Legal form
This is the most obvious way of determining a reporting entity, and, with the exception of consolidated financial statements, is the method generally used for reporting purposes. Sometimes however the substance of what constitutes an ‘entity’ may be different from its legal form. This is generally dealt with by applying the definition of control in IFRS 10.

Ownership
A reporting entity could be defined as all the property owned by a particular investor regardless of how that is distributed over legal entities. For example, an investor may have 3 different unrelated entities and an investment in, say, a joint venture. While not a group, combining these ownership interests together can be provide useful information for the investor.

Management
A management approach brings together all assets managed by the same party, again regardless of how distributed over legal entities. This can be useful from an investor’s point of view in order to assess how effective management of resources by the same party is. This is the approach used in IFRS 8 for segment reporting, for example.
(Marks awarded for other logical approaches as well, e.g. ‘control’ approach or ‘end user’ approach)

• In accordance with IAS 18, goods held at a customer’s premises remain the inventory of the selling entity if the risks and rewards of ownership have not transferred to the customer. In this case, the customer has no right of return of unsold goods. This would suggest that the risks and rewards of ownership have transferred to the customer and that Integrity Sport should have recognised a sale when the goods were delivered to the customer. The fact that no such adjustment has taken place previously, even though sales have taken place on the same terms would appear to support this assertion. If this is the case, the Finance Director is incorrect to increase closing inventory by the goods held at the customer’s premises.
• It would appear that the Finance Director might be trying to manipulate the net assets figure in order to meet bank covenants. If these were breached, the bank could take action and Integrity Sport’s funding package could be withdrawn and the company could be put out of business. In this case shareholders, employees and the public would all be affected. The fact that the Finance Director may be trying to protect these parties does not, however, make her actions acceptable. Adjustment to the closing inventory figure will also result in an overstated profit figure as cost of sales is reduced by the adjustment. If Integrity Sport gives its employees profit related bonuses, this may also result in a personal gain being made by the Finance Director.
  

The Finance Manager is a qualified accountant and as such is bound by the IFAC’s Code of Ethics. He cannot retain his integrity by ignoring this issue. He should also display professional behaviour by pursuing this issue. As the Finance Manager has identified a possible ethical issue, he should seek a resolution. An appropriate course of action would be to:

• Gather all relevant facts. There is a possibility that the Finance Director is correct in putting through an inventory adjustment, however the Finance Manager needs evidence to confirm this. Equally there is a possibility that pressure has been exerted on the Finance Director to put the adjustment through.
• If the Finance Manager is uncomfortable speaking to the Finance Director again, it may be appropriate to raise the matter with another Board member, explaining the issue and correct accounting treatment.
• If this is unsuccessful, the company may have a formal mechanism for reporting this type of issue.
• If the Finance Manager is not successful in pursuing the matter internally, he may consider approaching the company’s external auditors.
• A final consideration may be for the Finance Manager to resign his position and make his suspicions public to the bank and shareholders.
  

Integrated reporting: merging sustainability and financial reporting
The value created by an organisational strategy that achieves financial results and creates sustainable value cannot be expressed by individual financial and sustainability reports with no obvious links between the profit figure and sustainability impacts. Integrated reporting therefore involves taking a more cohesive and efficient approach to corporate reporting with the aim of improving the quality of information available.

An integrated report is a single annual report, however unlike a traditional annual report, it focuses on government, social and environmental as well as financial issues. An integrated report is prepared with all stakeholders in mind, rather than simply shareholders; it requires the co-operation of departments throughout an organisation rather than the individual input of some; it deals with the future as well as the past. The Framework provides guidance on the principles and contents that should be incorporated into financial reporting.

It explains that there are three main aspects to an integrated report, being capitals, guiding principles and content elements.

• Capitals are the inputs to an organisation that are used to create value. These include financial capital as well as non-financial capital such as human, social and natural capitals.
• Guiding principles explain how an integrated report should be prepared – these include principles that underlie financial reports such as materiality and reliability, but also principles more relevant to sustainability such as stakeholder relationships and future orientation.
• Content elements of an integrated report again include both financial and sustainability elements. They are: organisational overview and external environment, governance, business model, risks and opportunities, strategy and resource allocation, performance, outlook and basis of presentation.
  

• Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios.
• Inflation may have badly distorted a company’s balance sheet. In this case, profits will also be affected. Thus a ratio analysis of one company over time or a comparative analysis of companies of different ages must be interpreted with judgment.
• Seasonal factors can also distort ratio analysis. Understanding seasonal factors that affect a business can reduce the chance of misinterpretation. For example, a retailer’s inventory may be high in the summer in preparation for the back-to-school season. As a result, the company’s accounts payable will be high and its ROA low.
• Different accounting policies and practices can distort comparisons even within the same company (leasing versus buying equipment, LIFO versus FIFO, etc.).
• It is difficult to generalize about whether a ratio is good or not. A high cash ratio in a historically classified growth company may be interpreted as a good sign, but could also be seen as a sign that the company is no longer a growth company and should command lower valuations.
• A company may have some good and some bad ratios, making it difficult to tell if it’s a good or weak company.
  

