UG 1st Year 2013-14 Michaelmas Term | Financial Reporting

FINANCIAL REPORTING
Tomo Suzuki
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Lecturer Organisation

Prof. Tomo Suzuki (Head of Accounting Group) 1. Preliminary Exercise before the first lecture (See below) 2. Lectures (Eight 2-hour lectures in Michaelmas Term) 3. Classes and TESTs (Five 1.5 hour classes in weeks 1, 3, 5, 6 and 8) 4. Examination (Several calculative and conceptual questions, and a few explanatory and critical essay questions, in Trinity Term 1.5 hours.)

Background & Objectives Background: In the last decade or so, the International Financial Reporting Standards (IFRS), which adopt Fair Value Accounting instead of traditional Historical Cost Accounting, have become the internationally dominant accounting regulation. General perception of this Global Accounting is positive. Let us learn, first, how this should work. However, does IFRS help all the stakeholders, by presenting business realities as they are? To what extent, and in what ways, can we utilise this new accounting regime in todays highly financialized business society? Some even suspected IFRS roles in the recent financial crisis and scandals. We do not aim to be an accounting expert, yet, some technical and institutional knowledge of accounting is essential to be a good management of any organization. Objectives: Our objectives are: (1) to understand how modern financial reporting is supposed to theoretically work from a technical (e.g., double-entry system and ratio analysis) and an institutional (e.g., regulations and audit firms) point of view; (2) based on timely case studies, we try to assess the extent to which the roles of financial reporting are achieved in practice; (3) in a fast-changing, global and socially-conscious business environment, we explore new developments of business reporting and disclosure. This course will enable you to (1) read financial sections of business papers and magazines well (i.e., understand the language of business), (2) perform primary comparative analyses of many companies, for example, for investment purposes, (3) perform detailed analyses of each individual organisation, for example, for credit analyses, (4) consider your own organisations reporting policy and strategy in a fast-changing, global and socially-conscious environment, (5) beyond these practical benefits, to consider some intellectual and critical issues on the roles of financial reporting in society. Preliminary Reading Those with little or no background in accounting will find this course challenging. The course requires a considerable effort to get to grips with both the vocabulary of accounting and techniques. Officially speaking, the course does not assume any knowledge of accounting in advance of the first lecture
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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting (except for the Preliminary Exercise see below), however some preliminary reading should help. Choose any (short, light and very basic) double-entry bookkeeping and financial accounting book for business people. Or, perhaps it is better to utilise web-based information such as:http://www.freebookkeepinghelp.com/. Some courses here are really good and for free. Preliminary Exercise Most Important The aim of the Preliminary Exercise is to standardise the minimum knowledge that is required for this course. The point of this exercise is to understand the flow from double-entry bookkeeping to financial statements, and more fundamentally, to get used to accounting terms (such as assets and liabilities). Where to obtain it: The Preliminary Exercise can be found at the end of this Reading List, or can be available on the shared network drive or Weblearn, under the Financial Reporting, Lecture 0. Or, you may access it online by clicking here (please change the link to the UG drive, if we still have, and please link the latest version). When and How to complete it: The Preliminary Exercise should be completed in advance of the first lecture. The exercise is very simple but requires some time to repeat and memorise. You can NOT finish in a few days. You must repeat it at least Five Times if you have little background of accounting. You should expect a TEST in the first Lecture. Michaelmas term is going to be extremely busy for you, and you will never find time to catch up. Please do it now. The textbook below provides some double-entry bookkeeping issues. If you repeated the Preliminary Exercise five times and understood well, there is no need to go through them. However, if you wish to know double-entry bookkeeping and the accounting procedure a little better, please utilise it. There are some differences between the two, also in the above on-line accounting courses as well. If you find accounting terminologies confusing, actually, you are doing well. It is the case in the actual financial world (and it is not the disorganisation of the lecturer), and you started getting used to it. Class Work and Arrangement - Important We will have Classes in weeks 1, 3, 5, 6 and 8 (1.5 hours each time). You will be notified with your Class No., day and time at the beginning of Michaelmas term. You will NOT be able to change your Class unless you have an exceptional and legitimate reason. In the class room, you are asked to sit exactly the same seat every week so your class teacher can remember you (It is important for the Tutorial Reporting purpose). (1) The first 30 minutes will be spent for a short TEST on the previous weeks topic. The first week TEST will be on the double-entry bookkeeping from the Preliminary Exercise. In the following weeks, you are expected to revise weekly handouts and problem sets, to prepare for the TEST. If you perform very well or very poorly, your College will be notified. (2) The last 60 minutes will be spent for discussions on a few important topics from the lecture of the week. The discussions should form the basis of your essay which should be handed in in the following Class. (3) Essay: Strictly follow the rules below. Type written on A4 paper. 12-font-size. State your Class number followed by Surename, First Name on the top-right corner. The length should be strictly within 850 words. Staple top-left corner. Hand in the Class in person, only. Delayed submission will NOT be accepted under any circumstance due to the need for the efficient administration for large scale classes. If the above rules are not met, your essay will not accepted, and the score / mark will be zero.
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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting

