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Introduction介绍
在2007年初你收到70000美元从你的父亲那里，并想知道如何最好地使用这笔钱。你的朋友，他那时在一家证券公司工作，劝你把钱投资在该金融公司（“该”或“公司”）。公司发布了招股说明书，十二月15美元的最高2006提高到担保发行债券1亿，和收入有可观的增长，在过去四年的收入和资产。你的朋友还告诉你两董事内森是特许会计师，审计师对其2005和2006的财务报表审计意见和未给，其债券持有人的利益被照顾的信任。因此，你可以依靠该治理机制和考虑该担保债券的投资是安全的，建议你的朋友。
你从大学会计学位的想法和发现投资该“债券吸引力。但你有点担心。当你对国际财务报告准则（IFRS）和学习财务报表分析技术在你的财务会计和财务报表分析的课程，在大学里，你不知道如何整合和应用不同的国际财务报告准则的知识，财务报表分析。更进一步，当你了解到良好的公司治理提高报告质量的同时，你也知道有管理失败。所以你不知道有多少信任放在报告的数字弥敦。因此，对是否投资该“债券作出最后的决定，你决定学习国际会计准则（IAS）财务报表之呈列1，IAS 7现金流量表，IAS 8会计政策、会计估计和误差与IAS 18的收入变化，财务报表分析教材与盈余质量文献收集和分析信息，又该。你花了一个星期，收集了有关该公司的下列信息。
You received $70000 from the will of your father at the beginning of 2007 and were wondering how best to use the money. Your friend, who was working in a securities firm at that time, advised you to invest the money in Nathans Finance NZ Limited (“Nathans” or “the company”). The company had issued a prospectus on 15 December 2006 to raise a maximum of $100 million by the issue of secured debentures, and had impressive growth in revenues, earnings and assets over the last four years. Your friend further informed you that two directors of Nathans were chartered accountants, the auditor gave an unmodified audit opinion on its financial statements for 2005 and 2006, and the interests of its bondholders are looked after by a trust.
Therefore, you could depend on Nathans’ governance mechanism and consider investment in Nathans’ secured debentures as safe, suggested your friend.
You have an accounting degree from a university and found the idea of investing in Nathans’ debentures appealing. But you were a little worried. While you studied International Financial Reporting Standards (IFRS) and learnt financial statement analysis techniques in your financial accounting and financial statement analysis courses at the university, you did not know how to integrate and apply your knowledge of different IFRS to financial statement analysis. Further, while you learnt that good corporate governance improves reporting quality, you also knew that there were governance failures. So you are not sure how much trust to put in reported numbers of Nathans. Therefore, to make the final decision on whether to invest in Nathans’ debentures, you decided to study International Accounting Standard (IAS) 1 Presentation of Financial Statements, IAS 7 Statement of Cash Flows, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and IAS 18 Revenue, the financial statement analysis textbook and the earnings quality literature again and collect and analyse information about Nathans. You spent a week and collected the following information about the company.
Background Information背景信息
Nathans Finance NZ Limited was a New Zealand finance company incorporated as a limited liability company on 23 July, 2001 and its registered office was in Auckland, New Zealand. The 2006 annual report of the company stated the principal activity of the company as “the acceptance of investment funds and the use of those funds to provide financial accommodation and services” (Nathans Finance NZ Limited, 2007).
Nathans was a wholly-owned subsidiary of VTL Group Limited, a vending machine operator and technology development company (Nathans Finance NZ Limited, 2006). The Group had four main business segments – technology, franchising, commercial and finance (PricewaterhouseCoopers, 2007). Nathans was the finance arm of the group (PricewaterhouseCoopers, 2007). The Group owned a number of vending machine related businesses, which operated in New Zealand, Australia, North America and Europe. Its fixed assets were predominantly vending machines (PricewaterhouseCoopers, 2007).
Nathans had 10,000,100 shares and all the shares were owned by VTL Group Limited, a New Zealand listed company (Nathans Finance NZ Limited, 2006, 2007). It had four directors – Mervyn Ian Doolan, John Hotchin, Kenneth Roger Moses and Donald Menzies Young and two of them – Mervyn Doolan and Donald Young – were chartered accountants (Nathans Finance NZ Limited, 2006). Staples Rodway was the auditor of the company for the four years 2003-2006. The auditor rendered a clean audit opinion on its financial statements during 2003-06.
