PGBM65 Module: International Financial Statement Analysis Report

This report analyzes international financial statements, focusing on the convergence project between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). It explains the objectives of the convergence project, aiming to eliminate inconsistencies and enhance the comparability and transparency of financial reports. The report details the current status of various projects, including short-term and major joint projects, and discusses the benefits of IFRS implementation, such as increased comparability, cheaper capital, and reduced auditing complexity. The analysis includes a balance sheet statement for Ketsu Department Stores and explores provisions, liabilities, and equity, as well as the impact of IFRS on global organizations and governments. Furthermore, the report addresses the implications of IFRS adoption, highlighting advantages for investors, multinational organizations, and regional economic groupings. The report also includes working notes and calculations to support the financial analysis, providing a comprehensive understanding of the subject matter.

Running head: INTERNATIONAL FINANCIAL STATEMENT
Name of the Student:
Student Registration Number:
Programme of Study:
Word Count: 3,029
Name of the Module Leader: Caesar Nurokina
Name of the Tutor:

1INTERNATIONAL FINANCIAL STATEMENT
Table of Contents
Question One:..................................................................................................................................2
Requirement (a):..........................................................................................................................2
Requirement (b):..........................................................................................................................5
Question Two:.................................................................................................................................9
Requirement 1:.............................................................................................................................9
Requirement 2:...........................................................................................................................11
Question Three:.............................................................................................................................13
References:....................................................................................................................................17

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Question One:
Requirement (a):
Intention of IASB and FASB convergence project:
With the rising completion and pressure for organisations to disclose favourable reports of
earnings, there has been potential for fraud owing to the ambiguity in revenue recognition
guidance. Therefore, it has become increasingly necessary for IASB and FASB in establishing a
unified group of accounting standards (Tschopp and Nastanski 2014). In January 2002, the
FASB initiated discussions on a main project for overhauling the current standards of revenue
recognition. The discussions started identification of the scope and objectives of the project,
which would lead to comprehensive guidelines for revenue recognition in different industries. In
June 2002, there has been addition of revenue recognition by IASB in its technical agenda. In
September 2002, a formal agreement was made between IASB and FASB for working in
collaboration on the project of revenue recognition along with sharing staff resources (Hashim,
Li and O’Hanlon 2016). The significant objectives of this convergence project are listed down as
follows:
Elimination of weaknesses and inconsistencies in the revenue requirements
To form international accounting standards needing comparability, transparency and
increased quality in financial reports (Angeloni 2016)
At the time of implementing international accounting standards, the needs of emerging
markets are to be taken into consideration
Convergence of different national accounting standards with the international accounting
standards
Creation of a robust framework so that revenue issues could be addressed effectively
(Moldovan 2014)
Enhancement in comparability of revenue recognition practices throughout industries,
organisations, capital markets and jurisdictions
Delivery of beneficial information to the financial statement users by using enhanced
disclosure requirements

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Simplification of the preparation of financial statements by minimising the requirements
to be referred by an organisation (Ball 2016)
Current status of the project:
The scope of the convergence project has evolved with the passage of time. The
following table would show the present situation with the different projects. Some of the listed
projects are joint FASB-IASB projects, which are unofficially portion of the “Memorandum of
Understanding (MoU)” between the two boards. However, both the boards have agreed to work
in collaboration on the projects. On certain occasions, the projects have not been continued in the
form of joint projects and the IASB is carrying on with the project with its own right or it would
be taken into account for a longer-term research project of IASB. It is noteworthy to mention that
the convergence projects are on the verge of completion and there would not be any addition of
new projects on the agenda (Iasplus.com 2019).
Projects Status
Short-term convergence projects:
Cost of borrowings Reissuance of “IAS 23 Borrowing Costs” in
2008
Discontinued operations (only for IASB) Issuance of “IFRS 5 Non-Current Assets Held
for Sale and Discontinued Operations” in
March 2004
Fair value option related to financial
instruments (only for FASB)
Finished
Impairment Combined work on the project has not been
continued
Government grants Combined work on the project has not been
continued
Investment properties Active involvement of FASB in the project
Impairment Combined work on the project has not been