                                                     Report Format
From                         :
To                              : Research Department of ICAG
Date                          : 8 May 2018
Subject                     : Analysis of Fordland Ltd & Fiatland Ltd
Introduction
Operating Performance:

• Operating performance ratios are tools which measure the function of certain core operations for an organization or business. Particularly, these ratios reveal information about how efficiently that organization is using resources to generate sales and cash. A company with strong performance ratios is able to utilize a minimum resource pool to generate high levels of sales, as well as a significant cash inflow.
• Using the Gross Profit Margin, Fordland is doing better than Fiatland. This means that Fordland is able to control its cost of production and at the same time maximise its revenue or sales.
• Using the Net profit margin Fiatland (38%) is doing extremely well compared to Fordland (10.50%). This means that Fiatland is able to control its operating expenses compared to Fordland. Fiatland is more efficient in controlling its expenses.
• Fiatland’s ROCE of 30% is higher than Fordland’s 24.10% ROCE. This means that Fiatland does a better job of deploying its capital than Fordland. A higher ROCE indicates more efficient use of capital. ROCE should be higher than the company’s capital cost; otherwise it indicates that the company is not employing its capital effectively and is not generating shareholder value.     (4 points @ 0.5=2 marks)

Liquidity

• Liquidity ratios analyse the ability of a company to pay off both its current liabilities as they become due as well as their long-term liabilities as they become current. In other words, these ratios show the cash levels of a company and the ability to turn other assets into cash to pay off liabilities and other current obligations.
• The current ratio is mainly used to give an idea of a company’s ability to pay back its liabilities (debt and accounts payable) with its assets (cash, marketable securities, inventory, and accounts receivable). As such, current ratio can be used to make a rough estimate of a company’s financial health. For every GH¢1 of current debt, Fordland has GH¢1 available to pay for the debt. Fiatland has GH¢2 in current assets for each GH¢1 of current debt. Fiatland has more than enough to cover its current liabilities if they come due.
• The quick ratio measures the cedi amount of liquid assets available for each GH¢1 of current liabilities. Thus, a quick ratio of 0.8:1 for Fordland means that a company has GH¢0.80 of liquid assets available to cover each GH¢1 of current liabilities and Fiatland has GH¢1.0 of liquid assets available to cover each GH¢1 of current liabilities.     (2 marks)

Gearing

• Gearing ratio refers to the fundamental analysis ratio of a company’s level of long-term debt compared to its equity capital/capital employed. The point when processing what amount of debt an organization is undertaking as contrasted with its equity, the debt to equity ratio is generally utilized.
• Generally, a lower gearing ratio means greater financial stability. However, not all debt is bad debt. Loans and other fixed interest liabilities are a way for companies to leverage their value to increase profits for shareholders, so the optimal gearing ratio is largely determined by the individual company relative to others in its sector. Therefore Fordland with a debt to equity ratio of 50% is riskier than Fiatland with 30%.            (2 marks)

Investment Ratio

• Dividend yield is a way to measure how much cash flow you are getting for each cedi invested in an equity position. In other words, it measures how much cedi you are getting from dividends. In the absence of any capital gains, the dividend yield is effectively the return on investment for a stock. Assuming all other factors are equivalent, then, an investor looking to use his or her portfolio to supplement his or her income would likely prefer Fordland’s stock over that of Fiatland, as it has 3% the dividend yield compared to 2% of Fiatland.
• Dividend cover is the ratio of company’s net income over the dividend paid to shareholders, calculated as earnings per share divided by the dividend per share. It helps indicate how sustainable a dividend is. Dividend Cover of less than 1.5 may indicate a danger of a dividend cut while more than 2 is viewed as healthy. Investors will prefer Fordland with a dividend cover of 2 as compared to Fiatland with a dividend cover of 1.5
  Signature

Although it is true that cash flows are factual and not affected by accounting policies, there are a number of areas in which it could be argued that profit is a better measure of performance:

• Profit is accrual based. This has the following implications: – Management can manipulate cash flows to appear better than they are by delaying payments and bringing forward receipts; this is irrelevant to profits. – Certain items relating to the future are recognised in profit but not in cash flows. For example a provision for a liability is recognised in profit or loss so providing indicators of future cash flows.
• Non-cash items may be represented in profit or loss, but are obviously not represented in the statement of cash flows. An example is share-based payments. Although these do not involve the payment of cash, they are still relevant to performance appraisal.
• Due to the way in which cash flows are disclosed, normalisation for exceptional and one-off items is difficult to achieve. In the statement of profit or loss these items are disclosed and so can be excluded in order to assess sustainable performance more accurately.
• Management can time the purchase and sale of non-current assets in order to improve cash flow performance in a given year. The equivalent expense is depreciation; as this is recognised over the life of the underlying asset, there is limited opportunity to take a similar short-term approach to improving performance.
  

