The Hindu Business Line : Financial statements can be notoriously complex

But that may not be too encouraging for most of us, who'd rather have something tangible to turn. Such as the pages of Ambrish Gupta's "Financial Accounting for Management: An Analytical Perspective," from Pearson Education (www.pearsoned.co.in).

Let me not burden you with `qualitative characteristics of financial statements' such as understandability, relevance, materiality, and reliability but cite this illustration instead: "An employee of LSG Ltd embezzled Rs 4.5 lakh during the year ended March 31, 2002. The company, instead of treating this amount as a loss, showed it as recoverable from the employee in its balance sheet. The net profit of the company for the year was Rs 6.55 crore. Do you think that this treatment makes any material impact on the assessment of the profitability of the company?"

That's where the book's value lies in - the cases that the author brings up even while discussing concepts. This, despite handholding rank novices through the `wonderland of debit and credit', beginning with the traditional first transaction of proprietor bringing in capital.

The chapter on valuation of fixed assets takes up Indian Oil's numbers, for instance, showing `joint owners' of land, buildings, plant, railway sidings, and drainage. And there's a cross-reference to another case, of Nestle, which has retired some fixed assets from active use. "Assets acquired on finance lease mainly comprise cars and personal computers. The leases have a primary period, which is fixed and non-cancellable. In the case of cars, the company has an option to renew the lease for a secondary period... There are no exceptional/restrictive covenants in the lease agreements."

An extract, that is, from the annual report of L&T, which if you find hazy, is explained in Gupta's chapter on `valuation of assets under finance lease'. He'd also show you how Thermax deals with expenditure on technical know-how as `deferred revenue'; and how Colgate amortises `goodwill and trademarks' over 40 years, and copyrights and design, over 14 years.

If cash is king, cash flow is the royal scroll that you must first decode. Cash flow statement gives you info about the historical changes in cash and cash equivalents of an enterprise by classifying the flows during the period from operating, investing, and financial activities, defines the author, drawing upon resources from the Institute of Chartered Accountants of India.

But what's cash? It is cash-on-hand plus demand deposits with banks. And `cash equivalents' are "short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to insignificant risk of change in value". Note that `operating activities' are the principal revenue-producing ones, but don't be surprised to find a company rolling in more dough through investing and financing. "Sundry debtors amounting to Rs 300,097 thousands are outstanding since long. No provision has been made there-against since the management has initiated legal action in some of the cases while it is also in the process of arriving at settlement with some of these parties and is hopeful of recovering a substantial portion of the above amount."

That's a note from the 2000-01 accounts of Indo Rama Synthetics. For investors, though, recovery of money they invested in the share would have been of a greater concern then.

Gupta deals with issues of corporate governance and the ever-newsy Clause 49, and moves on then to financial statement analysis, where the murky areas of accounting such as window dressing and creative massaging get his attention. Before jumping into ratio analysis, I'd suggest you spend time on `multi-step, horizontal, vertical, and trend analyses'.

For, that would ready you for `strategic and integrated managerial analysis of corporate financial statements', presented as a separate part of the book, and the `innovative techniques' further on.

The book concludes with `contemporary issues in financial reporting', where Gupta explores the differences between the standards across the world. For instance, there's limited guidance in our GAAP on `spin-off/ carve out accounting', while the US pronouncements in this sphere specify the basis of valuation, allocation of common expenses and so on.

All's well that ends well, you'd say, heaving a sigh of relief, when seeing a discussion of Infosys accounts in the final chapter on `emerging dimensions in voluntary financial reporting'. However, remember that financial statements are growing in complexity, loaded as they are with the growing number of accounting standards.

And you may need all the help available, as of Gupta, to decipher the myriad rows and columns.

BookValue@TheHindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page