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continued
Research and development (only for FASB) Finished
Joint arrangements Issuance of IFRS 11 by IASB in 2011
Segment reporting Issuance of “IFRS 8 Operating Segments” by
IASB in 2008
Major joint projects:
Business combinations Issuance of merged standards in 2008
Consolidation Issuance of merged standards in 2011
Conceptual framework There is only partial completion and the other
phases are not continued; thus, IASB has
undertaken comprehensive project alone
Measurement of fair value Issuance of merged standards in 2011
De-recognition Inability of both IASB and FASB in arriving at
a joint solution and thus, there has been
enforcement of additional disclosures
Presentation of financial statements This project has not been continued jointly and
therefore, some amendments to the current
requirements are made for presenting the
comprehensive income statement
Financial instruments This project is extremely valuable for both
FASB and IASB and it is currently in progress.
It contains a number of sub-projects, some of
which have already been completed and the
others are in progress. In few areas, there has
been development of divergent outcomes and
there is no alignment of the timing of issuing
pronouncements. Work has been completed by

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IASB on “IFRS 9 Financial Instruments”.
Intangible assets In 2007, joint decision was undertaken by
IASB and FASB of not including this project
in the agenda
Insurance contracts Combined work on this project has not been
continued, even though both boards are liaising
on certain issues
Liabilities and equity The combined work on this project has not
been continued
Leases This project has high priority for both boards
and the work is in progress, even though
divergence has taken place about few aspects
Post employment benefits The combined work on this project has not
been continued
Recognition of revenue Issuance of IFRS 15 in May 2014, which has
been converged with ASU 2014-09
Table 1: Current status of the convergence projects of IASB and FASB
(Source: Iasplus.com 2019)
Requirement (b):
It is thought that the implementation of IFRS in all nations would assist the investors and
business organisations in the form of minimisation of cost of investments along with enhancing
the quality of the provided information. In addition, the investors would be willing to provide
funds with increased transparency among the financial statements of different organisations.
Along with this, the multinational organisations serve to obtain the maximum benefit from only
requiring a single standard and thus, they could save money. It provides the significant benefit, in

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which it is utilised in above 120 different nations, while US GAAP is utilised only in a single
nation.
There are certain advantages of convergence that the investors and global organisations
could enjoy and they are enumerated briefly as follows:
Increased comparability:
The investors, including both corporate entities and individuals, would be able to
distinguish the financial outcomes of the various domestic and global companies and industries
for undertaking investment decisions. The single group of financial reporting standards
harmonising international accounting allow the investors regardless of their understanding of the
financial results of various global organisations to compare the performance of these
organisations for arriving at investment decisions (McEnroe and Sullivan 2014).
Cheaper capital in the public market:
The organisations adhering to the IFRS guidelines could obtain large and cheaper public
funding both domestically and globally by listing on different global stock exchanges like
London Stock Exchange, New York Stock Exchange and others. They draw the foreign investors
as well. The reason is that the application of IFRS assures accurate investigation of the financial
results of business organisations with the help of auditing (Satin and Huffman 2015). As a result,
the integrity of the financial outcomes is assured and they could be maintained and represented
faithfully for reposing the confidence of the investors in financial reporting.
Minimisation in cost of capital:
The organisations accessing funding in different nations are required to restate their
financial statements with adherence to the GAAP requirements of such nations. This increases
the cost of obtaining such funding. The international harmonisation of IFRS would imply that
such organisations could represent the same financial statements in all main global markets
without any sort of conversion and as a result, there would be minimisation in the cost of capital
(Sedki, Smith and Strickland 2014).
Minimised complexity in auditing:

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Under GAAP, the audit work of multinational organisations is quite complex, since the
auditor needs to be accustomed to the required accounting regulations and frameworks of the
countries where the subsidiaries are located. This has increased the pressure on external audit
work and as a result, it leads to increased audit fees (McCarthy and McCarthy 2014). The IFRS
convergence eases auditing and accounting of multinational organisations, since the parent
organisations and their subsidiaries apply similar accounting standards.
Attraction of foreign direct investment:
The application of different domestic GAAP has restricted foreign direct investments in
some nations, particularly in the developing markets, to some extent. Assisting foreign investors
to list in the home country makes the domestic market busier and therefore, it encourages
additional investment. This could be accomplished in an easier way, if the nation is adhering to
IFRS norms and guidelines (Wingard, Bosman and Amisi 2016).
Increased flexibility for governments:
The governments of different nations would save money and time, if they implement
IFRS. Moreover, if the same is used internally, the governments of the developing nations could
undertake efforts for controlling the activities of the cross-border multinational organisations in
their own nations. Therefore, these organisations could not take shelter behind foreign
accounting practices, which are complex and difficult in terms of understanding.
Promotion of regional economic grouping:
The regional economic groups are generally involved in promoting trade within a
particular geographical area. The soundness of these groups relies on the available structures like
building blocks and accounting framework (Steinbach and Tang 2014). The implementation of a
single accounting practice like IFRS helps sound and cohesive regional grouping. At present, the
regional groupings like the EU, ECOWAS and others have implemented IFRS.
Central authoritative body:
From the perspective of policy-making, shifting to a single set of global accounting
standards is set within each nation by each standard-setting body as well as by a global group. A
single set of standards would minimise disagreement between nations and global regulators and

