@losses
*ince ac5uisition:
*ubCs 3<Cs A ac5Cn ac5Cn rate %. cl rate
Post8ac5 profits a%. rate %. cl. rate
,oodwill ac5Cn rate %. cl. rate
)- )-
Grea<do%n o e+change gains@losses
>or ear:
*ubCs 3<Cs A 7p. 7p. rate %. cl rate
Profit for r a%. rate %. cl. rate
,oodwill 7p. rate %. cl. rate
). ).
H Session
"roup Statements o
/ash Flo%
)/ )/
Statement o /ash Flo% Proorma
+ash >lows from 7peratin! <cti%ities
,roup profit before ta( 4
<d@ustments
'epreciation 4
<mortisation 4
1mpairments 4
Profit/loss on sale of PP$ 94: / 4
*hare of associateCs profit 94:
1n%estment 1ncome 94:
>inance costs 4
4
)0 )0
Statement o /ash Flo% Proorma
4
+han!e in in%entor 94:/4
+han!e in recei%ables 94:/4
+han!e in paables 4/94:
+ash !enerated from operations 4
1nterest paid 94:
Fa( paid 94:
3et cash from operatin! acti%ities 4
"& "&
Statement o /ash Flo% Proorma
+ash >lows from 1n%estin! <cti%ities
*ale proceeds from disposal of PP$ 4
Purchases of PP$ 94:
1nterest recei%ed 4
'i%idends recei%ed from <ssociate 4
<c5Cn/*ale of *ub, net of cash balances 94: / 4
4
"1 "1
Statement o /ash Flo% Proorma
+ash >lows from >inancin! <cti%ities
Ioan B issue/repament 4 / 94:
*hare issues 4
'i%idends paid to parent shareholders 94:
'i%idends paid to 3+1Cs 94:
4
"2 "2
Statement o /ash Flo% Proorma
+ash flows from operatin! acti%ities 4
+ash flows from in%estin! acti%ities 4
+ash flows from financin! acti%ities 4
+han!e in cash and cash e5ui%alents 4
+ash and cash e5ui%alents b/f 4
+ash and cash e5ui%alents c/f 4
"3 "3
I Session
Accounting or
2mployee Geneits
") ")
Retirement Geneits
*tatement of >inancial Position
Present %alue of obli!ation 4
>air %alue of plan assets 94:
4
?nreco!nised actuarial !ains/9losses: 4
3et 9asset:/liabilit 4
"" ""
Retirement Geneits
1ncome *tatement
+urrent ser%ice costs 4
1nterest cost 4
+urtailment costs 4
$(pected return on plan assets 94:
3et actuarial 9!ain:/loss 94:/4
$(pense 4
"- "-
Retirement Geneits
'isclosure 3ote
7penin! net 9asset:/liabilit 94:/4
$(pense for ear 4
+ontributions 94:
+losin! net 9asset:/liabilit 94:/4
". ".
Retirement Geneits
'isclosure 3ote
$(pected return on plan assets 4
<ctuarial !ain/9loss: on plan assets 4/94:
<ctual return on plan assets 4
"/ "/
1> Session
Substance 6ver
Form
"0 "0
Factored Receivables
Fransfer of Risks and 6enefits
3one
*ome
Recei%ables
Remain
Recei%ables
Remain
Recei%ables
Remo%ed
+ash 1nflow
= Ioan
+ash 1nflow
= Ioan
+ash 1nflow
= Proceeds
Iiabilit
Iiabilit
,ain 9Ioss: in
1ncome *tatement
<ll
-& -&
Sale and Jeasebac<
*ale of <sset and Ieaseback
>inance Iease
3o Fransfer of
Risks and 6enefits
Fransfer of
Risks and 6enefits
7peratin! Iease
-1 -1
11 Session
Financial Instruments
-2 -2
Financial Instruments
'efinition B 1<* 32
<n contract that !i%es rise to both a financial
assets of one entit and a financial liabilit or e5uit
instrument of another entit.
-3 -3
Financial Asset

+ash

Ri!ht to recei%e cash

$5uit
-) -)
Financial Jiability

+ontractual obli!ation to deli%er cash


-" -"
2'uity Instrument

$%idence of ownership
-- --
/lassiication o Financial Instruments
$5uit or IiabilitK

