Key Aspects on the Financial Statement Presentation by IASB

Jesus Villalba
IUBH School of Business & Management

Abstract
The present article had as objective to analyse different financial statements, with the main
idea of expose the importance of the key aspects of Financial Statements Presentation by
IASB. Based in the theory of the IAS 1 standards and taken as key points, the identification of
financial statement, statement of financial position, statement of profit or loss and other
comprehensive income and statement of cash flows it was possible to make a comparison of
these statements between the retail companies Adidas and Puma, from the point of view of
an investor. The results show, that evaluating companies from the same industry can be easy
if the companies have the same standards. The investor also obtained an answer fully based
in numbers, even though when evaluating businesses from the same industry tests and ratios
dont differed a lot from each other, there are certain test more accurate for this type of case.
Key words: financial statement, evaluating, comparing, investor.
Introduction
"If you don't have regular and accurate financial statements, you're driving your business 100
miles an hour down a one-way street the wrong way, at night, in the fog, without lights."

Author: Jim Blasingame

We are living in a complex world that is evolving everyday more and more and where financial
institutions play a huge role in the Worlds economy. For many years the financial and
accounting standards are being developed with the idea of create an international language
for business and make easier the evaluation of businesses for governments, shareholders or
owners.
Paraphrasing what Jim Blasingame said, an inaccurate financial statement could jeopardize
any business future for the simple reason that the owners, shareholders or managers rely in
those reports and they could chose the wrong decisions or dont apply the necessary changes
that a business need to be successful.
Without financial and accounting standards globalization could have not been realised and
agreements or business between nations or between people from all over the world could be
a lot more difficult and the veracity of those reports show the performance of a company in a
determined period.
From the analysis of the financial statements of two companies it was possible to realise how
important are these standards and why many countries are adopting them as a rule for the
financial statements of their own companies.

1.-The International Accounting Standards Board (IASB)

The International Accounting Standard Board is an organization dedicated to the development
and enhancement of accounting and financial standards with the main purpose of creating a
universal accounting language for every nation in the world. The regulations and standards
firstly were made by the IASC (International Accounting Standard Committee), however, After
nearly 25 years of achievement, IASC concluded in 1997 that to continue to perform its role
effectively, it must find a way to bring about convergence between national accounting
standards and practices and high-quality global accounting standards. To do that, IASC saw
a need to change its structure. About the International Accounting Standards Committee
(IASC) (2016) Retrieve from http://www.iasplus.com/en/resources/ifrsf/history/resource25
These standards are highly recognized by many institutions around the world in approximately
100 countries, nevertheless, one of the major economies in the World like the American
economy has not adopted this standards. American companies rely their accounting
regulations in the General Accepted Accounting Principles (GAAP) that were developed by
the Financial Accounting Standard Board in the US.
By definition, The International Accounting Standards Board (IASB) is an independent,
private-sector body that develops and approves International Financial Reporting Standards
(IFRSs). The IASB operates under the oversight of the IFRS Foundation. The IASB was
formed in 2001 to replace the International Accounting Standards Committee. International
Accounting Standards Board (IASB) (2016), Retrieved from
http://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb

2.-Financial Statement Presentation

Financial statements are a structured representation of the financial position and financial
performance of an entity. The objective of financial statements is to provide information about
the financial position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions. Financial statements also show the results of
the managements stewardship of the resources entrusted to it. To meet this objective,
financial statements provide information about an entitys assets, liabilities, equity, income and
expenses, including gains and losses, contributions by and distributions to owners in their
capacity as owners and cash flows. IAS 1 (2016) (Page. 11).
Financial statements provide an important and useful information for the owners, managers
or shareholders of a company, consequently, they can take better decisions for the future of
the entity. They can recognized if the company is following the expected course or if they have
to apply the necessary changes to get to the projected goal. Financial statements need to be
the most accurate possible, because any miss information can led the company to the wrong
decisions and jeopardize the corporations future. Any company needs to have a clear financial
statement even though it is a small or a big company in any economic sector.
Nowadays and for many years several entities have manipulated their financial statements
with the particular idea of generating more incomes, increase stock prices, avoid taxes, etc.
One company was really famous for doing that; Enron was a company in the energy sector
and they used to manipulate their financial statements making believed that they were a great
lucrative company with high incomes from sales in every quarter, hence, this raised the stocks
price of the company and many shareholders were making money, however, the reality was
totally different, thanks to loopholes in finance and accounting principles they were able to
hide huge debt that came from fail deals, when true the financial situation of the company was
discovered the stock price went from almost 100$ to 1$ in less than a year and consequently
the company had to filed bankruptcy.
Financial statements have big repercussions in the worlds economy since those are the
documents were governments, companies, funds or even ordinary people rely when they want
to know if is a good idea to invest in an entity or not and in a more technologic World were
millions of financials transactions are made each day it has become a must that every
business has the same financial standards thus people from anyplace in the world can
understand the statements and take decisions based on it.

