Advanced Financial Accounting
Course information:
- grade: 30% group work and 70% exam
- group assignment: Combination of problem sets and analysis of annual report
- exam: mix between open and multiple-choice questions
- goal: increases the ability to prepare, audit and analyze the information presented in
financial statements
Lecture 1: Setting the scene
Relevance of accounting information: At this moment there is hardly any standards for
reporting the market value of big firms, which is mainly made out of intangible assets. The
Embankment project on inclusive capitalism tries to include a big part of intangible value
with reliable measurement in the long term.
Earnings relevance: in recent
years, the relevance of earnings
has become lower. Other
information is also taken in to
account e.g.: companies with
no profit have huge IPO’s
Non-financial information:
Externalities (effect on people, environment and society); sustainability goals (Paris
agreements); shift from financial capitalism to inclusive capitalism; diversity and
inclusiveness; paying a fair share of tax; impact investment; stewardship
Annual report is considered to be a convenient mailbox for disclosures by organizations
disadvantages: piecemeal, flavor of the day, no link with strategy/value chain/ performance
- blurring line between financial and non-financial information: in between the two
nowadays pre-financial information is rising
- New financial reporting: expand the scope (include e.g. environment); explain
relationships; interaction between
financial and non-financial reporting
Suggested global corporate reporting
structure (figure): IASB has no desire to
become a standard setter for non-
financial information when
environment has impact on entity than
the IASB should play a role since it
influences the financials
Consequences of:
- financial reports: dividend;
remunerations; reputation
,- reporting standards: capital allocation; cost of financial reporting; less flexibility for
management
Lecture 2: business combinations (IFRS 3)
Business combinations are normally significant transactions with a large impact on current
and future performance of the entity Mergers or acquisitions
- reasons: growth strategy; synergy benefits; consolidation of the market; diversification;
acquiring knowledge; entering of a market
- financing can be done with shares or cash with loan combined earnings can lead to
synergies
- transparency important: there is a big difference between organic growth and acquired
growth entity should always report the impact on revenue and income after acquiring
another company
Forms of a business combination:
1. Acquisition of shares in another entity
2. Acquisition of a business without acquiring shares e.g. acquire the assets, employees
and intangibles, but not buy the shares
3. combination
Out of scope of IFRS 3:
- common control business combination: Looking at
the group of companies, nothing changes IFRS 3
only looks at acquiring third parties
- formation of joint arrangements: looking at
joint venture perspective, no guidance is
given on how to account everything
Step acquisition: When you already have an
interest in the acquire of for example 20%,
IFRS considers the following when acquiring the other 80%: you will have a book gain or loss
on the 20% and you consider an acquiring transaction of 100% for having the business
combination reason for this is because you GAIN or LOSE control of the company (e.g. go
over or under the 50%) when going from 80% to 100% of vice versa you call it a equity
transaction, and no new business combination
e.g.: an acquirer can argue that he doesn’t want to buy the shares because for example a lot
of debt or lawsuits come with it. He then can say that he want to buy a particular business of
the company
- Business: Integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants even if
no revenues yet in for example a start-up classification of IASB: at least one input and one
substantive process for it to be a business combination
- optional concentration test: if the value of all acquired gross assets is concentrated in one
asset or group of similar assets, it is not a business combination (it’s an asset acquisition)
, From an accounting perspective there are no mergers, all business combinations must be
accounted for as acquisitions
purchase method (acquisition method)
1. Identify acquirer
- the acquirer is the combining entity that obtains control of the other combining businesses
- reverse acquisition: the entity that becomes the legal subsidiary of the other entity is the
acquirer e.g. a private company buys a publicly listed company, so that it can bypass the
process of going public look at who has the control in substance
- indicators for acquirer: majority of voting rights, control over nomination of management,
largest in terms of fair value
- relevance of date: date of control is when contract is signed (shares transfer is just a
formality); date from which the earnings are consolidated, FV is measured and the following
goodwill as well; e.g.: all profits for the benefit of acquirer before the contract signing are
acquired profits and not earned profits
2. Value of the business acquired
- The fair values at the exchange date of the consideration (most of the time cash) by the
acquirer, in exchange for the control of the acquired company, plus the FV of any existing
interest in the acquired company
- value when issuing shares: FV determined at the date of control exchange; number of
shares given in return for shares * fair value of the shares given
- contingent consideration: consideration is subject to the outcome of future events cash
should be discounted but shares already are in FV so you don’t have to discount them
using shares, no adjustment has to be made since there wasn’t any provision made before
- any condition attached to being employed, is considered as an employment compensation
under IAS 19: This is taken as an expense over the course of the timespan and will not be
added to the acquiring price
- acquisition costs: all costs (e.g. due diligence, legal) are expenses because it is recognized at
fair value costs of equity and debt are deducted from equity and debt
3. Determine the fair value of assets / liabilities acquired
- recognize all identifiable assets and liabilities of the acquired company that exist at the
date of acquisition, even if they are not recognized by the acquired company yet
- provisions: only take in to account existing liabilities, not recognizing liabilities for future
losses or intended measures restructuring provision only recognized if the restructuring
was initiated by the acquired company and contingent liabilities triggered by the acquisition
will be recognized (e.g. contractual obligations when acquiring)
- contingent liabilities are measured at the higher of: 1. The initial amount 2. The amount
that would be recognized under IAS 37 provisions (probability * payment)
Course information:
- grade: 30% group work and 70% exam
- group assignment: Combination of problem sets and analysis of annual report
- exam: mix between open and multiple-choice questions
- goal: increases the ability to prepare, audit and analyze the information presented in
financial statements
Lecture 1: Setting the scene
Relevance of accounting information: At this moment there is hardly any standards for
reporting the market value of big firms, which is mainly made out of intangible assets. The
Embankment project on inclusive capitalism tries to include a big part of intangible value
with reliable measurement in the long term.
