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0:00
Hi, and welcome to part eight:
Group Accounting
in this HSTalks lecture series
on Analyzing Financial Statements.
My name is David Bond.
0:10
If you've been following this series,
you may have noticed
as we look at
Qantas's financial statements,
they refer to the income statement,
balance sheet,
and cash flow statement
not just as the income statement,
balance sheet, and cash flow statement,
but it's the consolidated
income statement,
consolidated balance sheet,
and consolidated cash flow statement.
The reason for this
is that the information contained
in the annual report
is not just about one entity
but rather about an entire group.
According to Qantas's 2016
annual report,
there are six operating segments,
Qantas Domestic, Qantas International,
Jetstar Group,
Qantas Freight, Qantas Loyalty,
and Corporate in the Qantas group.
And there may well be
more than one legal entity
residing in each of those segments
and potentially some
which cut across them.
If somebody is interested
in investing in Qantas,
they are just interested
in investing in, say, Qantas Loyalty,
they're interested
in how the entire Qantas group
as a whole is performing
because it's ultimately
the group performance
which is reflected
in the income statement
and Qantas's share price.
The consolidated financial statements
are simply an aggregate
of all the entities
which make up the Qantas group.
1:23
Let's take two hypothetical airlines,
Southern and Northern.
Southern earned 75 million
of revenue this year,
had expenses of 57 million
for a profit of 18 million,
as a balance sheet
with 200 million of assets,
150 million of liabilities,
and 50 million of equity.
Northern earned 12 million of revenue,
had expenses of 8 million
for a profit of 4 million,
and has a balance sheet
with $30 million of assets,
20 million of liabilities,
and 10 million of equity.
Southern has a $10 million investment
in Northern,
which means it owns it 100%.
This means that Southern
is the parent whilst Northern
is Southern's subsidiary.
If we were to aggregate
Southern and Northern
into the Southern group
using simple arithmetic,
we'd have 87 million of revenue,
65 million of expenses
for 22 million of profit,
230 million of assets,
170 million of liabilities,
and 60 million of equity.
But hold on, and I'm sure many of you
would have picked up on this,
something is not quite right.
Firstly,
10 million of the 60 million in equity
is not owned by an outside interest.
That 10 million represents one part
of the group owning another part,
in this case,
Southern's investment in Northern.
It doesn't reflect
an external shareholder stake.
The entity from a group perspective
is the group,
so equity for the group needs to reflect
the interests of external owners.
So we need to get rid of that
$10 million of equity,
but that leaves us with another problem
because the balance sheet
now doesn't balance.
We have 230 million of assets
but liabilities of 170,
and equity of 50 for a total of 220.
This is because we only dealt
with one half of the investment
Northern's equity.
However, we also need to get rid
of Southern's investment in Northern.
This is not an investment
in something external.
Again, it's wholly within the group,
so we get rid of it.
And now we have $220 million in assets,
equalling 170 million in liabilities,
and 50 million in equity.