*ubstance

Responsibilit to deli%er cash = liabilit

Eandator redemption = liabilit

3o responsibilit to deli%er cash = e5uit


-. -.
12 Session
Analysis and
Interpretation o
Financial Accounts
-/ -/
Perormance
Profitabilit ( $fficienc = Returns
,P#
7P# ( <sset utilisation = R7+$
3P#
-0 -0
2+ample 1
>inance char!e
3& 1& )& Profit from operations
91.&: 910&: 91-&: 7peratin! costs
2&& 2&& 2&& Re%enue
L&&&s L&&&s L&&&s Income Statement
/ G A
.& .&
2+ample 1
1&& 32& 1)& +apital emploed
>inance lease paable
21& Re%aluation reser%e
"& -& 0& Retained earnin!s
"& "& "& *hare capital
Statement o Financial
Position
/ G A
.1 .1
3&# 3.1# 2/.-# Return on capital
emploed
2 &.-3 1.)3 <sset utilisation
1"# "# 2&# 7peratin! profit mar!in
/ G A
2+ample 1
.2 .2
Ji'uidity
Paables 'as
6u ,oods
*ell ,oods
+ash 1n +ash 7ut
1n%entor
'as
Recei%able
'as
.3 .3
/apital Structure
$5uit
'ebt
Ji!h ,earin! Iow 1nterest +o%er
.) .)
2+ample 2
"&&
1),.&&
9-,3&&:
21,&&&
9),&&&:
2",&&&
"&& 2,&&& 2,&&& 'i%idends paid
9"c per share:
11,2&& 1-,/&& 13,3&& 3et profit
9),/&&: 9.,2&&: 9",.&&: 1ncome ta(
1-,&&& 2),&&& 10,&&& Profit before ta(
9),&&&: 91,&&&: 91,&&&: >inance cost
2&,&&& 2",&&& 2&,&&&
Profit from operations
Income Statement
Geta Alpha
." ."
2+ample 2
1&3,"&&
"3,"&&
1&,&&&
)&,&&&
1&&,&&& 1&3,"&& 1&&,&&& +apital emploed
"&,&&& "3,"&& "&,&&& Reser%es
1&,&&& )&,&&& )&,&&& *hare capital L1
ordinar shares
)&,&&& 1&,&&& 1&,&&& 1&# loan notes
Statements o FP
Geta Alpha
.- .-
2+ample 2
<lpha is more hi!hl !eared then 6eta, but both
companies ha%e the same amount of capital
emploed in total and !enerate the same returns
o%erall:
,earin! 1&# )&#
R7+$ 2&# 2&#
Geta Alpha
.. ..
2+ample 2
1f there is a 2"# increase in the profits of both
companies howe%er, the shareholders of 6eta
benefit more than the shareholder of <lpha:
Return on e5uit 1)..# 1/.&#1/.-#23.1#
G22.)# G2).2#
$P* 33.2"c )2c 112c 1).c
G2-.3# G31.2"#
Geta Alpha
./ ./
Preparing a Report
Fo
>rom
'ate
*ub@ect
.0 .0
Preparing a Report
1ntroduction
'iscussion
+onclusion
/& /&
Jimitations o Ratio Analysis

>inancial statements

+omparisons of different entities

Ratios

+reati%e accountin!
/1 /1
Segmental Analysis

1>R* / re5uires for listed companies only

<nalsis based on internal information pro%ided


to senior mana!ement

*eparatel analsed se!ments are those parts of


the business whose results are material and
whose risk characteristics are distinctive
/2 /2
Segmental Analysis ) Illustration
1&1 920: 30 01 Fotal re%enue
920: 12 1. 1nter8se!ment sales
2. .) $(ternal sales
Re%enue
/onsolidated 2liminations 6ice
product
s
Paper
products
/3 /3
Segmental Analysis Illustration
3& 981: 0 22 *e!ment result
9.: ?nallocated e(penses
23 7peratin! profit
9): 1nterest e(pense
2 1nterest income
/ / *hare of net profits of
associates
9.: 1ncome ta(es
22 3et profit
/onsolidated 2liminations 6ice
product
s
Paper
products
/) /)
Segmental Analysis Illustration
1&/ )) -) *e!ment assets
32 32 1n%estments in associates
3" ?n8allocated assets
1." Fotal assets
)2 0 33 *e!ment liabilities
)& ?n8allocated liabilities
/2 Fotal liabilities
/onsolidated 2liminations 6ice
product
s
Paper
products
/" /"
2arnings Per Share
$P* =
3et Profit <ttributable to 7rdinar *hareholders
Dei!hted <%era!e 3umber of 7rdinar *hares
/- /-
Issue o Shares at Mar<et :alue
$P* =
$arnin!s
93o. *hares 6efore ( K/12: G 93o. *hares <fter ( K/12:
/. /.
Gonus Issue
$P* =
Restate
+omparati%e
= Iast Mrs $P* ( 6onus >raction 1n%erted
$arnin!s
93o. *hares 1ncludin! 6onus *hares:
// //
Rights Issue
Restate +omparati%e = Iast Mrs $P* ( F$RP/+RP
$P* =
$arnin!s
93o. *hares 6efore ( +RP/F$RP: G 93o. *hares <fter ( K/12:
/0 /0
Biluted 2arnings Per Share
7ptions ( 9>28$(:
>2
3il 7ptions
1ncrease b
ma(imum
G Preference
di%idends
+on%ertible
preference shares
1ncrease b
ma(imum
G 1nterest B Fa( +on%ertible debt
-o4 o Shares Ad; 2arnings Ad; Potential
6rdinary Share
0& 0&
1$ Session
Bevelopments in
2+ternal Reporting
01 01
Syllabus /ontent Biagram
'e%elopment
s in $(ternal
Reportin!
3on8>inancial
$n%ironmenta
l and *ocial
Reportin!
1nternational
>inancial
Reportin!