3.-Identification of the financial statements.

According to the International Accounting Standard Board (2016), every financial statement
must have certain characteristics and distinctions that make the statement different from any
other financial document that does not under the IAS 1 standards; those characteristics are
the following:
(a) The name of the reporting entity or other means of identification, and any change in that
information from the end of the preceding reporting period;
(b) Whether the financial statements are of an individual entity or a group of entities;
(c) The date of the end of the reporting period or the period covered by the set of financial
statements or notes;
(d) The presentation currency, as defined in IAS 21; and
(e) The level of rounding used in presenting amounts in the financial statements.
IAS 1 (2016) (page 20)
As a consequence, the lack of one or more of the five points described above will have
repercussions in the analysis of the financial statement. For example, the identification and
designation of the period has to be done since the difference between an annual and a
quarterly statement could be numerous, therefore the person or company whos reading it will
assume mistaken conclusions about the statement. All other points have to be taken into
consideration if a financial statement wants to be under the standards of IASB.

4.-Statement of financial position.

Accordingly to IAS 1 (2016).The statement of financial position shall include line items that
present the following amounts:
(a) Property, plant and equipment;
(b) Investment property;
(c) Intangible assets;
(d) Financial assets (excluding amounts shown under (e), (h) and (i));
(e) Investments accounted for using the equity method;
(f) Biological assets within the scope of IAS 41 Agriculture;
(g) Inventories;
(h) Trade and other receivables;
(i) Cash and cash equivalents;
(j) the total of assets classified as held for sale and assets included in disposal groups
classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations;
(k) Trade and other payables;
(l) Provisions;
(m) Financial liabilities
(n) Liabilities and assets for current tax, as defined in IAS 12 Income Taxes;
(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12;
(p) Liabilities included in disposal groups classified as held for sale in accordance with IFRS
(q) Non-controlling interests, presented within equity; and
(r) Issued capital and reserves attributable to owners of the parent. An entity shall present
additional line items (including by disaggregating the line items listed in paragraph 54),
headings and subtotals in the statement of financial position when such presentation is
relevant to an understanding of the entitys financial position. IAS 1, Statement of Financial
Position (2016) (Page 20).
Any company with their financial statement under the IASB standards is capable to measure
different characteristics and these features can be compared between companies, to clarify
this point, as an example in the next pages are shown the financial statement position of the
company Adidas and the company PUMA.
Adidas financial statement (2016) Retrieve from. http://www.adidas-
group.com/en/investors/key-financial-data/statement-financial-position/
PUMA Consolidated Statement of Financial Position.

Group Manager Report for the financial year 2015. (2015) (Page 53)
After analysing the financial statement position of the company Adidas and Pumas it is
possible to come out with the next results:

Adidas PUMA

Net working Capital=Current Assets - Current Liabilities

The term Net working capital can be defined as:
a) The difference between current assets and current liabilities. Working Capital
Management. Manika Garg
Net working Capital (Adidas) = 8317 6269= 2048
Net working Capital (Puma) = 1684.8 880= 804.8
The results exposed above represent that the company Adidas is more capable of paying its
current liabilities than PUMA, however, PUMAs number is not really weak because it
represents that the company have enough money to cover their liabilities. Even though both
companies have great positive figures, using the net working capital formula is not really
accurate way of measure because for example, not every asset is liquid and convert it to a
liquid asset could be very difficult. (E.g. Inventory)

Current ratio=Current Assets/Current Liabilities

Current ratio indicates a firms ability to meet its short term obligations. Financial Accounting:
an introduction to concepts, methods and uses. Stickney (2010)

Current Ratio (Adidas) = 8317/6269= 1.3266

Current Ratio (Puma) =1684.8/880= 1.1945
Both companies have a similar current ratio and those numbers show that the both business
are capable of paying their debt in short time. Current ratio can be higher or lower, depends
in the industries. Those number explain that Adidas for example has 1.3 more assets than
liabilities and PUMA has 1.19 more assets than liabilities.