Earnings relevance: in recent
years, the relevance of earnings
has become lower. Other
information is also taken in to
account e.g.: companies with
no profit have huge IPO’s
Non-financial information:
Externalities (effect on people, environment and society); sustainability goals (Paris
agreements); shift from financial capitalism to inclusive capitalism; diversity and
inclusiveness; paying a fair share of tax; impact investment; stewardship
Annual report is considered to be a convenient mailbox for disclosures by organizations
disadvantages: piecemeal, flavor of the day, no link with strategy/value chain/ performance
- blurring line between financial and non-financial information: in between the two
nowadays pre-financial information is rising
- New financial reporting: expand the scope (include e.g. environment); explain
relationships; interaction between
financial and non-financial reporting
Suggested global corporate reporting
structure (figure): IASB has no desire to
become a standard setter for non-
financial information when
environment has impact on entity than
the IASB should play a role since it
influences the financials
Consequences of:
- financial reports: dividend;
remunerations; reputation
,- reporting standards: capital allocation; cost of financial reporting; less flexibility for
management
Lecture 2: business combinations (IFRS 3)
Business combinations are normally significant transactions with a large impact on current
and future performance of the entity Mergers or acquisitions
- reasons: growth strategy; synergy benefits; consolidation of the market; diversification;
acquiring knowledge; entering of a market
- financing can be done with shares or cash with loan combined earnings can lead to
synergies
- transparency important: there is a big difference between organic growth and acquired
growth entity should always report the impact on revenue and income after acquiring
another company
Forms of a business combination:
1. Acquisition of shares in another entity
2. Acquisition of a business without acquiring shares e.g. acquire the assets, employees
and intangibles, but not buy the shares
3. combination
Out of scope of IFRS 3:
- common control business combination: Looking at
the group of companies, nothing changes IFRS 3
only looks at acquiring third parties
- formation of joint arrangements: looking at
joint venture perspective, no guidance is
given on how to account everything
Step acquisition: When you already have an
interest in the acquire of for example 20%,
IFRS considers the following when acquiring the other 80%: you will have a book gain or loss
on the 20% and you consider an acquiring transaction of 100% for having the business
combination reason for this is because you GAIN or LOSE control of the company (e.g. go
over or under the 50%) when going from 80% to 100% of vice versa you call it a equity
transaction, and no new business combination
e.g.: an acquirer can argue that he doesn’t want to buy the shares because for example a lot
of debt or lawsuits come with it. He then can say that he want to buy a particular business of
the company
- Business: Integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or other
economic benefits directly to investors or other owners, members or participants even if
no revenues yet in for example a start-up classification of IASB: at least one input and one
substantive process for it to be a business combination
- optional concentration test: if the value of all acquired gross assets is concentrated in one
asset or group of similar assets, it is not a business combination (it’s an asset acquisition)
, From an accounting perspective there are no mergers, all business combinations must be
accounted for as acquisitions
purchase method (acquisition method)
1. Identify acquirer
- the acquirer is the combining entity that obtains control of the other combining businesses
- reverse acquisition: the entity that becomes the legal subsidiary of the other entity is the
acquirer e.g. a private company buys a publicly listed company, so that it can bypass the
process of going public look at who has the control in substance
- indicators for acquirer: majority of voting rights, control over nomination of management,
largest in terms of fair value
- relevance of date: date of control is when contract is signed (shares transfer is just a
formality); date from which the earnings are consolidated, FV is measured and the following
goodwill as well; e.g.: all profits for the benefit of acquirer before the contract signing are
acquired profits and not earned profits
2. Value of the business acquired
- The fair values at the exchange date of the consideration (most of the time cash) by the
acquirer, in exchange for the control of the acquired company, plus the FV of any existing
interest in the acquired company
- value when issuing shares: FV determined at the date of control exchange; number of
shares given in return for shares * fair value of the shares given
- contingent consideration: consideration is subject to the outcome of future events cash
should be discounted but shares already are in FV so you don’t have to discount them
using shares, no adjustment has to be made since there wasn’t any provision made before
- any condition attached to being employed, is considered as an employment compensation
under IAS 19: This is taken as an expense over the course of the timespan and will not be
added to the acquiring price
- acquisition costs: all costs (e.g. due diligence, legal) are expenses because it is recognized at
fair value costs of equity and debt are deducted from equity and debt
3. Determine the fair value of assets / liabilities acquired
- recognize all identifiable assets and liabilities of the acquired company that exist at the
date of acquisition, even if they are not recognized by the acquired company yet
- provisions: only take in to account existing liabilities, not recognizing liabilities for future
losses or intended measures restructuring provision only recognized if the restructuring
was initiated by the acquired company and contingent liabilities triggered by the acquisition
will be recognized (e.g. contractual obligations when acquiring)
- contingent liabilities are measured at the higher of: 1. The initial amount 2. The amount
that would be recognized under IAS 37 provisions (probability * payment)
