Module 11: Understanding and
Analyzing ICT Firms’ Annual Reports
Carlo M. Rossotto, MNA Regional Coordinator,
Global ICT Department, Policy Division
March 11, 2009
Module Outline
1.
2.
3.
Introduction to Accounting
Special Issues in Accounting and Technology
Analyzing Annual Reports for Economic
Analysis: Cases
2
Introduction to Accounting
1.
2.
3.
4.
5.
6.
7.
Basic Accounting Principles and International Standards
Islamic Finance and AAOIFI Standards
What is a Balance Sheet
What is an Income Statement
What is a Cash Flow Statement
Financial Ratios
Financial Disclosure
3
Introduction to Accounting
Basic Accounting Principles and International Standards
– The International Accounting Standards Board (IASB) is responsible for the
development of International Financial and Reporting Standards (IFRS).
www.iasb.org
– A large number of countries, including Egypt, adopts IFRS or a modified
version of IFRS
– Which countries are adopting IFRS:
http://www.iasplus.com/country/useias.htm
– Egypt adopts IFRS for all companies, domestic and foreign
– European Union. Adoption of virtually all IFRS, with a time lag, and certain
exceptions
– United States. US SEC registrants are required to use US GAAP and are
not permitted to use IFRSs. However, on 14 November 2008, the US SEC
published for comment a proposed “Roadmap for the Potential Use of
Financial Statements Prepared in Accordance with International Financial
Reporting Standards” by US Issuers
4
Introduction to Accounting
Islamic Finance and AAOIFI Accounting Standards
–
Islamic finance is finance in according with Islamic law and
jurisprudence. London, Dubai, Kuala Lumpur emerging as global hubs
for Islamic finance and banking
–
Islamic finance is a growing phenomenon with over
US$500billion of assets (Source: Forbes). Highest growth among all
managed assets
–
Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) www.aaoifi.com
–
London, Dubai, Kuala Lumpur: global hubs for Islamic finance
and banking
–
Coordination efforts between AAOIFI and IFRS. Professional
certifications (example, Islamic Finance Qualification)
5
Introduction to Accounting
What is a Balance Sheet
–
Balance sheet summarizes the position or balance
of a firm at a certain point in time.
–
It is divided in three parts: assets, liabilities and
equity
Current
Assets
Long-term
6
Introduction to Accounting
Current Assets
– Cash and cash equivalents
– Inventories
– Accounts receivable
– Prepaid Expenses
Long-term assets
– Property, plant and equipment
– Investment Property
– Intangible assets
– Investment assets
7
Introduction to Accounting
Liabilities
• Accounts payable
• Provisions for warranties or court decisions
• Financial liabilities (excluding provisions and accounts
payable), such as promissory notes and corporate bonds
• Liabilities and assets for current tax
• Deferred tax liabilities and deferred tax assets
• Minority interest in equity
• Issued capital and reserves attributable to equity holders of
the parent company
• Unearned revenue
8
Introduction to Accounting
Equity
–
–
–
–
–
Share capital
Capital reserves
Revaluation reserve
Translation reserve
Retained earnings
9
Introduction to Accounting
Example of a balance sheet: Google
http://www.google.com/finance?fstype=ii&q=GOOG
10
Introduction to Accounting
What is an income statement
Statement that reports revenues and expenses over a certain period of time
Revenues –
Cost of Revenue = Gross Profit –
- General and Administrative
- R&D
- Depreciation
- Interest expense (revenue)
- Unusual expense
Total Revenues – Total Operating Expenses = Operating Income
Operating Income +/- Interest = Income before Tax
Income before tax – tax = Income after tax
Income after tax – extraordinary items = Net income
11
Introduction to Accounting
What is an income statement
Net income – preferred stock dividend
Earning per share (EPS) =
Weighted average opf common stock outstanding
Basic
EPS
Diluted
12
Introduction to Accounting
Let’s go back to the Google example Income statement
http://www.google.com/finance?fstype=ii&q=GOOG
13
Introduction to Accounting
What is a cash flow statement
Statement that shows a company’s flow of cash over a certain period of time (IAS 7)
Operating activities
• receipts from the sale of goods or services
• receipts for the sale of loans, debt or equity instruments in a trading portfolio
• interest received on loans
• dividends received on equity securities
• payments to suppliers for goods and services
• payments to employees or on behalf of employees
• tax payments
• interest payments
• payments for the sale of loans, debt or equity instruments in a trading portfolio
Items which are added back to [or subtracted from, as appropriate] the net income figure
to arrive at cash flows from operations:
•Depreciation (loss of tangible asset value over time)
•Deferred tax
•Amortization (loss of intangible asset value over time)
•Any gains or losses associated with the sale of a non-current asset, because associated
cash flows do not belong in the operating section.(unrealized gains/losses are also added
back from the income statement)
14
Introduction to Accounting
What is a cash flow statement
Statement that shows a company’s flow of cash over a certain period of time (IAS 7)
Investing activities
•Purchase of an asset
•Assets can be land, building, equipment marketable securities,
•Loans made to suppliers or customers
Financing activities
•proceeds from issuing shares
•proceeds from issuing short-term or long-term debt
•payments of dividends
•payments for repurchase of company shares
•repayment of debt principal, including capital leases
•for non-profit organizations, receipts of donor-restricted cash that is limited to long-term
purposes
•Items under the financing activities section include:
•Dividends paid
•Sale or repurchase of the company's stock
•Net borrowings
15
Introduction to Accounting
Let’s go back to the Google example Cash flow
http://www.google.com/finance?fstype=ii&q=GOOG
16
Introduction to Accounting
Financial Ratios
Profitability Ratios - Examples
Net Income
Return on Equity (ROE) =
Average Sharehold. Equity
17
Introduction to Accounting
Financial Ratios
Liquidity Ratios - Examples
Current Assets
Current Ratio =
Current Liabilities
18
Introduction to Accounting
Financial Ratios
Activity Ratios - Examples
Total Sales
Asset Turnover =
Total Assets
19
Introduction to Accounting
Financial Ratios
Debt Ratios - Examples
Total Liabilities
Debt Ratio =
Total Assets
20
Introduction to Accounting
Financial Ratios
Market Ratios - Examples
Market Price
P/E Ratio =
Diluted EPS
21
Introduction to Accounting
Financial Disclosure
Financial Disclosure Obligations
•
•
•
•
•
Local securities laws and regulations
Compliance with international accounting standards
Local Stock exchange regulations
Foreign Stock exchange regulations
Statute of the corporation
22
Accounting and Technology
IFRS and Technology Firms
Research and Development
- Capitalisation Approach
Revenue Recognition
IFRS requires recognition of revenue
on an element of a transaction, if that elements
has commercial substance on its own
23
Accounting and Technology
IFRS and Technology Firms: Affected Areas
Research and Development
R&D expense is capitalised once technical
and commercial feasibility established
Marketing
Recognition of customer incentives
Sales
Different revenue recognition methods
Taxation, Legal, Communications
IFRS as an opportunity to reshape business
24
Accounting and ICT Analysis
How to Use Balance Sheet of
Technology Firms for Economic Analysis
CASE I – BRITISH TELECOM, TELEKOM MALAYSIA AND
INTERNATIONAL COMMUNICATIONS REVENUES
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Accounting and ICT Analysis
How to Use Balance Sheet of
Technology Firms for Economic Analysis
CASE II – TELECOM EGYPT
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Accounting and ICT Analysis
How to Use Balance Sheet of
Technology Firms for Economic Analysis
CASE III – Mobinil
27