Textbook As financial accounting has just gone through the International revolution and Fair Value revolution over the last decade or so, we have not seen a good textbook authors are just catching up. Also, Oxford accounting courses are short which does not provide candidates with much time to read through a tick textbook. If candidates just skim a textbook, it can be rather confusing. On the other hand, updated teaching/learning materials are increasingly available on-line. Therefore, I thought of not setting a textbook this year for the first time. However, this can cause a worry among many students; and therefore I tried to find a relatively concise and updated textbook which covers similar topics as ours. The following textbook (John Dunn, 2010; there could be a new edition, and in such a case, use the new edition.) is recommended. By the time of your purchase, there may be a new edition, which is fine, of course. The textbook sometimes addresses issues which go beyond the scope of this course. In such cases, use your discretion as to whether or not you have time to read beyond topics raised in the lectures. Reasonable judgements and time management, are essential in surviving the Oxford courses. In any case, Readings in the Reading List should be done AFTER lectures, unless otherwise advised. In this Reading List, Chapter and page numbers refer to this textbook (2010 version). Financial Reporting and Analysis (1st edition, 2010) John Dunn ISBN 978-0-470-69503-6 January 2010, 2009 Paperback, 392 pages

Alternatively, the following textbook is also good, covering more topics and details. If you are keen to develop your financial reporting knowledge, you may wish to purchase this textbook. (But if you just skim this textbook, it will be more confusing than helping you.) You should always use the newest edition. By using the Table of Contents and Index, you can easily find relevant parts of the textbook to our course. Financial Accounting: An International Introduction , 4/e (April 2010), by David Alexander and Christopher Nobes; Publisher: Financial Times Press/Peasons Education

The following textbooks are recommended for advanced and interested students. For reading Annual Report and Financial Statements line by line (Basics): Interpreting Company Reports and Accounts (2008) 10/e Holmes, Sugden and Gee, FT Prentice Hall, ISBN-13:978-0-27371141-4.
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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting For Financial Statements Analysis (Applied): Analysis, Interpretation and Understanding (2003) 6/e Pendlebury and Groves, Cengage, ISBN-13: 9781861529473 For more advanced and comprehensive (including company valuations): Financial Reporting, Financial Statement Analysis, and Valuation - A Strategic Perspective 6/e (2007) Stickney, Brown, and Wahlen, Cengage, ISBN-13: 9780324302950