Quick Ratio= (Cash + Short Term + Receivables)/Current Liabilities

The quick ratio is a variant of the current ratio. It takes into account the fact that inventory,
while it is a current asset, is not as liquid as cash or accounts receivables. Cash is completely
liquid: accounts receivable can normally be converted to cash fairly quickly, by pressing for
collection from customer. But inventory cannot be converted to cash except by selling it. The
quick ratio determines the relationship between quickly accessible current assets and current
liabilities. Business Analysis with Microsoft Excel, Carlberg, 3 rd Edition.

Quick Ratio (Adidas) = (1264+5+102)/6269=1371/6269=0.218

Quick Ratio (Puma) = (338.8+0+483.1)/880=821.9/880=0.9339

In this case we can analyse that Adidas is holding a lot more inventory than PUMA and that is
why that Adidas Quick Ratio or also call Acid-test is lower than PUMA and this means that
Adidas can only pay 0.218 of every 1 of liability while PUMA can pay at the end of 2015
0.9339 of every 1 of liability.

5.-Statement of profit or loss and other comprehensive income.

The statement of profit or loss and other comprehensive income (statement of comprehensive
income) shall present, in addition to the profit or loss and other comprehensive income
sections:
(a) Profit or loss;
(b) Total other comprehensive income;
(c) Comprehensive income for the period, being the total of profit or loss and other
comprehensive income.
An entity shall present the following items, in addition to the profit or loss and other
comprehensive income sections, as allocation of profit or loss and other comprehensive
income for the period:
(a) Profit or loss for the period attributable to:
(i) Non-controlling interests, and
(ii) Owners of the parent.
(b) Comprehensive income for the period attributable to:
(i) Non-controlling interests, and
(ii) Owners of the parent.
In addition to items required by other IFRSs, the profit or loss section or the statement of profit
or loss shall include line items that present the following amounts for the period:
(a) Revenue, presenting separately interest revenue calculated using the effective interest
method;
(AA) gains and losses arising from the derecognition of financial assets measured at amortised
cost;
(b) Finance costs;
(ba) impairment losses (including reversals of impairment losses or impairment gains)
determined in accordance with Section 5.5 of IFRS 9;
(c) Share of the profit or loss of associates and joint ventures accounted for using the equity
method;
(ca) if a financial asset is reclassified out of the amortised cost measurement category so that
it is measured at fair value through profit or loss, any gain or loss arising from a difference
between the previous amortised cost of the financial asset and its fair value at the
reclassification date (as defined in IFRS 9);
(cb) if a financial asset is reclassified out of the fair value through other comprehensive income
measurement category so that it is measured at fair value through profit or loss, any
cumulative gain or loss previously recognised in other comprehensive income that is
reclassified to profit or loss;
(d) Tax expense;
IAS 1, Statement of profit or loss and other comprehensive income (2016) (Page 26).

As an example, in the next pages are shown the statements of profit or loss and other
comprehensive income of the company Adidas and the company PUMA.
Adidas financial statement (2016) Retrieve from http://www.adidas-
group.com/en/investors/key-financial-data/income-statement/
PUMA Statement of profit or loss and other comprehensive income.

Group Manager Report for the financial year 2015. (2015) (Page 54)
After analysing the statement of profit or loss and other comprehensive income of the company
Adidas and the company PUMA it is possible to come out with the next results:

Adidas PUMA

Inventory turnover= Cost of goods sold/ Average Inventory

Inventory turnover measures how many times a company has sold its inventory during a
period.
Average inventory= (Inventory Year 1 + Inventory Year 2)/2

Average inventory (Adidas) = (3203 + 2698)/2= 2950.5

Inventory turnover (Adidas) = 7513/ 2950.5= 2.546

Average inventory (PUMA) = (657 + 571.5)/2= 614.25

Inventory turnover (PUMA) = 1847.2/ 614.25= 3.007

Analysing the results obtained above, with a simple look we can realised that PUMA has been
able of selling its inventory 3 times during the period, however, Adidas has been only able to
sell 2.5 times during the period.

Net profit margin= (Net income / Net sales) x 100

Net profit margin (Adidas) = (1029 / 14604) x 100= 7.04%

Net profit margin (PUMA) = (50.4 / 3387.4) x 100= 1.484%

The numbers shown above are really important because allow to compare the performance
of both companies. Adidas and PUMA difference shouldnt be that high, which means that
PUMA in the period 2014-2015 had poor managerial decisions concerning sales or with
production costs.
Return on Assets= Net income / total average assets
Total Average Assets for the period= Total assets (current year) + Total assets (previous year)
/2

Total Average Assets for the period (Adidas) = 14255 + 12748 / 2= 13501.5
Return on Assets (Adidas) = 1029 / 13501.5= 0.076= 7.6%

Total Average Assets for the period (PUMA) = 2620.3 + 2549.9 / 2= 2585.1
Return on Assets (PUMA) = 50.4 / 2585.1= 0.0194= 1.94%
With this numbers it is also possible to realise the big gap between Adidas and PUMA, since
those results mean that PUMA has not manage very well its assets to produce profit. From
the point of view of an investor, the return on assets and the net profit margin are really
important for knowing how the enterprise is going.

