SBRINT
Syllabus E. Interpret Financial Statements For Different Stakeholders E1. Interpretation Of Financial Information

E1a. Indicators Of (Non) Financial Performance 1 / 11

Syllabus E1a)

Discuss and apply relevant indicators of financial and nonfinancial performance including earnings per share and additional
performance measures.

Analysis is not just calculations!

So remember this is not a baby paper now so...

  1. Explaining the ratio is just not enough

  2. You need to compare (eg to prior periods or industry averages)

  3. Then say what the movement/difference is telling you - by using the scenario - and what this may mean for the company and its stakeholders

  4. Now also consider any non-financial consequences? (quality, ethics etc)

  5. Any transactions/events in the year that had a significant impact on ratios

  6. Any impact of different accounting policies on ratios? (particularly if comparing to other entities)

A Ratio Analysis Technique

  1. Always see if the ratio has improved or deteriorated (Not 'increased' or 'decreased')

  2. The say why the ratio has improved or deteriorated - here is where you use the scenario not a textbook!

  3. Finally explain the longer term impact on the company and make a recommendation for action where appropriate.

EPS

PAT / NO. OF SHARES

EPS means nothing on its own

It always needs to be compared over time

Remuneration packages might be linked to EPS growth, so increasing the pressure on management to improve EPS, and be an inherent ethical risk

Illustration

A company changes its depreciation policy (longer UEL) - in order to reduce depreciation - and thus increase EPS

Answer

  1. Step 1: State the IFRS knowledge:

    An entity should review UEL every year - and any change is a change in accounting estimate

    Changes in accounting estimates only allowed if a result of new information

  2. Step 2: Apply the rule or principle to the scenario

    So in the scenario you'd look for things like:

    1) Large profits on disposals - a result of too short a useful life previously 
    2) Other evidence of longer UELs on similar assets
    3) Buying periods matching the new UEL

  3. Step 3: Explain the ethical issues (if you think this is solely to manipulate the earnings figure)

    Threat to objectivity

    Also non-compliance with IAS 16 and therefore, contravene the fundamental principle of professional competence.

Ethics note

So far we only looked at the manipulation of earnings

Other examples could include:

Significant sales to related parties and the directors not wanting to disclose details of the transactions
Directors trying to window dress revenue by offering large incentives to make sales to un-creditworthy customers or Manipulating estimates to achieve required results.