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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 1 Overall Framework of Financial Reporting The first lecture illustrates the overall workings of Financial Reporting, covering its brief history, the users and uses of accounts, the method of double-entry bookkeeping, basic financial statements, namely Statement of Financial Position (or more commonly, Balance Sheets or BS), Statement of Comprehensive Income (Income Statement or IS; or Profit and Loss Account or PL) and Statement of Cashflow (Cashflow Statement or CF), and issues which go beyond traditional Financial Reporting. (I warned you already that the terminologies are confusing, but this is the reality.) 1.1 Users and Uses of Financial Reporting 1.2 Revision of Preliminary Exercise: Case Study (Lemonade ltd.) 1.3 Basics of BS, IS and CF accounting techniques and terminologies to be understood. 1.4 Annual Report (Nestle, and Oxford BioMedica plc.). Contents to be understood. 1.5 Off-balancesheet transactions and extended reporting Reading Textbook and supplement in the lecture Lecture handouts and Revision Guide, which will be given at the end of each lecture, will give you precise contents that you are supposed to learn in each week. Use the following readings as supplement to what we study in the lecture. You do NOT need to go through all the details to pass the course. Chapter 1 Chapter 2 Chapter 3 Chapter 4 Annual Reports Off-balance story provided in Lecture
Learn overall background of Financial Reporting Lean overall background of todays regulation. We will come back to this point in other lectures. Learn the contents of Annual Reports but use Nestles Annual Report for details. Skim this chapter to know the role of academic research. You are warmly invited to consider your career as an academic accountant. Please do speak to me. Read annual reports of Nestle and Oxford BioMedica as much as possible to familiarise the contents of Annual Report. Understand the importance of Off-balance sheet transactions.

Additional Reading (only if you are keen to know the details) Zeff, S. (2003) How the U.S. Accounting The UK is covered by the textbook. So, use this for the US. Do Profession Got Where It Is Today not try to remember the details. Simply use this as a supplementary reading about the accounting profession, which Accounting Horizon. Vol. 17, Issue. 4. is very helpful as basic knowledge of FR. Available on Business Source Complete. Class 1 TEST (Calculation): Double-entry bookkeeping, Gap filling of Financial Statements. Class 1 Work (Essay): What is IASB, and what is IFRS? Critically evaluate the roles of them.

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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 2 Details of IS In Lecture 1, we learnt the overall framework of financial reporting, however, almost all the figures were given. This time, we will see how figures are actually calculated. In order to understand this, we will study some important accounting terms and concepts such as Realisation, Accrual, Consistency, etc (see below in the table), and we will do this with many examples. Through this process, we will realise how accounting figures can be problematic, rather than neutrally or objectively reflecting corporate reality. We start from IS items in this lecture, followed by BS items and CF items next time (The IFRS approach starts from BS, then IS; but we start from IS then BS, for some good reasons. Details will be explained in the Lecture). 2.1 IS Accounting concepts and terms to be learnt with examples

Revenues (or Sales)

On this, the textbook is not strong. But see Construction contracts (pp. 221-228. We will come back to this point time and again. Please check the accounting concept of Realization on Websites. Cost of Sales Chapter 10. Please check the concepts of Matching, Fifo/Lifo and prudence. Gross Profit - (Whats the use of this notion of profit?) General Expenses Accrual, Expense e.g., Rent, Water charge, etcSee Lecture handout. Depreciation/Amortisation Chapter 8 and 9. Depreciation / Amortisation e.g., Depreciation of buildings, or Amortisation of Licence. Bad Debt Provision / pp. 252-267. Please check the concepts of Prudence and Consistency Allowance See Lecture handout and Websites. Directors pay e.g., Stock Options. See Lecture handout. Profit before Tax - (Whats the use of this notion of profit?) Tax Chapter 6. (But do not go into details) Profit after Tax - (Whats the use of this notion of profit?) Dividends Retained Profit for year Statement of Changes in Equity, Corporate Governance. See Lecture handout. - (Whats the use of this notion of profit?)

Below the line, either under the IS or Statement of Changes in Equity (IFRS, etc) . The format above is slightly different from IFRS format in relation to the Other Comprehensive Income at the bottom of the statement. We will deal with this issue in the lecture.

Reading - Textbook See the above table. Additional readings will be provided in the lecture. Because the textbook takes a slightly different teaching approach from the Lecture, the reading sections above appear messy. If this bothers you, do not spend too much time this week. Wait until Lecture 3, and read through the textbook from Chapters 6 to 11. This should help you understand issues around IS, BS and CF items. Class 2 TEST (Calculation): [Class 2 is in week 3] Several IS items. See handouts for details. See also the Selected Exam Questions in Week 0 file online. Class 2 Work (Essay): Choose one from (1) What are profits and how do we determine in the IS?, and (2) Explain accounting for R&D. (We will come back on these in Lectures 3 and 4).
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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 3 Details of BS, CF and Reading Annual Report In Lecture 2, we covered Income Statement items. We now move on to Balance Sheet items, and Cashflow Statements. 3.1 BS Accounting concepts and terms to be learnt with examples

