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    HBR Article

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    siva shankar

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    HBR Article

    Uploaded by

    siva shankar
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    HBr Article

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    Download as pptx, pdf, or txt
    4 views15 pages

    HBR Article

    Uploaded by

    siva shankar

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    FINANCIAL REPORTING AND ANALYSIS

    UNIT-1:Introduction to financial reporting and analysis

    Session Slide-2
    31-01-2024
    Submitted By:
    Submitted To:
    Bhoomika Jyothi HK- 2328015
    Prof Latha Ramesh

    MISSION VISION CORE VALUES


    CHRIST is a nurturing ground for an individual’s Faith in God | Moral Uprightness
    Excellence and Service
    holistic development to make effective contribution to Love of Fellow Beings
    the society in a dynamic environment Social Responsibility | Pursuit of Excellence
    CHRIST
    Deemed to be University

    Article discussion: HBR article-Where financial reporting still falls short accounting
    standards disclosure

    The HBR article argues that current financial reporting standards are failing to provide an
    accurate picture of companies' financial health, due to the use of flawed estimates, metrics that
    don't capture true value, and incentives for executives to manipulate the numbers.

    Excellence and Service


    CHRIST
    Deemed to be University
    PROBLEMS HIGHLIGHTED IN THE ARTICLE:

    1. UNIVERSAL STANDARDS

    2. REVENUE RECOGNITION

    3.UNOFFICIAL EARNINGS MEASURES

    4. FAIR VALUE ACCOUNTING

    5.COOKING THE DECISIONS, NOT THE BOOKS

    Excellence and Service


    CHRIST
    Deemed to be University

    1.UNIVERSAL STANDARDS:

    Excellence and Service


    CHRIST
    Deemed to be University

    International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by
    the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a
    standardized way of describing the company's financial performance and position so that company
    financial statements are understandable and comparable across international boundaries

    IFRS

    ADOPTION CONVERGENCE NO-ADOPTION


    Eg: Germany Eg: India Eg: USA

    Excellence and Service


    CHRIST
    Deemed to be University

    2. REVENUE RECOGNITION: “Fertile ground for managing the earnings.”

    KEY POINTS:

    a. Seller fulfilling obligation.

    b. Risk is transferred from seller to buyer.

    c. Significant risk is transferred.

    Excellence and Service


    CHRIST
    Deemed to be University
    Example Scenario:

    Scenario 1: Maruti car delivery to Varun Motors using a Maruti car carrier

     Seller: Maruti Suzuki India Limited (MSIL)

     Buyer: Varun Motors (Car dealership)

     Obligation: Delivery of a Maruti car to Varun Motors

     Risk: Damage or loss of the car during transportation

     Transportation: Maruti car carrier driven by a professional driver

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    CHRIST
    Deemed to be University

    ● Revenue can be recognized when the car is delivered to and accepted by Varun Motors.
    This assumes:

     Significant risks and rewards of ownership have transferred to Varun Motors: They gain control of
    the car, assume responsibility for any damage, and can readily sell it.

     Collection of payment is reasonably assured: Varun Motors has a good credit history or has already
    paid for the car.

     Amount of revenue is measurable: The agreed-upon sale price is clear and readily calculable.
    ● If the agreement specifies payment as a precondition for ownership transfer, revenue may be
    recognized when payment is received.

    Excellence and Service


    CHRIST
    Deemed to be University

    Scenario 2: Shobha Developers, as a real estate company, can engage in multiple types of transactions with
    different accounting implications. Here are some examples and how revenue recognition might differ:
    1. Land sale: Generally occurs at the point of sale when ownership and control of the land are transferred to the
    buyer, assuming payment is reasonably assured.
    2. Construction and sale of apartments: Revenue recognition can be more complex due to the progressive nature of
    construction.
    3. Development of commercial properties: Revenue recognition depends on the lease or sale agreement.
    Sale: Similar to land sale, revenue recognized upon ownership transfer.
    Lease: Revenue recognized over the lease term, typically using the straight-line method.

    Additional factors:
    Contract terms: Specific terms of agreements with buyers can impact revenue recognition timing and conditions

    Excellence and Service


    CHRIST
    Deemed to be University
    3. UNOFFICIAL EARNINGS MEASURES:
    Unofficial earnings measures, also known as non-GAAP earnings, are financial metrics calculated outside of
    Generally Accepted Accounting Principles (GAAP). While not mandatory for companies to report, they are frequently
    used by both companies and analysts to provide additional insights into a company's performance.
    What are they?
    Non-GAAP measures adjust GAAP earnings by excluding or adding certain items, aiming to offer a
    clearer picture of a company's underlying operating performance.
    Common examples include:
    • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): Removes
    financing and accounting decisions' impact.
    • Adjusted Earnings Per Share (EPS): Excludes one-time events like restructuring charges.
    • Free Cash Flow (FCF): Indicates cash available for operations and investments.

    Excellence and Service


    CHRIST
    Deemed to be University

    Potential concerns:
    Manipulation: Companies can misuse non-GAAP measures to paint a rosier picture.
    Comparability: Different adjustments by companies make comparisons difficult.
    Lack of standardization: No clear definition or regulation for specific measures.

    KEY POINTS:
     During the first dot-com wave, companies began using “eyeballs”, “page views” and so on to convince
    analysts and investors.

    Example : "Shark Tank" investors frequently throw around terms like EBITDA!

    Excellence and Service


    CHRIST
    Deemed to be University
    4. FAIR VALUE ACCOUNTING
    Fair value accounting is a method of measuring assets and liabilities at their estimated current market
    value, instead of their historical cost. This means that the value reported on the financial statements
    reflects what the item could be bought or sold for on the open market, rather than what the company
    originally paid for it.
    Why Use Fair Value Accounting?
    1. Investors and creditors may find fair value information more useful for assessing a company's
    financial health and future prospects.
    2. In some cases, historical cost may not accurately reflect the current value of an asset, especially for
    items like investments or intangible assets.
    3. Comparing companies across different industries can be easier when they use the same valuation
    techniques.

    Excellence and Service


    CHRIST
    Deemed to be University

    FAIR VALUE ACCOUNTING ALSO HAS DRAWBACKS:


     Subjectivity: Estimating fair value can be subjective and prone to manipulation, leading to potential
    inaccuracies.
     Volatility: Market fluctuations can cause significant changes in reported values, impacting financial
    performance metrics.
     Implementation complexity: Implementing and maintaining fair value accounting systems can be complex and
    expensive.

    Excellence and Service


    CHRIST
    Deemed to be University

    5.COOKING THE DECISION, NOT THE BOOKS.

    Managers may, for instance,

    choose to overprovision—that is, deliberately overstate expenses or losses, such as bad debts or restructuring costs

    that can be released in future periods to artificially inflate profits.

    Or a company might under provision, deliberately delaying the recognition of an expense or a loss in the current

    year. In that case, profit is borrowed from future periods to boost profit in the present.

    Excellence and Service


    CHRIST
    Deemed to be University

    THANK YOU

    Excellence and Service

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