According to section 33(2) of the Securities Act 1978, no issuer in New Zealand can offer debt securities to the public for subscription unless it has appointed a trustee in respect of that security and both the issuer and the trustee have signed a trust deed. The main responsibility of the trustee is to protect the interests of the security holders. Perpetual Trust Limited (“Perpetual”) was the trustee of debenture holders of the company (Nathans Finance NZ Limited, 2006). According to the Trust Deed signed between Perpetual and the company, Perpetual’s duty was to “hold the charge created by the Trust Deed on behalf of all [Debenture] Stockholders, to receive and consider regular financial reports furnished by the Company and Auditors as set out in the Trust Deed, and if necessary to enforce the Trust Deed on behalf of all [Debenture] Stockholder” (Nathans Finance NZ Limited, 2006, p. 12).
The Trust Deed imposed some restrictions on Nathans. For example, the Trust Deed said that total liabilities could not exceed 90% of total assets and the company could not cease or alter the character, scale or scope of its business without the consent of the trustee (Nathans Finance NZ Limited, 2006, p. 12). The Trust Deed indicated several default events and allowed Perpetual to convert the floating charge into a fixed charge, appoint a receiver and realise the assets to repay the debenture stock (Nathans Finance NZ Limited, 2006, p. 12). Under the Securities Act 1978, Perpetual was bound to exercise a reasonable degree of diligence to ascertain whether any breach of the terms of the Trust Deed had occurred and would do all such things as it was empowered to do to cause the breach to be remedied. Perpetual was also required to exercise a reasonable degree of diligence to ascertain whether the assets of the company were sufficient to discharge the amounts of debenture stock as they became due.
The company issued a prospectus on 15 December 2006 to raise a maximum of $100 million by the issue of secured debentures. The prospectus described the purpose of the issue as providing funds for the development of the company’s business of providing financial accommodation and financial services (Nathans Finance NZ Limited, 2006).
Chairman’s Letter to Potential Investors董事长给潜在投资者的信
You found the following letter by the Chairman of Nathans’ board of directors in the prospectus of the company.
CHAIRMAN’S LETTER
We are pleased to present this opportunity to invest with Nathans Finance NZ Limited (“Nathans”). Nathans is a wholly owned subsidiary of VTL Group Limited, a company listed on the New Zealand Stock Exchange.
Nathans has a proud history of providing investors with quality investment opportunities in Secured Debenture Stock and the company continues to deliver strong profit results.
For the year ending 30 June 2006, Nathans produced an audited net surplus of $4.97 million, an increase of 47% on the previous year’s result of $3.38 million.
Nathan’s consistent profit combined with a robust credit assessment process and a strong level of corporate governance have ensured that we have retained our unblemished record of nil bad debts written off for the period ending 30 June 2006.
Nathans specialises in commercial lending, and provides loans to a broad range of commercial entities, including franchisees under VTL’s franchising brands 24seven and Shop24.
The relationship that Nathans has with both 24seven and Shop 24 provides us with a growing source of quality clients in the form of both new and existing franchisees, who require commercial loans to purchase or grow their businesses.
Nathans does not lend into the ‘higher risk’ consumer areas such as vehicle and retail consumer lending – that means no cars and no small retail loans. Nathans has a growing commercial lending book that includes diverse sectors, such as manufacturing, recreation and leisure, hospitality, transport and service industries.
We believe that these factors continue to provide confidence to our investors.
Our financial highlights include:
• Net surplus of $4.97 million
• Total assets increased by 26% to $172.30 million, total liabilities increased by 24.90% to $152.10 million#p#分页标题#e#
• Total equity increased by 33% to $20.22 million
• Total revenue increased by 43% to $19.70 million
• No bad debts written off
At Nathans, our team of dedicated finance professionals have two core objectives:
• To provide tailored finance solutions to its expanding client base, providing steady and consistent growth, and ensuring long term business relationships, and;
• To provide our investors with attractive interest rates and peace of mind by only offering quality finance solutions to businesses and individuals that meet Nathans’ prudential lending requirements in line with the company’s credit policy.
