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Introduction to Financial Statement Analysis

Overview of Inflation Adjustment Methods

• The video series focuses on financial statement analysis within the public accounting curriculum at the University of Los Angeles, specifically discussing inflation adjustment methods.

• It introduces two key methods: the inflation adjustment method as per international financial reporting standards for both large and small entities, and the current cost method (or fair value method).

Historical Cost vs. Current Cost

• Prior to 2015, only historical cost was permitted under IFRS; since then, companies can choose between historical cost and current cost based on their accounting policies.

• Changing from one method to another requires careful consideration of pros and cons, with specific mechanisms outlined by international standards.

Frequency of Valuation Adjustments

• In high-inflation contexts like Venezuela, organizations may need to conduct valuations every two years instead of three due to significant inflation rates.

• Current cost reflects fair value—the amount an asset could be exchanged for or a liability settled between informed parties in an independent transaction.

Initial Recognition and Subsequent Measurement

Basis for Initial Recognition

• According to IFRS for SMEs, initial recognition is generally based on historical cost unless specified otherwise by the standard.

• Subsequent measurement allows optional use of fair value for certain items such as investments in joint ventures and biological assets.

Application Focus: Property, Plant, and Equipment

• The discussion will primarily focus on property, plant, and equipment (PPE), although it can also apply to investment properties under certain conditions.

• Fair value assessments are crucial but cannot be applied indiscriminately across all asset types without proper valuation data.

Adjusting Financial Statements for Inflation

Procedure for Inflation Adjustment

• The procedure for presenting adjusted financial information using either current cost or fair value is consistent across both methods.

• Non-monetary items must be adjusted in financial statements while ensuring that monetary items remain unaffected during inflation adjustments.

Steps in Financial Reporting

• Previous videos outlined steps including preparing schedules that culminate in determining undistributed earnings after adjusting non-monetary items.

• The same methodology applies when transitioning from historical costs to current costs—focusing specifically on PPE rather than investment properties.

Understanding Revaluation Surplus

Impact of Valuation Differences

• Differences arising from revaluations will affect retained earnings or accumulated profits through a revaluation surplus account.

• This process involves recognizing how changes in asset values impact overall financial health and reporting accuracy.

Cost Valuation and Depreciation in Financial Reporting

Historical Values and Adjustments

• The historical values for assets are presented, with a correction needed for the accumulated depreciation figures: 750 should be for 2015, while 625 is accurate for 2014. This adjustment is crucial for accurate financial reporting.

• The speaker emphasizes that the company's policy does not utilize historical cost methods but instead focuses on market value adjustments through current cost accounting practices. This reflects a shift towards more relevant valuation methods.

Role of Independent Appraisers

• An independent appraiser must be engaged to assess asset values, ensuring they meet specific criteria such as being unaffiliated with the company and registered with professional associations in Venezuela. This independence is vital for unbiased valuations.

• The appraiser provided a valuation report indicating that the land is worth 3,500 and the commercial property at 7,500 as of December 31st, which raises questions about why market values might differ from inflation-adjusted figures. Understanding these discrepancies is essential in financial analysis.

Accounting Policies and Asset Presentation

• The company’s accounting policy requires presenting assets net of accumulated depreciation rather than at gross values; this affects how financial statements are prepared and reported to stakeholders. Accurate representation according to policy ensures compliance with accounting standards.

• A mathematical process is necessary to convert asset values into their appropriate forms based on appraisals while considering accumulated depreciation—this involves determining both gross asset value and adjusted depreciation amounts accurately reflecting current conditions as of December 2015.

Deflation Process in Valuation

• To adjust historical costs back to previous years (e.g., from 2015 to 2014), a deflation process is applied instead of inflation adjustment; this method helps present accurate financial data reflective of past economic conditions without overestimating asset values due to inflationary pressures.

• It’s important to note when the appraisal was conducted since it influences how adjustments are made; if an appraisal occurs later than year-end, adjustments must reflect changes up until that date accurately. Understanding timing can significantly impact reported results.