Scheme 1
i. The advantage of immediate liquidation is that the cash flows can be estimated with a reasonable amount of accuracy, particularly as a firm offer has been received for the leasehold buildings.
ii. On the face of it the valuations of the loan portfolio do not appear excessive, though the possibility of them realizing as much as forecast needs to be considered.
iii. The bank suffers a material loss on its investment, but nevertheless manages to recover 90% of the amount owing.
(Any 2 points for 1.5 marks)

Scheme 2
i. The advantage of this option is that the bank retains a customer, and avoids bad publicity possibly associated with the closure of a local firm.
ii. The computed financial advantage of this option is also a significant factor. However, there must be considerable doubt concerning the achievement of these estimates. Is there any evidence that the recent trading pattern has been reversed?
iii. The nature of the arrangement with the Cheap Finance Company Ltd also needs to be explored. If the bank is being offered 20% on its investment, the finance company is probably being offered something higher. Also, what is the order of priority on repayment between the planned loans from the finance company and the bank?
iv. Can the company really expect to generate the cash flows necessary to service and finance repayment of amounts due to both financial institutions?
v. Finally, what is the financial commitment of the directors in terms of further cash investment or offering assets as security?
(Any 2 points for 1.5 marks)

Financial statement extract
Income Statements for the year ended 30 June
.                                                                       2016                      2017                    2018
.                                                                       GH¢                      GH¢                    GH¢
Finance costs (see working)                       1,056,480             1,094,035.2          1,140,603.65

Note: The finance cost in the income statement for 2016, for instance, is computed as GH¢4,402,000 x 24% = GH¢1,056,480. Meanwhile, the interest to be paid is GH¢5,000,000 x 18% = GH¢900,000. This requires an accrual of GH¢156,480 (that is, GH¢1,056,480 – 900,000). This accrual should be added to the carrying value of the debt to arrive at the amortised cost at the end of year 2016.

• Deferred tax liability c/d GH¢27,000 of which 25% =GH¢6,750 of which amount relating to revaluation surplus on land = (80,000-65,000)x 25% = 3,750.
• Increase in deferred tax liability will be recorded =GH¢6,750-GH¢2,600 =GH¢4,150 OF WHICH GH¢3,750 should be charged to OCI and the remainder charged to profit or loss account.          (3 marks)

Journal Entry:                                        GH¢                  GH¢
Dr income tax expense (SPL)                  400
Dr Income tax on OCI (SOCI)                3,750
Cr deferred tax liability (SFP)                                          4,150                                            (2 marks)

Classification as held for sale is a non-adjusting event after the reporting period (IAS 10 para 22(c)). Therefore the definition of a discontinued operation is not met as the assets are neither discontinued in the period nor classified as held for sale at the year end.

A reportable operating segment closed down during the year is likely to meet the definition of a discontinued operation because it represents a major part of the entity’s business and it was disposed of during the entity’s accounting period.

For an operation not yet sold or abandoned to meet the definition of a discontinued operation, it must meet the IFRS 5 held for sale criteria. All of these criteria were met at the previous year end, however at the current year end the operation was not sold within 12 months of classification and the period is expected to be extended well past this. However, where the period is extended by an event beyond the entity’s control such as this IFRS 5 Appendix B permits classification as held for sale (and therefore treatment as a discontinued operation) to continue provided the other criteria are still met, which appears to be the case here.

• EPS gives a way to measure a company’s profits relative to the number of shares in issue. It is argued that as owners hold equity shares, it is more relevant to them to know how much profit each share has earned than to know the overall profit figure.
• EPS feeds into the price / earnings ratio, one of the most important stock market measures of value. This gives an estimate of the number of years it would take for an investment in an equity share to return itself in earnings terms, assuming current performance continues into the future.
• It is essential that such an important measure of performance have clear guidelines regarding its calculation. IAS 33 Earnings per Share gives us a standardised method of calculating both earnings, and the number of shares.
• Many investors feel that other measures are more appropriate, and that the IAS 33 definition of EPS is too conservative. IAS 33 allows alternative measures of EPS to be published, as long as the IAS 33 figure gets equal or greater prominence.
• There is a danger in relying on a single measure of performance, as no single measure can encapsulate all aspects of an entity’s performance.
• Also, there is a danger that EPS may be seen by unsophisticated investors as a definite exact number, when in reality it is subject to all the accounting estimates and judgments that are necessary in preparing a set of financial statements.
• Despite these fears, it is generally agreed that IAS 33 gives a very fair method of calculating EPS, and that the consistency it offers is of value to the investor and analyst.                                          (Any 3 points)