The Board has confidence that Nathans will continue to be well placed to capitalise on the emerging strategic growth opportunities.
For these reasons we are pleased to offer to you the opportunity to invest with Nathans.
Thank you for considering our company. We look forward to receiving your investment application.
Yours sincerely
Roger Moses
Chairman
Company Business Activities
You found the following section entitled “Description of Activities of the Company” in the prospectus.
The company provides financing to individuals participating in VTL’s franchising programmes under its brands 24 seven and Shop 24. The Company also provides financing for the acquisition of electronic vending equipment, vending operating franchises, and master and area franchises throughout New Zealand, Australia, USA, UK and Europe. In addition the company provides commercial finance to a growing client base that includes diverse sectors, such as manufacturing, recreation and leisure, hospitality, transport and service industries. The company does not provide consumer retail or motor vehicle finance.
The company is not restricted as to the types of financial accommodation it provides. Depending on market opportunities, the Company may provide other sorts of financial services and accommodation, so long as those opportunities fall within prudential guidelines set by the Directors of the Company from time to time. These guidelines are set bearing in mind the Company’s obligations under the Trust Deed, which include the obligation to carry on, conduct, and maintain its business in a proper and efficient manner.
In its lending to commercial entities and private individuals the Company’s policy is to obtain security for the loan, usually in the form of general or specific security over assets of the borrower. The Company also follows a documented process approved by external legal counsel in each of the local jurisdictions in which it lends (as noted above) prior to the release of funds. In an enforcement scenario, there is the possibility that security may not be readily realizable or yield sufficient to pay off the relevant loan.
The term of these loans are generally between 12 and 36 months, although the Company does consider loans for shorter and longer durations. The amount of advances is usually between $150000 and $3000000, however from time to time the Company may approve smaller or larger loans. In addition, the Company currently provides financial accommodation to its parent company VTL to fund the acquisition of assets and companies complementary to VTL Group’s franchising programme, including the acquisition of share and/or assets of vending operators in New Zealand, Australia, USA and Europe. These advances make up a significant proportion of the Company’s current assets and are secured by way of a charge over certain assets of VTL including vending machines and investment assets. Advances to VTL have been made on a commercial arm’s length basis, normally for terms no longer than 12 months. VTL is actively seeking to repay these loans by arranging loan facilities in the country of origin. The principal activities of VTL include franchising of its 24seven and Shop 24 brands, vending machine technology development, commercial operations and finance. If VTL Group becomes insolvent and is unable to repay this debt to the Company, then the financial position of the Company will change significantly.
Summary Financial Performance Metrics
The prospectus provided the following summary financial performance metrics.
Exhibit 1 about here
Exhibit 2 about here
Summarized Financial Statements总结财务报表
The prospectus contained financial statements for 2005 and 2006. However, you learnt in the financial accounting paper about the benefits of trend analysis in financial statement analysis. So you decided to collect the financial statements for 2003 and 2004, which were publicly available. The financial statements had been prepared using New Zealand GAAP. Exhibits 3-6 present summarized financial statements of the company for the four years 2003-06. Exhibit 3 provides the summarized statement of financial performance, Exhibit 4 presents the summarized statement of financial position and Exhibit 5 contains the summarized statement of cash flows. Exhibit 6 reproduces part of the reconciliation between cash flow from operation and net profit. Since the summarized financial statements do not include all financial statements numbers, the figures in the summarised statements do not add up to the total in those statements. You calculated index numbers using 2003 as the base year to help you with financial statement analysis. The index numbers are in parentheses.
Exhibit 3 about here
Exhibit 4 about here
Exhibit 5 about here
Exhibit 6 about here
Earnings Quality
You learnt in your financial accounting paper that profit is a widely used indicator of the success of a company and found the continuous growth in revenues, profits and total assets of the company over the past years impressive. However, you were not sure about the quality of the reported earnings number. You recalled your financial accounting lecturer at the university warning you and other students against relying exclusively on reported profits as profits are susceptible to estimation and managerial manipulation.
