www.aqhuman.com The balance sheet Aqhuman financial training & coaching
Jun 11, 2015
Aqhuman financial training & coachingwww.aqhuman.com
The balance sheet
Aqhuman financial training & coachingwww.aqhuman.com
The balance sheet
AssetsNon-current (“fixed”) assetsProperty, plant and equipment
Current assetsCash at bankReceivables (“debtors”)Inventories (“stocks”)
Aqhuman financial training & coachingwww.aqhuman.com
The balance sheet
AssetsNon-current (“fixed”) assetsProperty, plant and equipment
Current assetsCash at bankReceivables (“debtors”)Inventories (“stocks”)
Non-current assets we do not intend to
liquidate
Aqhuman financial training & coachingwww.aqhuman.com
The balance sheet
AssetsNon-current (“fixed”) assetsProperty, plant and equipment
Current assetsCash at bankReceivables (“debtors”)Inventories (“stocks”)
Current assets we do intend to
liquidate (collect debtors, sell
stock ...)
Aqhuman financial training & coachingwww.aqhuman.com
The balance sheet
AssetsNon-current (“fixed”) assetsProperty, plant and equipment
Current assetsCash at bankReceivables (“debtors”)Inventories (“stocks”)
What about People?
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What do we mean by an asset?
•Items where the benefit has yet to come (equipment will produce goods in the future, debtors will provide cash in the future)•Are only assets to the extent that they represent a benefit•Are owned by the company (except for “finance leases”; these are leases which are loans in disguise)
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Non-current (or fixed) assets
These assets are held for some time in the business and need to be depreciated
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DepreciationYou buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it.
Balance 10sheet
Income statement
Cash flow (10)
Today
Today; all of the benefit of owning the equipment lies
in the future. So the expenditure is entirely an
asset
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DepreciationYou buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it.
Balance 10 10Sheet (2)
8Income Statement (2)
Cash flow (10)
Today
A year later 1/5th of the expected benefit has been
used; so 1/5th of the spend is now a cost. This is
depreciation
1 2
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DepreciationYou buy some equipment, today, for £10,000. You estimate that it has a 5 year life, when you will scrap it.
Balance 10 10Sheet (2)
8Income Statement (2)
Cash flow (10)
Today 1 2
10 10 10 10(4) (6) (8) (10) 6 4 2 -
(2) (2) (2) (2)
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Receivables (“debtors”)
•These are sums due from our customers.
•Recall that assets are only assets to the extent that they represent a future benefit
• So for debtors the future benefit is not how much we are owed...
•But how much we expect to receive. So the debtor figure is the outstanding invoice sum less any bad or doubtful debts
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Inventories (“stocks”)
•Again with inventories we can only show the future benefit•With stocks this is the possibility of selling them at a profit•However we cannot account for a profit until we have made it...•So stocks are shown at original purchase price, unless...•There is no future benefit (ie profit). We are going to make a loss on the stock. No benefit = no asset•Where we are going to make a loss we reduce the holding value of the stock to its likely net sales value
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What about people?
Are people an asset?People are clearly an asset to a business...
But are they an asset for accounting purposes?
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People
There is only one industry where people are shown as accounting assets....
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People
There is only one industry where people are shown as accounting assets....Professional sports players. Why?Assets need to be capable of being valued. Professional sport
is the only sector where people are bought and sold.Thus the purchasing company has an amount.Note that if the sportsman was acquired free then he/she does not appear on the balance sheet (no amount)
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Intangible assets
This issue with people (only purchased people can be shown as assets) also applies to intangible assets generally. Only purchased intangible assets may be shown on the balance sheet.
The most common intangible asset we encounter is GOODWILL
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Goodwill
What makes up a company’s goodwill?
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Goodwill
What makes up a company’s goodwill?
staff
Geographic spread
Client quality
brand
Spread of products
abilitycontacts
loyalty quality
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Goodwill
But remember only purchased goodwill (like sportsmen) is shown on the balance sheet
The company’s own inherent goodwill IS NOT shown; only that of companies’ it has purchased
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Goodwill and amortisation
Goodwill is not amortised (depreciated)
Instead an impairment test is done a year later. The company revalues its acquisition. If it would pay less than the original purchase price then the goodwill is written down
An example...
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Goodwill example
Company A has net assets worth £80m. Company B buys the company in 2011 for £110m.
£80m
£80m
£30m = goodwill
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Goodwill example
Company A has net assets worth £80m. Company B buys the company in 2011 for £110m.
A year later it values the company at £100m. So the goodwill is reduced by £10m to £20m.
£80m
£80m
£30m = goodwill = £20m
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Goodwill and the impairment review
Note that in the last example the £10m write down is NOT amortisation (like depreciation, the transfer of an asset to cost due to its benefit being used up). Instead an impairment write down is the acknowledgment that company B overpaid for its acquisition.
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Liabilities
Liabilities:Payables due in less than a year
Trade payables (Creditors)Short term debt
Payables due after more than a yearLong term debt
Shareholders’ EquityShare capitalRetained earnings
There is not much to say about the
liabilities. We shall discuss debt and equity when we
consider gearing in the KPI
presentation
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The balance sheet
Liabilities:Payables due in less than a year
Trade payables (Creditors)Short term debt
Payables due after more than a yearLong term debt
Shareholders’ EquityShare capitalRetained earnings
AssetsNon-current (“fixed”) assetsProperty, plant and equipmentCurrent assetsCash at bankReceivables (“debtors”)Inventories (“stocks”)
The total of these 2 columns will be equal.
Assets= liabilities
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The balance sheet; an example
We buy a property for £10m, paying £2m cash, borrowing £5m and issuing £3m of sharesAssetsProperty +£10mCash -£2m
Net effect +£8m
LiabilitiesDebt +£5mEquity (sharecapital) +£3m
+£8m
The balance sheet has increased by £8m on both sides: it balances
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Balance sheet formats
The asset = liability format shown so far is very popular around the world. But not in the UK! The balance sheet assets = liabilities:Property, plant and equipment PayablesReceivables DebtInventories EquityCash
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Balance sheet format: UK
In the UK the payables and debt are deducted from the assets:Property, plant and equipment PayablesReceivables DebtInventories EquityCash
(Payables)(Debt)
Net Assets Equity
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Balance sheet example
Take the earlier example using UK format: We buy a property for £10m, paying £2m cash, borrowing £5m and issuing £3m of shares
Assets LiabilitiesProperty +£10mCash -£2m Equity +£3m(Debt) -£5m
Net effect +£3m +£3mIt still balances!
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Balance sheet summary
•Assets represent future benefit and only to the extent that they represent a benefit•Non-current (“fixed”) assets are not intended to be liquidated when acquired (although one can one’s mind later)•Goodwill is only shown where it is purchased•There are a number of different balance sheet formats: assets= liabilities, net assets= equity
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Aqhuman Financial Training
Aqhuman’s principal is Kevin Amor, FCA. Kevin qualified as a chartered accountant with PWC. He spent 12 years working in commerce at financial controller/director level. Kevin now has more than 12 years experience in financial training. He trains managers at all levels and gives 1 to 1 financial coaching to senior executives.He also teaches corporate finance andaccounting for a number of business schools’ MBA programmes.