Topic list Syllabus reference

Change in group structure
When comparing financial statements year-on-year, the effect of any change in group structure must be considered. In particular, if a group has disposed of a subsidiary in the previous year, the results of the subsidiary disposed of need to be separated out in order to make any comparison meaningful. The application of IFRS 5 Non-current Assets Held for Sale and Discontinued Operations makes it possible to separate out the results of continuing and discontinued operations (IFRS 5: para. 33). This is important for analysts as discontinued operations will not be contributing to future performance and non-current assets held for sale will be disposed of in the near future.

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   FAST FORWARD J
   
   Exam focus point
   Presentation of financial performance
   

However, many ratios you can find to calculate numbers alone will not answer a question. You must interpret all the information available to you and support your interpretation with ratio calculations.
Examination questions on financial performance may try to simulate a real life situation. A set of accounts could be presented and you may be asked to prepare a report on them, addressed to a specific interested party, such as a bank.
You should begin your report with a heading showing who it is from, the name of the addressee, the subject of the report and a suitable date.
A good approach is often to head up a 'schedule of ratios and statistics' which will form an appendix to the main report. Calculate the ratios in a logical sequence, dealing in turn with operating and profitability ratios, use of assets (eg turnover period for inventories, collection period for receivables), liquidity and gearing/leverage.
As you calculate the ratios you are likely to be struck by significant fluctuations and trends. These will form the basis of your comments in the body of the report. The report should begin with some introductory comments, setting out the scope of your analysis and mentioning that detailed figures have been included in an appendix. You should then go on to present your analysis under any categories called for by the question (eg separate sections for management, shareholders and creditors, or separate sections for profitability and liquidity).
Finally, look out for opportunities to suggest remedial action where trends appear to be unfavourable. Questions sometimes require you specifically to set out your advice and recommendations.


Analysis of financial performance techniques are discussed in the ACCA's technical articles which can be found on its website. They highlight the key areas of analysis which will be examined in Financial Reporting and build on these skills in Strategic Business Reporting. In particular, there is an article on analysis of financial statements, as well as one commenting on ratios and their uses.
Exam focus point

1. 
   Planning your answers
   

This is as good a place as any to stress the importance of planning your answers. This is particularly important for 'wordy' questions. While you may feel like breathing a sigh of relief after all that number crunching, you should not be tempted to 'waffle'. The best way to avoid going off the point is to prepare an answer plan. This has the advantage of making you think before you write and structure your answer logically.
The following approach may be adopted when preparing an answer plan.

1. 
   Read the question requirements.
   
2. 
   Skim through the question to see roughly what it is about.
   
3. 
   Read through the question carefully, underlining any key words.