1 Historical analysis Ch. 2. Framework of financial analysis Classification – Operating and financial items (2.1) – Core and unusual items (2.2) Changes in Shareholders Equity and comprehensive income (2.3) Segmental reporting (2.4) Ch.3. Historical profitability analysis Profitability analysis – Ratios relevant for forecasting – Operating profitability (3.2) – Financial performance (3.3) – Total profitability (3.4)

2 Lecture 2. Classification Operating and financial items General rule: Classify both the income/expense and the corresponding asset/liability in a consistent manner

3 Operating and financial items: problematic issues Informational restrictions Availability of information in the income statement (IS) and the balance sheet (BS), including the footnotes (refer to number of footnote in the annual report for 2007) Accept the classification of the income statement, with some exceptions

4 Operating and financial items: problematic issues Cash and cash equivalents – Working cash (and its income) could be regarded as operating – (generally all) Financial – exception: when a portion of this asset is distributed among “real segments” (excl. “central and eliminations”) in the segmental report, together with the corresponding interest revenues In this case the classification of the income statement is not accepted Debt and equity securities – Both long- and short-term – Financial

5 Operating and financial items – problematic issues Participations in associated companies – Ownership >= 20%, < = 50% – Equity method Classify according to the segmental report (regard all as operating if some are distributed among real segments)

6 Operating and financial items: problematic issues Current receivables and current liablilities – Next year’s repayment of liabilities to credit institutions – Accrued interest expense (interest payable) – Financial – Accounts receivables – Implicit interest revenue included in sales – Operating – Accounts payable – Implicit interest expense included in operating expenses – Operating

7 Operating and financial items: problematic issues Long-term receivables and long-term payables – Explicit or implicit interest usually included among financial items in the income statement – Financial

8 Long-term receivables Example: Long-term accounts receivable Sale at the beginning of year 1 for 121 Payment after 2 years, no interest, market rate of interest 10%

9 Long-term receivables Example: Long-term accounts receivable

10 Operating and financial items: problematic issues Provisions for pensions – Pension payments discounted to the present – Implicit interest included in interest expense – Financial Other provisions – Unless discounting is evident – Operating

11 Operating and financial items: problematic issues Deferred tax liabilities (“Provisions for taxes”) / Deferred tax claims – Estimated future tax payments (or reduction of tax payments) because of “temporary differences” – Not discounted – no implicit interest in the income statement (compare with pension liabilities) – Operating

12 Annual reports – order of analysis Analyse four historical years in the following order Annual report for 2007 – Year 2007 – Year 2006 by using comparative figures Annual report for 2006 – Year 2005 by using comparative figures Annual report for 2005 – Year 2004 by using comparative figures Annual report for 2004 – Year 2003 by using comparative figures (BS only)