Since you graduated quite a few years ago, you forgot exactly what earnings quality means. Therefore, you googled to search academic papers on earnings quality and found an extensive literature that used a variety of earnings quality metrics. For example, Schipper and Vincent (2003) propose four classes of earnings quality constructs based on (a) time series properties of earnings, (b) selected qualitative characteristics of accounting information, (c) the relations among income, cash flow and accruals, and (d) implementation of financial reporting standards. Earnings quality constructs based on time series properties of earnings include persistence, predictive ability and variability, while constructs derived from the qualitative characteristics of accounting information address the value relevance of earnings. On the other hand, earnings quality constructs based on the relation between income, cash flow and accruals focus on the relative share of accruals in earnings on the assumption that accruals reduce earnings quality. This construct includes metrics such as closeness of income to cash, changes in accruals and discretionary accruals estimated by using firm fundamentals. Finally, earnings quality metrics derived from implementation decisions are based on the assumption that earnings quality declines as the incidence of accounting numbers that must be estimated increases and management takes advantage of the requirement to make these estimates and judgments in preparing financial statements.
The earnings quality literature places particular emphasis on the relation among earnings, accruals and cash flow from operations in assessing earnings quality. Accruals are the earnings minus cash flow from operations. There are four reasons for this emphasis. First, accruals are the result of accounting estimates and judgments, and thus are open to management manipulation (Dechow and Schrand, 2004). Hence, the literature postulates that higher magnitude of accruals of either sign reduces earnings quality (Schipper and Vincent, 2003; Dechow and Schrand, 2004). Second, the persistence of the cash flow components of earnings is higher than that of the accrual component (Sloan 1996). Therefore, the relative share of accruals and cash flows in earnings has differential implications for the persistence of earnings. Third, accrual accounting recognizes revenue when it is earned and its collectability is highly probable (IASB, 2012). Hence, the extent to which current period revenue and earnings can be mapped on to past, current and future cash flows provide an indication of earnings quality (Dechow and Dichev, 2002). For example, when cash is received in advance of sales, current year revenue should match the prior year cash flow. In case of cash sales, current year revenue should match current year cash flow. On the other hand, in case of credit sales, current year revenue should match next year cash flow. Fourth, while accruals are easy to manipulate, they also serve useful information roles. For example, because of conditional conservatism , accruals recognise bad news earlier than good news (Ball and Shivakumar, 2006; Beaver and Ryan, 2005; Pae, 2007). Therefore, if reported reliably, accruals should provide early warning signals about impending financial distress. However, accrual manipulation may constrain the capacity of accruals to provide early warning signals about impending financial distress. #p#分页标题#e#
Conclusion总结
After studying IFRSs, financial analysis textbook and the earnings quality literature again, and collecting all the information on Nathans’ governance structure, financial condition and financial performance, you are pondering whether to invest in the company’s secured debentures. The crux of the problem for you is how much trust to place in the reported earnings number.
Questions
1. Calculate the return on assets of Nathans Finance for four years 2003-2006 and comment on its trend. Given the governance of Nathans Finance, do you trust the reliability of the reported profit figures? Briefly explain.
2. Research suggests that earnings quality varies as a function of accruals (Dechow and Schrand, 2004). More specifically, higher accruals of either sign indicate poor earnings quality and vice versa (Dechow and Schrand, 2004. Apply this insight to assess the quality of reported earnings of Nathans and comment on your findings. (Note: Calculate accruals as net income minus cash flows from operating activities).
3. Sloan (1996) hypothesizes and documents that the accrual component of earnings is less persistent than its cash flow component. He reports the following results for model (1):
Exhibit 7 here
Interpret the above results and apply the insights from these results to assess the earnings quality of Nathans Finance NZ Limited. (Note: Calculate accruals as net income minus cash flows from operating activities).
4. Accrual accounting suggests that current year revenues should match relevant cash flows of the past, present and the future. For example, in case of cash received in advance of sales, current year revenue should match the cash inflow from customers of the previous year. In case of cash sales, current year revenue should match current year cash inflow from customers and in case of credit sales, current year revenue should match cash inflow from customers of the next year.
