Discovery Learning Team ProjectIFRS financial statement disclosures and analysis Wayne G.

Bremser, PhD, Professor of Accountancy Sixth edition, Spring 2012

Lord Kelvin: "When you are face to face with a difficulty, you are up against a discovery."

PROJECT LEARNING OBJECTIVES: The projects primary objective is to enhance students depth of understanding of IFRS financial statements using a discovery learning methodology. Student teams are required to compare annual reports and major accounting policies of a U.S. firm and a European competitor that uses IFRS. A second objective is to enhance student competencies in financial statement analysis techniques and extend them to IFRS firms. COMPANY SELECTION Your team will have a European firm to study IFRS in depth. For comparison with US GAAP purposes, you will study a publicly traded U.S. company (high performing benchmark competitor) in that industry that competes with the European firm in some market segments. You have the option of using another IFRS competitor as a financial statement analysis benchmark. Your professor will identify the firms to be studied, and a pdf of the financial statements will be posted on Blackbaord. ANALYSIS MODEL The goal of financial statement analysis is to answer specific questions. For example, should you invest in the company or not? If you own the stock, should you sell? For purposes of this project, you may or may not choose to make an investment recommendation for the IFRS firm. In the international accounting course, the concept that investors should not rely solely on the financial statements was stated. At a minimum, your analysis should make a conclusion about the insights provided by your accounting and financial statement analysis that would contribute to an assessment of the IFRS companys financial prospects. 1. ACCOUNTING ANALYSIS Compare the IFRS financial statements with the US GAAP statements. Read the auditors reports. Identify significant transactions major acquisitions, discontinuance or disposal of business segment, unresolved litigation, major write-downs of receivables or inventories, etc. Read the financial statements and footnotes. Compare the IFRS and US GAAP firms financial statements for the most recent two years. Prepare an IFRS comparison exhibit with 5 to 8 major differences in accounting policies for the most recent year (see appendix illustration) to summarize your findings. In your presentation,

you should select at least three significant US GAAP differences from IFRS that would likely impact reported net income and cause comparability issues. You may want to go to sec.gov and retrieve a copy of the IFRS firms 20F for 2006 and examine the reconciliation between US GAAP and IFRS for insights into possible differences. Do an in-depth accounting analysis, including consideration of the firms operations. Examine the IFRS income statement and list at least three presentation or measurement differences: >> Does the format differ significantly from the US GAAP firm? >> Is there any reporting of unusual or non-recurring items? If so, how do you interpret this? >> Have the firms changed accounting methods or estimates that affect comparability over time? The statement of cash flow can provide insights. For the IFRS firm and the US firm net cash from operating activities per share with earnings per share. Use a slide or an excel graph (minimum 5years) and compute percent change year to year. >> How does the trend in operating cash flow compare to the trend in earnings? >> How does the correlation of operating cash flow to earnings compare? >> Does this provide any insight? Are there any implications for assessing earnings quality? Look at the IFRS balance sheet and list at least three presentation or measurement differences. Look at the assets: >> What do you see on the IFRS firms statements with regard to using fair values to a greater extent than US GAAP? >> Can you identify any assets that are of questionable value such as goodwill or receivables? If so, why are they questionable? >> How does the IFRS firms quality of the disclosures pertaining to current asset valuations compare with the US GAAP firm? Look at the liabilities: >> What do you see on the IFRS firms statements with regard to provisions? >> How does the IFRS firms quality of the disclosures pertaining to provisions and contingencies compare with the US GAAP firm? How does the firm define cash generating units? How many CGUs are disclosed? Does it seem that there should be more CGUs? What impairments were reported in the most recent two years? Quantify the differences in the IFRS and US GAAP disclosures and the components of the financial statements for the two firms. >> [1] Accounting policies: What is the number of policies listed (with headings)? What is the number of words (include headings)? >> [2] Notes to financial statements: What is the number of notes listed (with numbers)? What is the number of words (include headings)?