6.-Statement of cash flows.

Cash flow information provides users of financial statements with a basis to assess the ability
of the entity to generate cash and cash equivalents and the needs of the entity to utilise those
cash flows. IAS 7 sets out requirements for the presentation and disclosure of cash flow
information.
The notes shall:
a) Present information about the basis of preparation of the financial statements and the
specific accounting policies used in accordance with paragraphs 117124;
(b) Disclose the information required by IFRSs that is not presented elsewhere in the financial
statements; and
(c) Provide information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them.
An entity shall, as far as practicable, present notes in a systematic manner. In determining a
systematic manner, the entity shall consider the effect on the understandability and
comparability of its financial statements. IAS 1, Statement of Cash Flow 1 (2016) (Page 33).

As an example, in the next pages are shown the statements of cash flows of the company
Adidas and the company PUMA:
Adidas financial statement (2016) Retrieve from: http://www.adidas-
group.com/en/investors/key-financial-data/cash-flow-statement/
PUMA Cash flow statement

Group Manager Report for the financial year 2015. (2015) (Page 55)
After analysing the statement of cash flow of the company Adidas and the company PUMA it
is possible to come out with the next results:

Adidas PUMA

Operating Cash Flows Ratio = Cash Flows from Operations/Current Liabilities

Operating Cash Flows Ratio (Adidas) = 376/ 6269= 0.0599

Operating Cash Flows Ratio (PUMA 2015) = -37.1/ 880=- 0.0421
Operating Cash Flows Ratio (PUMA 2014) = 126.4/ 822.6= 0.15365

Both companies have low operating cash flow ratio because there results are under 1 and that
means they are not able to pay all their short liabilities on time, however, considering that both
business are part of the retail industry where credits with supplier can be extended in some
cases that shouldnt be a real problem. More concerning is the situation of PUMA, that went
from successful year to another with negative numbers.

Cash Flow Margin Ratio= Cash flow from operating cash flows/Net sales

Cash Flow Margin Ratio (Adidas) = 376/14604 = 0.0257= 2.57%

Cash Flow Margin Ratio (PUMA 2015) = -37.1/3387.4 = 0.0109= -1.09%
Cash Flow Margin Ratio (PUMA 2014) = 126.4/2972 = 0.04253= 4.253%
As a profitable ratio this measure is really important. After analysing the results and comparing
the percentages from Adidas in 2016 and PUMA in 2014 we can easily conclude that PUMA
was doing a great better job than Adidas, however, comparing with the next year of PUMA it
is exact opposite. Negative numbers from PUMA mean that even though the company is
making sales revenue the company is still losing money,

Summary

The net working capital is substantially bigger in Adidas (Adidas=2048; Puma=804.8)

Current ratio its really similar between the two companies (Adidas=1.32; Puma=1.19)
 The quick ratio is a lot better in Puma than Adidas (Adidas=0.218; Puma=0.9339)
The net profit margin shows that Adidas is performing a lot better than Puma
(Adidas=7.04%; Puma=1.484%)
In return on assets it can be seeing a similar difference like the net profit margin
The operating cash flow ratio and the cash flow margin ratio are terrible to Puma in
both cases.
As an investor it will be smart judge the companies by their net profit margin or cash flow ratio,
therefore in this case the ideal investment would be Adidas, however, it is necessary to take
into consideration the low quick ratio of Adidas mentioned before, because in any case, Adidas
does not have sufficient liquid funds to pay its short term debts. Puma on the other hand, has
gone from a profitable company to a company with awful numbers in matter of only a year,
hence, it will be necessary to take a deeper look and Pumas business strategy to realise why
they have gone to that path. All these analysis were possible thanks to both companies hold
the same standards (IASB) and that make it easier and clearer to analyse.

Conclusions

The IASB standards are the modern universal language of finance and accounting
The importance of the IASB standards is base in the efficiency of analysing different
companies under the same finance and accountable principles.
Financial statements provide useful information to a wide range of users, such as:
Managers
Share Holders
Prospective Investors
Governments, etc.
Financial statements are what others are using to measure your company
Financial statements tell you the performance and the value (sort of) of your company

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