Use these insights to assess the quality of reported interest revenue of Nathans Finance and comment on your findings.
5. Kabir and Laswad (2014) hypothesize and document that earnings and accruals decline and impairment loss of loans and receivables increase prior to the failure of finance companies. Apply these insights of their paper to analyse the financial condition of Nathans Finance NZ Limited and comment on your findings
6. Notes to the 2006 financial statements of Nathans Finance contain the following statement in the accounting policy section:
“The figures in the statement of cash flows for the year ended 30 June 2005 have been restated to show Group interest as a non-cash item. See note 12.” (Nathans Finance, 2006, p.8). (Note 12 reports the reconciliation of reported profit with net cash flows from operating activities.”
a) Exhibit 8 reports two sets of cash flows for 2005 – (i) originally reported cash flows in 2005 annual report, and (ii) restated cash flows in 2006 annual report. Analyse the trend of cash flows from operations during 2004-05 using originally reported cash flow from operations in 2005, and during 2005-06 using restated 2005 cash flow from operations. What conclusions would you draw?
b) Please refer to the accounting policy note cited above. Compare the originally reported cash flows in 2005 with the restated cash flows. Comment on the comparison.
Exhibit 8 about here
7. Reflect on the learning experience from answering the questions above and list the key considerations you would apply to financial statement analysis.
References 文献
Ball, R. and Shivakumar, L. 2006. The role of accruals in asymmetrically timely gain and loss recognition, Journal of Accounting Research, 44 (2): 207-242.
Basu, S. 1997, ‘The Conservatism Principle and the Asymmetric Timeliness of Earnings’, Journal of Accounting and Economics, 24: 3-37.
Beaver, W.H. and Ryan, S.G. 2005, ‘Conditional and Unconditional Conservatism: Concepts and Modelling’, Review of Accounting Studies, 10: 269-309.
Dechow, P.M. and Dichev, I.D. 2002. The quality of accruals and earnings: the role of accrual estimation errors, Accounting Review, 77 (Supplement), 35-59.
Dechow, P.M. and Ge, W. 2003. Earnings, cash flows, persistence, and growth, Working paper, University of Michigan.
Dechow, P.M. and Schrand, C.M. (2004). Earnings Quality. USA: The Research Foundation of CFA Institute.
Friedlan, J. M. 1994. “Accounting Choices of Issuers of Initial Public Offerings.” Contemporary Accounting Research 11 (Summer): 1-31.
International Financial Reporting Standards Foundation (IFRS Foundation) (2012), International Accounting Standard 18 Revenue.
Gibson, A. 2011. Nathans Finance directors guilty, The New Zealand Herald, July 8 2011.
Nathans Finance NZ Limited (2005) Nathans Finance NZ Limited Annual Report for the year ended 30 June 2005.
Nathans Finance NZ Limited (2007) Nathans Finance NZ Limited Annual Report for the year ended 30 June 2006.
Pae, J. 2007, ‘Unexpected Accruals and Conditional Accounting Conservatism’, Journal of Business Finance & Accounting, 34, 5 & 6: 681-704.
Pincus, M., Rajgopal, S., and Venkatachalam, M., 2007. The accrual anomaly: international evidence. The Accounting Review, 82 (1), 169viewa
PricewaterhouseCoopers (2007) Receivers’ First Report on the State of Affairs of Nathans Finance NZ Limited (In Receivership), available at http://www.business.govt.nz/companies/app/ui/pages/companies/1150880/documents?
Schilit, H.M. and Perler, J. 2010, Financial Shenanigans – How to Detect Accounting Gimmicks & Fraud in Financial Reports, The McGraw-Hill Companies, New York.
Schipper, K. and Vincent, L. (2003). Earnings Quality. Accounting Horizons, Supplement: 97-110.
Sloan, R.G. 1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review, 71 (3), 289-315.
Teoh, S.H., I. Welch, and T.J. Wong. 1998. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics 50 (October): 63-99.
Teoh, S.H., T.J. Wong, and G.R. Rao. 1998. “Are Accruals During Initial Public Offerings Opportunistic?” Review of Accounting Studies 3 (Nos. 1 & 2): 175-208.
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