Assess earnings quality and related balance sheet valuations. Earnings quality may be affected by a number of strategies managers use to influence accounting numbers. They can make discretionary accruals that involve judgments. Firms can use biased accounting estimates to manage earnings and get desired results. >> Can you identify any issues related to the following strategies? o Overstating operating performance to meet earnings goals o Income smoothing o Taking a bath o Creating hidden reserves o Employing off-balance-sheet financing Overall assessment: >> In presenting the differences, refer to the financial statements in your handout. >> What are the major differences in accounting policies and disclosure? >> Were there any accounting changes by the IFRS firm in the last three years that resulted in convergence with US GAAP or vice versa? >> If the US firm had used IFRS, what would have been the estimated effect on net income and EPS?higher? Would you expect a big difference? >> How would you rate the disclosure (transparency) of the IFRS firm as compared to the US firm? >> What is the apparent impact of IFRS / US GAAP convergence? 2. FINANCIAL ANALYSIS Your financial analysis should cover the most recent 2 years for the IFRS firm. Analyzing the financial statementsyour class presentation should focus on the most important aspects of the following: Comparisons across time Comparisons within the financial statements: common-size statements and ratio analysis Profitability ratios-- ROA analysis Leverage ratios ROA versus ROE Asset turnover ratios Cash flow analysis >>How does sales growth compare with earnings growth? >> How does total market value compare with book value? Ratio analysis table 1(see Blackboard xls) of key ratios should be prepared presenting two (most recent) years of data for your firm and the US comparison firm. You need to interpret what the ratios imply about the company's performance. The performance of your chosen IFRS firm and US firm should be compared to each other as competitors. You should prepare table 2 to compare your IFRS firms ratios to a benchmark. Industry ratios are often used as benchmarks and the data to compute additional ratios can be found in: MSN money or Reuters.com, Yahoo finance, Dun and Bradstreets Industry Norms and Key Business Ratios, Yahoo Finance, Standard and Poors Industry Reports, Value Line Investment Surveys and various Moodys publications. The problem is that the industry ratios are based on US GAAP firms. You may choose another IFRS competitor as a benchmark for ratios.

>>Be sure to have a slide that examines ROA before tax and the two components (asset turnover and profit margin on sales) for the IFRS firm and the US firm. >> A major question that you should address in your presentation is: how meaningful is this comparison, given IFRS and US GAAP differences? Your ratio analysis table should be based on audited annual financial statements. A ratio calculator excel file is available on Blackboard. Alternatively, you can use published ratios for your firms from library data sources internet sources in the table or you can calculate them. If you use published ratios for your firms, make a check on key ratios (ROA, ROE, sales growth, EPS growth) on the calculations before using them. Small differences can be tolerated. Some internet sites do not provide the formulas used to compute the ratios reported. There is often more than one way to compute a given ratio. You must be comfortable about the formulas used for industry ratios and for your company are consistent. Internet sources may compute ratios based on the most recent 12 months (combining quarterly data). They may refer to this as trailing 12 months or TTM. If the ratios that you calculate are not much different than published ratios for your firm, you can feel comfortable using published ratios for the firm that you are choosing for a benchmark. If not, there may be two or three ratios that need to be calculated for your benchmark firm. It can be argued that the most important thing is that the ratios for your firm and the benchmark be calculated the same way. When a firms ratios have changed significantly from one year to the next, you need to consider the cause of the change. If ratios differ significantly between the firm and the benchmark, you should think about reasons for the differences. In many instances it may not be possible to pin down an exact cause. In that case, you might: (a) list alternative explanations for the difference, (b) list questions you would ask to try to identify the cause, and/or (c) list data you would need in order to reach a conclusion. In addition, you should discuss any unique accounting issues that apply to the industry and the specific firm. 3. KEY QUESTIONS ABOUT IFRS vs. US GAAP: 1. What do you see with regard to disclosure and transparency? 2. What are the important points about financial statement usefulness and comparability? 3. Is fair value more important in IFRS financial statements than US GAAP? From a user perspective, do any of the fair values used seem too subjective? 4. What insights about IFRS financial reporting did you get from this project? DELIVERABLES: A. Presenting teams: There will be two presenting teamslead team and analysis team. Both teams will prepare presentations. The teams may compare their ratios for the US and IFRS firms, but they should not collaborate on other aspects of the presentation content.The presentations will be organized into three sections and the approximate times are indicated. 1. ACCOUNTING ANALYSIS (8 minutes) 2. FINANCIAL ANALYSIS (8 minutes)