Fixed Assets (Tangible) Chapter 8 Historical Cost, Revaluation e.g., Land. (Intangible) Chapter 9 Historical Cost, Revaluation e.g., Goodwill (Lecture 4) Current Assets Chapter 10. e.g., Inventories, Cash, etcCurrent/non-current distinction Biological Assets (IAS 41). See Lecture handout. Total Assets Schuetze, W. (1993) What is an asset?, Accounting Horizons, 7 (3), pp. 66-70. [This is an Additional Reading] Available from Business Source Complete. Liability Chapter 11 e.g., Contingent Liability, Off-balance sheet Shareholders Equity Chapter.1 Retained Profit Chapter.1 Other components of Eq See lecture handout, and also Fixed Assets and Revaluation. Equity and Liabilities 3.2 CF - See Lecture handout for Cashflow Statement

Reading - Textbook For BS, see the above table. Additional readings will be provided in the lecture. For CF, the textbook is not strong. Use Lecture handout. Reading Biondi, Y. & Suzuki, T. (2007) Introduction: the socio-economic impacts of international accounting standards. Socio-Economic Review, Vol. 5, No. 4. Available from OUP journals Dichev, Ilia D.. (2008) On the Balance Sheet-Based Model of Financial Reporting. Accounting Horizons, Dec2008, Vol. 22 Issue 4, p. 453-470

Learn Fair Value accounting and the difference from Historical Cost accounting. The Socio-Economic Review,

Vol. 5, No. 4. covers different impacts of Fair Value Accounting on wider issues including financial crisis, fair trade, etc Read as much as you can.
Learn the difference between Income Statement Approach and Balance Sheet Approach.

3.3 Reading Financial Statements As a revision case study, we will read and analyse Oxford BioMedicas Annual Report. If we do not have time for this in the class, you are expected to read the Annual Report at home. Class 3 TEST (Calculation): [Class 3 is in week 5] Balance Sheet items; Cashflow statement. Class 3 Work (Essay): Choose one from (1) Cash is fact. Profit is someones opinion What does this mean? Critically evaluate this statement, and (2) Explain the recent shift from the Income Statement Approach to the Balance Sheet Approach in Financial Accounting. Note: See other questions for Class 3 in Lecture 4 (next page)
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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 4 Financial Statement Analysis 1; Accounting for Business Combination. 4.1 Financial Statement Analysis 1 - Trend Analysis (Horizontal analysis) Lecture 1 covered the overall framework of financial reporting. Lectures 2 and 3 covered many accounts in the IS, BS and CF. Having studied details of each account, this time, we will analyse actual financial statements. Based on a simple Trend Analysis, we will form a basis of detailed analysis of an organisation. Case Study 1: Network Communication plc. (No preparation is required) Reading Textbook and Annual Report (Chapter 7) The textbook is not strong on Financial Analysis. Learn Trend analysis based on the case studies in the lectures. The textbook covers some critical pints of the use of financial analysis. Go back to the Annual Reports we have already seen and Annual Reports try to read Financial Statements as much as possible. 4.2. Accounting for Business Combination (or Group Accounting) In the second half of the lecture, we will introduce the issues of Business Combination. So far, we assumed that we account for one legal entitys financial performance and positions. However, large companies usually have many group companies. In order to know the groups performance and financial positions, we will introduce group accounting. We use cases from Nestle, Coca Cola, Enron and others. Reading - Textbook Chapter 12 and 13 Learn usefulness and difficulty of group accounting. Learn also basic methods of consolidation, but do not go into details. Learn the nature and meanings of Goodwill, Minority Interest and other key notions. For Segment Reporting, see Chapter 7.

Additional Reading Henry, B. (1999) What constitutes control?, Journal of Accountancy, 187 (6), pp. 39-43. Available from Business Source Complete Herrmann, D. & Thomas, W.B. (2000) An analysis of segment disclosures under SFAS No. 131 and SFAS No. 14, Accounting Horizons, 14 (3), pp. 287-302. Available from Business Source Complete

Lean the difficulty of consolidation in relation to determination of the to-be-consolidated entities. If you are very busy, just scan the article. We learnt the necessity of consolidation, but what about the necessity of segment (i.e., breakdown) information? Shareholders and Stakeholders keep demanding more information. If you are very busy, just scan the article.