Finalizing Financial Statements

• The final calculations yield specific figures: local commercial property valued at approximately 10,714 after applying rules based on appraised values against historical costs; this calculation illustrates how different valuation methods can lead to varying outcomes in financial reporting practices.

• Accumulated depreciation needs careful recalibration based on appraised figures; using established ratios ensures consistency across reports while adhering strictly to accounting policies regarding presentation formats—this maintains integrity in financial disclosures as required by international standards.

• Ultimately, these processes culminate in preparing comprehensive financial statements that align with international norms while reflecting true asset valuations post-appraisal adjustments—ensuring clarity and accuracy for stakeholders reviewing these documents at year-end reporting periods.

Financial Statement Comparisons and Depreciation Calculations

Comparative Financial Statements

• The discussion emphasizes the need for comparative financial statements, specifically comparing figures from December 2015 with those from December 2014.

• It is crucial that both financial statements are presented in the same currency to ensure accurate comparisons, particularly regarding accumulated depreciation.

Depreciation Analysis

• The speaker outlines a timeline indicating that the commercial property was purchased on January 5, 2010, and discusses how to calculate depreciation over five years leading up to December 31, 2014.

• Various methods of calculating depreciation are explored, including dividing historical value by useful life and adjusting for time elapsed since purchase.

Adjusting Values for Inflation

• The importance of deflating values to account for inflation when presenting financial data as of December 2014 is highlighted.

• A specific example is provided where a historical value is adjusted using an inflation factor (2.80), demonstrating how to derive the correct monetary value as of December 2014.

Calculation Methods Explained

• Different calculation methods are discussed for determining property values adjusted for inflation; these include direct division by useful life and multiplication factors based on elapsed time.

• The speaker clarifies that adjustments must consider accumulated depreciation accurately reflecting the property's age at different points in time.

Presentation of Financial Data

• A visual representation of financial statements is mentioned, showing both historical and inflation-adjusted figures side by side.

• The necessity of not applying an adjustment coefficient when using perito-determined values is emphasized; instead, reliance on calculated values from previous discussions ensures accuracy in reporting.

Adjusting Financial Statements for Inflation and Revaluation

Overview of Property Valuation Adjustments

• The speaker discusses the process of adjusting financial figures related to property, plant, and equipment due to inflation and revaluation. Specific figures are mentioned: 1,246; 3,815; and 1954.

• A valuation figure is provided by an expert appraiser for December 31, 2015. The calculated value is noted as significant in the context of financial statements.

Depreciation and Financial Statement Alignment

• The appraised value of commercial properties is stated as 10,000. This figure plays a crucial role in aligning the financial statements accurately.

• Accumulated depreciation as of December 2015 is reported at 3,214. An adjustment for inflation from December 2014 to December 2015 is necessary using a specific interannual coefficient.

Finalizing Financial Figures

• The adjusted surplus from revaluation must be reflected accurately in the financial statements. The speaker emphasizes that all adjustments should align with historical costs.

• Depreciation expenses have been previously calculated at a value of 536 for December 2015, which needs to be incorporated into the final results.

Completing Financial Statements

• To finalize the financial statement values, adjustments must include both revalued assets and standard operational expenses such as sales and taxes.

• It’s highlighted that comparative financial statements are mandatory according to regulations; thus adjustments will reflect both current (December 2015) and previous (December 2014) monetary values.

Implications of Asset Revaluation

• For presentation purposes, values will be converted to reflect December 2015 currency standards. Specific figures are recalculated accordingly.

• Historical asset valuations may not show movement unless there has been an increase during the year; this necessitates careful tracking of asset appraisal dates.

Future Considerations on Asset Appraisal

• Companies may need regular appraisals every two years depending on their policies regarding asset valuation.

• Market fluctuations can affect surplus from revaluations significantly since these values are determined by market conditions rather than accounting entries.