3. KEY QUESTIONS ABOUT IFRS vs. US GAAP (5 minutes) 1. Prior to your presentation both teams provide by email to the professor: [a] Ratio analysis tables 1 and 2 without comments. [b] IFRS comparison exhibit draft (can be changed) comparing the IFRS and US GAAP financial statements for the most recent year. --due April 19 at 10:00AM. On this day in class, the teams should indicate their preference to be lead team and analysis team. The presentations are as follows: Lead team-- section 1 Analysis team--presents sections 2 and 3 Lead team-- section 3 Since different viewpoints are expected, section 3 is being presented by both teams. In case of some unresolved questions, the lead team should be prepared to present section 2 and the analysis team should be prepared to present section 1. 2. You must provide to the professor by 9:00AM on the day you present (April 25) the following (slide under my office doorB3024) [a] A hard copy IFRS comparison exhibit comparing the IFRS and US GAAP financial statements for the most recent year [b] final Ratio analysis tables 1 and 2 [c] A summary of your teams conclusion on the Key questions about IFRS vs. US GAAP-approximately one page single spaced. [d] 2 hard copies of your power point slides (3 slides per page) and your class handouts (second copy needed for the professional reviewer). 3. Class presentation: You should use a class handout of: [a] The balance sheet and income statement (including a statement of comprehensive income) for your IFRS firm.provided by the lead team. [b] Ratio analysis table 1.provided by the analysis team. Other handouts can be used. The teams will present a report focusing on the most interesting aspects that provide the greatest insights into IFRS and conclusions about the firm will be presented. B. Non-presenting teams The non-presenting (review) teams will have access on Blackboard the following materials prepared by the presenting teams: [a] Ratio analysis tables 1 and 2 draft without comments [b] IFRS comparison table draft from the presenting lead team. The review teams will write a report (approximately 3 pages single spaced) on the following key questions about IFRS vs. US GAAP: 1. Examine the IFRS income statementlist and describe at least three presentation or measurement differences. 2. Examine the IFRS balance sheetlist and describe at least three presentation or measurement differences. 3. What do you see with regard to disclosure and transparency?

4. What are the important points about financial statement usefulness and comparability that you want to share with us? 5. What insights about IFRS financial reporting did you get from this project? 6. How does the firm define cash generating units? How many CGUs are disclosed? Does it seem that there should be more CGUs? What impairments were reported in the most recent two years? 7. Is fair value more important in IFRS financial statements than US GAAP? From a user perspective, do any of the fair values used seem too objective? Review team reports are due at the beginning of class. The review teams should be prepared to comment on any major differences in their report as compared to the presenting team during the Q&A part of the presentation. GRADING Teams will be graded on the basis of the project objectives and the requirements stated above. A presentation evaluation form will be used (see appendix). A professional accountant(s) will be invited to attend the presentations and provide input into the grading process. A high quality presentation is required. Some aspects of team projects can be graded on an individual basis such as a students presentation and preparedness in the team project presentation to the class. See the course syllabus for the peer evaluation policy. Appendix: Notes: A few more detailed points follow: 1. List references for material you include in the project as you would in a research paper. 2. The Villanova librarys data bases can be helpful-- You can do a search on ABI Inform and other data bases to attempt to find these issues for a firm. Financial writers in Business Week, Forbes, Fortune, Wall Street Journal, etc. sometimes question accounting practices in their coverage of a firms investment prospects. The S & P and Value Line data bases may be helpful. IFRS comparison exhibit (illustration)

Accounting policy US INC. UK Ltd. Comments 1. Inventory LIFO FIFO UK Ltd. would have higher assets; higher earnings (most years); US Inc.s Lifo reserve is $8,000,000 ______________________________

ACC2420 EVALUATION OF TEAM CASE PRESENTATIONDiscovery Learning IFRS Team _______Case______________________________________ Evaluator _____________ TEAM- CONTENT Effectively presented major issuesIFRS comparison exhibit, key differences (why and impact) Comments_______________________________ Poor____ Fair____ Good____ Very Good____ Excellent____

Clearly explained IFRS issuesCGU, fair value, disclosure and transparency rating Comments_______________________________ Poor____ Fair____ Good____ Very Good____ Excellent____

Effectively presented an assessed earnings quality, impairment and related balance sheet valuations Comments_______________________________ Poor____ Fair____ Good____ Very Good____ Excellent____

Effectively discussed ratio analysis tables, US firm, benchmarks, conclusions about comparability Comments_______________________________ Poor____ Fair____ Good____ TEAM- PRESENTATION MATERIALS Quality of the visual aids and handouts Very Good____ Excellent____

Comments_______________________________ Poor____ Fair____ Good____ Very Good ____ Creativity demonstrated in the presentation. Comments_______________________________ Poor____ Fair____ Good____ Very Good ____ Excellent____ Excellent____

Overall team rating consider: Speaking skills, Clarity of expression, Reflected clear understanding of issues, Ability to effectively respond to questions, Ability to involve the audience, Overall presentation skills Poor Excellent 0-----10-----20-----30-----40-----50-----60-----70-----80-----90-----100 What did you like best about the presentation? ___________________________________________________________________________________ What constructive comments do you have for the presenting team? 1. ___________________________________________________________________________________ 2. ____________________________________________________________________________________ 3. ____________________________________________________________________________________ 4. ____________________________________________________________________________________