Professional Documents
Culture Documents
Parties involved
- Shareholders: own company
- Directors: Guardians of company’s assets for shareholders
- Manager: Uses company’s assets
CG vs Mgmt
Why CG?
- Better access to external finance
- Lower costs of capital (interest rates on loans)
- Improved company performance – sustainability
- Higher firm valuation & share performance
- Reduced risk of corporate crisis & scandals
CG Pillars
- Accountability
o Ensure mgmt. is accountable to the board
o Ensure board is accountable to shareholders
- Fairness
o Protect shareholders rights
o Treat all shareholders, including minorities, equitably
o Provide effective redress for violations
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- Transparency
o Ensure timely, accurate disclosure on all material matters incl. financial situation, performance,
ownership and corporate governance.
- Independence
o Procedures & structures are in place so as to minimize or avoid conflicts of interest
o Independent directors and advisers – free from outside influence
CG – Tool set
- Board of directors
o Good board practices include…
Clearly defined rules/authorities
Duties & responsibilities of directors understood
Board is well structured
Appropriate composition & mix of skills
Appropriate board procedures
Director remuneration (reward) in line with best practice
Board self-evaluation and training conducted
- Transparent disclosure
o Financial info disclosed
o Non-financial info disclosed
o Financials prepared according to IFRS
o High quality annual report published
- Control environment
o Internal control procedures
o Risk mgmt. framework
o Internal audit function
o Independent audit committee established
o Management information systems established
o Independent external auditor conducts audit
- Large shareholders
o Can act as monitors
o Minority shareholders should have well-defined rights, a well-organised shareholder meetings, a policy
on related party transactions and a clearly defined and explicit dividend policy
o The legal environment = important
- Proxy fights
o Group of shareholders join forces and gather enough proxies to win a corporate vote
o Standard way to replace board members
- Financial structure
o Debt service limits inefficient management if bankruptcy is costly
- Hostile takeovers
o Allows one to capture large gain from taking over underperforming company
o 2 issues..
Free rider problem: small shareholder doesn’t want to tender (offer for sale) their shares
Competition from other bidders/incumbent management
- Agency conflict
o Issues between stockholder and debtholder or stockholder and management
o Two parties have different interests and asymmetric information. Principal cannot directly ensure that
agents are always acting in its (the principal’s) best interests.
o Incentives of two parties are not aligned
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Class 2: Measuring and reporting financial position (CH2)
Statement of financial position / balance sheet
- Financial position of firm on a particular date
Accounting equation
- Current assets
o 1. Held for sale/consumption
o 2. Expected to be sold within year
o 3. Held principally for trading
o 4. Cash or near equivalents to cash
- Non-current assets
Classification of claims
- Current liabilities
o 1. Expected to be settled within the business’s normal operating cycle
o 2. Held principally for trading purposes
o 3. Due to be settled within a year after the statement of financial position date
o 4. No right to defer settlement beyond a year after the statement of financial position date
- Business entity convention = business & its owners are treated as being quite separate and distinct
- Historic cost convention = the value of assets on the balance sheet should be based on historic cost
- Prudence convention = caution should be exercised when preparing financial statements
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- Going concern convention = financial statements should be prepared on the assumption that a business will
continue operations for the foreseeable future
- Dual aspect convention = each transaction has two aspects, both of which will affect statement of financial
position
Money measurement
Key problems
- Goodwill & brands
- Human resources (eg. Waarde personeel)
- Monetary stability (inflatie ed.)
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Class 3: Measuring and reporting financial performance
The income statement (aka profit & loss account)
- Measures and reports how much profit a business has generated over a period
Profit (or loss) = Total revenue in period – Total expenses incurred in generating that revenue
- Revenue = Measure of inflow of economic benefits (eg. sales of goods, interests received)
- Expense = Measure of outflow of economic benefits (eg. COGS, insurance expense)
COGS
Recognition of revenue
Recognition of expenses
- Matching convention: expenses should be matched to revenue that they help generate
o Expense reported in income statement cash paid for that item during period
Materiality convention
- Subject to treatment of accruals and prepayments
- If amounts involved are trivial (not meaningful), we should consider only what is expedient (useful)
o Usually this means treating an item as an expense in the period in which it is first recorded rather than
strictly matching it to the revenue to which it relates
- Example: $2 worth of equipment left at end of year. Processing It isn’t worth time and effort since its effect is
negligible on the measurement of profit or financial position. Result; treat as expense of current period and
ignore following period
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Accruals convention
- Profit is the excess of revenue over expense, NOT excess of cash receipts over cash payments.
- Says that profit is NOT a measure of cash generated, rather of achievement.
Depreciation
= portion of the cost of a non-current asset that has been depleted in generating the revenue recognized during a
particular period
Annual depreciation charge = 2 x straight line methods depreciation % x net book value at beginning period
In this case..
- Reduce trade receivables
- Increase expenses ‘bad debts written off’
Matching convention: at end of reporting period, try to estimate amount of bad debts
- allowance for trade receivables
o expense on income statement and deducted from total trade receivables on balance
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Uses and usefulness of the income statement
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Lesson 4: Accounting for limited companies (Ch 4)
Limited company
- Can be very small or very large
- Liability of owner is limited
- Unlimited number of owners possible
- Some obligations, including…
o Documents of incorporation
o Annual financial reports
o Annual meeting of owners
o Audit
Main features:
- Share splits
o Splitting the price of a share, but doubling the amount so nominal value stay the same
- Share consolidation
o Reducing the number of shares and increasing their nominal value per share to compensate
Bonus shares
- Issue extra shares by using reserves of any kind and turning them into share capital
o Decrease reserves by $50k, increase share capital by $50k
- Share issues
- Retained profits
- Long-term borrowings
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Raising share capital
Withdrawing equity
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Class 5: Measuring and reporting cash flows (ch 6)
Cash = notes and coins in hand and depostits in banks and similar
institutions that are accessible to business on demand
- Balance sheet
o relationship between assets and claims at particular point
in time
- Income statement
o Explains how, over a period of two statements, equity
figure from first statement has altered as a result of
trading operations
- Cash flow statement
o Looks at changes over the reporting period. Explains the
alteration in the cash (and cash equivalent) balances between the first and second statement.
Two approaches…
- Direct method
o Involves analysis of cash records for that period, identifying all
payments / receipts relating to operating activities. Hardly used.
- Indirect method
o Popular method. Figure for profit for the period will be linked to the net cash flows from operating
activities. Income statement has to be made anyway; information from it can be used as a starting
point to deduce cash flows from op. act.
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Net cash flows from investment activities
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Class 6: Analyzing and interpreting financial statements (Ch 7)
Categories
Ratios benchmarks
A circular movement in the large wheel (operating profit) leads to a relatively large circular movement in the small wheel
(returns to ordinary shareholders
Limitations of ratio’s
- Quality of financial statements
- Inflation
- Restricted view of ratios
- The basis for comparison
- Statement of financial position ratios
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