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it might reduce costs. In some nations, businesses are needed to incur reporting fees, which move
to finance these standard-setting bodies (Macve 2014). Although the costs might not affect large
organisations, they could have significant effect on small businesses. By shifting to a central
authoritative body, these costs could be minimised massively.
Other reasons:
There are certain other reasons for convergence to IFRS, which mainly constitute of the
following:
Vast sources of funds to foreign organisations while allowing smaller organisations for
accessing funding domestically and hopefully at lower cost
Straightforward appraisal of foreign organisations for mergers and takeovers
Allowing the shift of accounting staffs throughout the national borders due to the usage
of similar accounting standards in all nations
Development of group accounts would be easier owing to the application of similar
accounting standards (Pelger 2016)
Easy calculation of tax liability of the multinational organisations and investors receiving
income from foreign nations to eliminate tax evasion and fraud

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Question Two:
Requirement 1:
It is noteworthy to mention that provisions and other current liabilities of Ketsu
Department Stores include bank overdrafts.
Working Notes:

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From the above table accompanied by working note tables, a simplified balance sheet
statement for Ketsu Department Stores and the statement is segregated into two sections, which
include assets and equity and liabilities. The three sub-headings in the asset section constitute of
property, plant and equipment, current assets and other fixed assets. In order to current assets, the
accounts that have been taken into consideration are inventories, trade accounts receivable, other
receivables and miscellaneous assets and liquid funds or marketable securities. For computing
other fixed assets, the accounts considered include intangible assets, deferred tax assets, shares in
associated companies and other investments. By computing these three main accounts, the total
assets of Ketsu Department Stores have been £9,856,000 in 2015 compared to £11,382,000 in
2014.

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In order to compute equity with minority interests, the considered accounts include
capital reserve, subscribed capital, unappropriated profit, revenue reserves, currency translation
difference and minority interests. For calculating long-term borrowings, bank overdrafts have
been deducted from gross borrowings to arrive at the desired figure (Bekaert and Hodrick 2017).
Finally, for computing provisions and other current liabilities, the accounts taken into account
include provisions for deferred tax liabilities, provisions for pensions and similar obligations,
other provisions, trade accounts payable, bank overdrafts and other liabilities. By computing
these three main accounts, the total equity and liabilities of Ketsu Department Stores have been
£9,856,000 in 2015 compared to £11,382,000 in 2014.
Requirement 2:

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The above tables mainly help in representing working capital, working capital need and
net cash for Ketsu Department Stores for the years 2014 and 2015. As stated by Finkler, Smith
and Calabrese (2018), working capital could be defined as the money available to an
organisation for managing its daily operations. In other words, working capital assists in gauging
the liquidity, efficiency and overall health of the concerned organisation. Thus, the working
capital of an organisation depicts the outcomes of a series of business activities comprising of
inventory management, revenue collection, payments to the suppliers and debt management
(Karadag 2015).
For Ketsu Department Stores, working capital is computed as £2,076,000 in 2015 in
comparison to £2,665,000 in 2014. This denotes that the working capital of the organisation is
deemed to be positive and thus, it has the ability of paying its short-term dues immediately
(Baños-Caballero, García-Teruel and Martínez-Solano 2014). However, the trend is found to be
declining for the concerned organisation in 2015. This signifies that the organisation is becoming
over lagged. Despite increase in sales revenue, it has paid off its trade payables too quickly,
while the collection of receivables is slow. Thus, Ketsu Department Stores needs to undertake
necessary measures for increasing its availability of working capital.