Class 3 TEST (Calculations): [Class 3 is in week 5] Calculation of Goodwill and Minority Interests. Class 3 Work (Essays): Choose only one from the questions in Lecture 3 and (3) How should we account for Goodwill?
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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 5 Financial Statement Analysis 2 - Ratio Analysis; Regulation. Following Trend Analysis in Lecture 4, we now move on to Ratio Analysis which will enable us to perform comparative analysis of many companies. XBRL may appear useful in the globalised markets and businesses. However, the danger of the over reliance on the ratio analysis will also be emphasised. 5.1 Risks of Ratio Analysis Cases from Nestle, Henkel and Sany (a Chinese company). 5.2 Revision of Trend Analysis Vodafone Case Reading - Textbook Chapter 7 The textbook is not strong on Financial Analysis. Use the Lecture handout. For basic calculations, you must use actual financial statements to practice.

Reading Brown, P. (1998) A model for effective financial analysis, Journal of Financial Statement Analysis, 3 (4), pp. 60-63. Available on Business Source Complete Brashear, Jim. (2009) SEC Mandates Interactive Data Financial Reporting. Corporate Governance Advisor, Vol. 17 Issue 3, pp. 27-30 Available on Business Source Complete See Reference textbook above

This is one of traditional ways of doing financial analysis. Critically evaluate the model proposed here and combine it with the model proposed in the textbook. Learn how XBRL should work; but also critically evaluate risks associated with it. Some more details on ratio analysis.

5.3 Accounting Regulation Critically evaluating the Global Accounting Regulation Read Chapter 5. IFRS by International Accounting Standards Board (IASB) is generally regarded as progress towards more efficient financial markets. Is it the case? If so, in what ways, is it so; and is it not so? We evaluate effectiveness of IFRS in the globalized business world based on some examples such as IAS 41 Agriculture. Class 4 TEST (Calculations): [Class 4 is in Week 6] Financial Ratios and their interpretation. Class 4 Work (Essay): Choose one from (1) In the era of internet and XBRL, how would such readily available data work in our business and society?, and (2) How should financial reporting be regulated in the globalised era? Demonstrate balanced arguments based on good examples. Preparation for Lecture 6: You can also find the copy on the Weblearn. (1) Read Microsoft Case Study (HBS 9-100-027). Questions and Data for this Case Study. (You can disregard the Questions and Data for now). (2) Oxford BioMedica Case Study (No in-advance preparation). (3) IFRS (IAS 41), Plantation and Sustainable Development Case Study. (Click Here Case should be available soon from The Case Centre Link / Copyright).

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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 6 Creative Accounting, Audit and Regulation. Lecture 5 pointed out that accounting figures and ratios are utilised in our highly globalised and automated financial world. Under such conditions then, how would management of multinational firms behave? Let us examine managements behaviour based on the cases from Microsoft, Oxford BioMedica, Enron and Satyam. How, should accounting regulation and auditing, prevent excessive creative accounting and accounting scandals? For the preparation for the case studies below, see page 8. 6.1 Case Study 1: Microsofts Creative Accounting 6.2 Case Study 2: Oxford BioMedica plc. 6.3 Case Study 3: IFRS (IAS 41), Plantation and Sustainable Development Case Study. 6.4 Auditing and Audit Firms Cases of Satyan (India) and others. Reading - Textbook Chapter 7 Reading Collingwood, H. (2001) The earnings game: Everyone plays, nobody wins, Harvard Business Review, 79 (6), pp. 6574. Article available on Business Source Complete. For help with searching click here Sharma, E. Kumar. (4/5/2009) Run Open Fraud.exe. Business Today, Vol. 18 Issue 7, p9092. For full text click here Available from Business Source Complete Bazerman, Max H.; Loewenstein, George; Moore, Don A. (2002) Why Good Accountants Do Bad Audits. Harvard
Business Review, Vol. 80 Issue 11, pp. 96-103.

Revise again how financial analysis is done and where trick may be hidden.

