In reference to your request for analyzing the financial statements of AS Company S.A Commercial Industrial Computer & Toy Company, I am highlighting some of the areas where the management is discretion is highly possible and can influence truthfulness, materiality and usefulness of the financial statements.
Referring to the income statement of the company, we found that the company has directly reported the operating income, however, there isn’t any discussion available for the operating expenses and operating income. This is a direct violation of IFRS standards for the preparation of financial statements and gives a clear opportunity for the management to hide its operating expenses and thus mislead the investors.
No Consolidation
According to the rules of IFRS, if an entity has a controlling interest over another company, in that case, it is required to file the consolidated results. However, referring to the cash flow statement, we witness that while the investment in subsidiary is disclosed by the company, it is not filing the financial statements on a consolidated basis. Yet again, this is a sign of clear misrepresentation by the company to hide consolidated results from the investors. Moreover , there is no clear indicating over the controlling ownership in the financial notes as the company only states that it do no prepare financial statements on consolidated basis, while it didn’t gave any legitimate reason for that action.
Inventory
AS Company S.A Commercial Industrial Computer & Toy Company is required to prepare its financial statements according to the requirements of International Financial Reporting Standards (IFRS). While the IFRS requirements prohibits the company from using LIFO valuation system, however, the company still have discretion to use FIFO or weighted average method to value the inventory. Important to note, the value of inventory under FIFO method will be lower than the weighted average costing method. Accordingly, the company can manipulate the inventory level as it has not exclusively discussed the inventory valuation methodology in the accompanying notes to the financial statements.
Balance Sheet Preparation
Just like the income statement, even the balance sheet is not prepared according to the standards of IFRS. To begin with, the balance sheet is not prepared in a classified manner. For instance, there is no separate classification of current assets and fixed assets. In addition, the company has not given a separate classification for shareholders equity also with no information disclosed for par value of the share and the number of shares authorized and issued by the company. This indicates that the company is disclosing only over the top information and is depriving the shareholders from the comprehensive information that may assist in performing the analysis of the company.
Contingent Liabilities
Referring to the notes to the financial statements, we found that the company has disclosed that no pending litigation will have a material impact on the company’s financial condition or operation, and accordingly, the company has not disclosed the contingent liabilities on the balance sheet. However, considering the other inappropriate classifications, investors should be skeptical of the impact of pending litigations and should estimate the potential losses from each litigation against the company.
I hope the above discussion was satisfactory for you and if you still need any more information, please let me know
Regards,
References
IAS 1 — Presentation of Financial Statements. (2016). Retrieved August 26, 2016, from IFRS: http://www.iasplus.com/en/standards/ias/ias1
IAS 2 — Inventories. (2016). Retrieved August 26, 2016, from IFRS: http://www.iasplus.com/en/standards/ias/ias2
IFRS. (2016). IAS 37 — Provisions, Contingent Liabilities and Contingent Assets. Retrieved August 26, 2016, from IFRS: http://www.iasplus.com/en/standards/ias/ias37