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On the other hand, working capital need is utilised for paying short-term obligations like
closing inventory and accounts payable. In case; the working capital falls sharply, the
organisation bears the risk of running out of cash (Patel 2014). In case of Ketsu Department
Stores, working capital need is observed to decline from £2,430,000 in 2014 to £1,948,000 in
2015. This denotes that Ketsu Department Stores could fall into trouble, if it loses the ability of
meeting its short-term obligations. Thus, it needs to undertake corrective measures like collecting
quickly from the customers to increase its working capital base.
Finally, net cash is primarily used to test for the ability of an organisation in paying off its
liabilities. The investors mainly use this measure owing to its simplicity and it helps in
understanding the suitability of an investment (Martin 2016). Moreover, net cash could be
utilised for ascertaining the amount of debt an organisation could undertake for supporting
projects or operations. By using this measure, if an organisation is looking at transactions, it
could tell the profitability of those particular transactions for the organisation. In case of Ketsu
Department Stores, there has been decline in net cash amount from £3,207,000 in 2014 to
£2,536,000 in 2015. Such decline states that there has been minimisation in the ability of the
organisation in settling off its liabilities due to the lower amount of cash remaining after all
transactions.
Question Three:
The financial performance of JSC Aeroflot has been evaluated by carrying out
profitability, liquidity, efficiency and investment ratio analysis represented as follows:
Profitability analysis:

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From the table above, it has been gathered that net margin of JSC Aeroflot is observed to
increase in the year 2015 to 9.08% than the year 2014 (6.24%). Such results indicate that the
company is able to address all its expenses effectively and is attaining an increasing growth in its
revenue over the years.
Return on capital employed of the company is observed to decrease to 14.95% in the year
2015 in comparison to year 2014 that was 15.12%. This result indicates that the company is
dealing with concerns related with employing its accumulated capital effectively in generating
sufficient profits. It also signifies the company is not able to attain enough returns from its yearly
capital invested within the business operations (Bhalla 2014).
Liquidity analysis:
The current ratio of JSC Aeroflot has decrease to 2.95 in the year 2015 in comparison to
the year 2014 that was 5.04. Such results signify that the company’s current assets are getting
lower than its current liabilities over years, which further indicates that the organization is
dealing with issues related with addressing all its short term obligations or debt payments.
The quick ratio of JSC Aeroflot is also observed to decrease to 1.82 in the year 2015 in
comparison to the year 2014 that was 4.07. This decrease is because of the reason that the
company is facing concerns related with covering all its short term obligations through
employing its available funds efficiently. This is further affecting the liquidity position of the
company as it does not possess enough cash or other liquid resources in paying off its debt
obligations (Banerjee 2015).
Efficiency analysis:

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From the table above, it has been gathered that inventory turnover of JSC Aeroflot is
observed to increase in the year 2015 to 61.01 % than the year 2014 (31.53%). This increase is
for the reason that the company is being highly efficient in converting its inventory into sales for
attaining revenue. However, it might also indicate shortage in its inventory levels in the long
term (Martin 2016).
The receivables turnover of JSC Aeroflot is observed to increase in the year 2015 to
72.64% than the year 2014 (71.18%). This signifies that the company is efficient enough to
collect all its receivables in shorter time duration. It is also gathered that the company is
collecting cash on a regular basis from all its debtors.
The payables turnover of JSC Aeroflot is observed to increase in the year 2015 to 41.86%
than the year 2014 (32.50%). This result indicates that the company is being capable enough to
pay off all its suppliers in shortest to possible in order to decrease its accumulated debt and
maintain its financial liquidity (Churet and Eccles 2014).
Investment analysis:

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From the table above, it has been gathered that debt/equity ratio of JSC Aeroflot is
observed to increase in the year 2015 to 37.82% than the year 2014 (33.46%). This increase is
evident because of the reason that a large proportion of the company’s assets are being financed
through debt. It also signifies the business is relying on high debt for financing its investment
activities.
From the table above, it has been gathered that dividend pay-out ratio of JSC Aeroflot is
observed to decrease in the year 2015 to 22.94% than the year 2014 (79.37%). This decrease
signifies that the company is paying a low percentage of its net income in the form of dividends
to its shareholders. It also signifies that less amount of company’s profits are shared with the
investors, as it is holding maximum profits for business growth purposes (Brigham and Daves
2014).

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Banerjee, B., 2015. Fundamentals of financial management. PHI Learning Pvt. Ltd.
Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital
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