Consider the effects of earnings management.

Learn some details of recent accounting scandal at Satyam which was listed at NYS and also received the Corporate Governance Award.

Article available on Business Source Complete. For help with searching click here

You know theoretically what auditors are supposed to do. But then let us learn why they do bad audits.

Class 4 TEST (Calculations): [Class 4 is in Week 6] Review double-entries of creative accounting. Class 4 Work (Essay): Choose only one from the questions in Lecture 6 and (3) What is Creative Accounting? Is it always wrong or bad? What is the role of Auditors in this context? Are they playing the expected roles under the current institutional arrangements?

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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 7 CSR Reporting, Environmental Accounting, and Accounting for NPOs. So far, we have looked at Financial Reporting of for-profit organisations. However, Oxford candidates are often more socially conscious than those in the other top business schools, and many of them will become a social entrepreneur, work for NPOs, governments and international organisations such as the UN. How could these organisations be best accounted for? In addition, even if you are working for a commercial company, you will need to be aware of impacts of CSR Reporting which has become an increasingly important means of communications with stakeholders. Let us understand the state of arts of these new reporting practices, and consider the future and the strategy for emerging business reporting issues. 7.1 CSR Reporting 7.2 Environmental Accounting (including Accounting for Nuclear Power Plants) 7.3 Accounting for NPOs 7.4 Designing Accounting for Sustainable Growth Experimental Research Perspective Reading (No good textbooks are readily available) Use the Business Source Complete database for browsing relevant articles to serve your interests. We are now almost at the end of the course. Also, todays topics are fast changing. Please actively search the relevant literature, articles, data, etc which serve your interests. Lean the evolution and future of CSR reporting Some accounting for NPOs. If you are very keen on this point, use as a reference point.

Ballou, Brian; Heitger, Dan L.; Landes, Charles E. (2006) The Future of Corporate Sustainability Reporting. Journal of Accountancy, Vol. 202 Issue 6, p65-74. Available from Business Source Complete. NPO Accounting http://www.muridae.com/nporegulation/accounting.html

Class 5 TEST (Calculations): [Class 5 is in week 8.] None. Class 5 Work (Essay): (1) Accounting should simply reflect the reality as they are. Or, Financial Reporting can be designed to enhance sustainability of business and socio-economy. Discuss from an institutional mechanism design perspective.

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UG 1st Year 2013-14 Michaelmas Term | Financial Reporting Lecture 8 Summary: Account-ing for what and how? This is the last lecture of our Financial Reporting course. Throughout the course, various problematic features of accounting were identified. Once caught up in the busy business life, however, we tend to forget these problematic features of accounting. Accounting shifts our focus quite exclusively on numbers themselves, which, in turn, creates new social realities. At the end of this course, let us recapitulate what we have studied, and remind us what we are accounting for and in what ways. We will use two case studies. 8.1 Case Study 1: Japanese Banking Industry - Institutional and socio-economic need. 8.2 Case Study 2: Enron Scandal Personal need (or greed). (For these Case Studies, no preparation is required. For the Enron case, DVD will be played.) Essential Reading The whole textbook No new issue this week. It is time to re-read the textbook for revision. Do not worry about the details, but try to understand the overall framework of Financial Reporting.

Additional Reading (only if you are keen to know the details) Special Issue on Enron. Journal of Accounting and Public Policy, 21 (2). Particularly: Benston, George J. & Learn what happened with Enron. Do not worry about the Hartgraves, Al L. (2002) Enron: what details of accounting techniques, but know how creative happened and what we can learn from it accountings might have happened. pp.105-127. Available from Science Direct. Class 5 TEST (Calculations): [Class 5 is in week 8.] None. Class 5 Work (Essays): Choose only one from the question in Lecture 7 and (2) Consider an effective social mechanism in which accountants and accounting practices are appropriately disciplined. Epilogue: Thank you for learning Financial Reporting with me. This course is too short, but I hope you learnt something from this course. Financial reporting is much more powerful than usually thought, in many different senses. If you are interested in learning financial reporting more, please contact me. I am on Facebook (please make friends .). I hope we have a chance to meet again. Thank you. Tomo Suzuki

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