Accounting

From IAS to IFRS: How International Accounting Standards Shape Financial Reporting

by
Maxime PIOUX

In this article, Maxime PIOUX (ESSEC Business School, Global Bachelor in Business Administration (GBBA) – 2022-2026) explains the importance of international accounting standards and highlights the key differences that finance and business students should be aware of.

Why International Accounting Standards

Financial statements are the primary source of information used by investors, managers, and other stakeholders to assess a company’s financial position and performance. However, without common accounting rules, it would be difficult to compare the results of two companies operating in different countries and industries. International accounting standards were developed to address this challenge.

In a context of globalization in financial markets, international accounting standards aim to harmonize accounting practices in order to ensure better comparability between companies regardless of their country or sector. These rules also play a key role in financial transparency. By defining how transactions should be recorded, measured, and presented, they enhance transparency and reduce information asymmetries (situations in which some parties, such as investors, have less information than others about a company’s actual financial situation).

Finally, international accounting standards help improve the quality of financial reporting by imposing disclosure requirements in the financial statements and their notes. These guidelines therefore provide more reliable and consistent financial information, facilitating economic decision-making and strengthening market confidence, as highlighted by Richard Grasso, former Chairman of the NYSE (New York Stock Exchange, the main American stock exchange), “It should strengthen investors’ confidence. This is done through transparency, high quality financial reports, and a standardized economic market.”

IAS: First International Accounting Standards and reference framework

The first international accounting standards to emerge were the IAS (International Accounting Standards), developed from 1973 by the International Accounting Standards Committee (IASC). This international organisation, composed of representatives from multiple countries, was responsible for developing accounting rules applicable worldwide by proposing a common accounting framework.

The IAS were created to meet the needs of investors and markets for reliable, transparent, and consistent information. They cover numerous areas and provide detailed rules on how to account for and present financial transactions and events. Initially, they primarily concerned multinational companies and listed entities seeking to publish financial statements comparable internationally. At the beginning, their application was often voluntary, but some jurisdictions gradually required their adoption.

IFRS: the emergence of a modern international accounting framework

In 2001, the International Accounting Standards Board (IASB) replaced the IASC, representing a significant shift with the former committee. While the IASC focused mainly on developing voluntary standards to harmonize accounting practices, the IASB introduced a more structured, rigorous, and coherent framework, with a mission to supervise and continuously develop international standards in order to strengthen their adoption and credibility worldwide. The IFRS (International Financial Reporting Standards) were born from this process. Their primary objective is similar to that of the IAS: to improve the reliability and comparability of financial statements. However, IFRS go further by imposing a uniform framework with precise principles. They aim to provide a single accounting reference, ensuring that all relevant companies present their financial transactions and events transparently and in a standardized way.

Today, IFRS apply to a wide range of companies, mainly listed and multinational entities, but some countries have adopted them for all companies. In the European Union, for example, all listed companies must prepare their consolidated financial statements according to IFRS, while in other countries, such as the United States, IFRS may be applied voluntarily or for certain subsidiaries of international groups.

To better understand the purpose of IFRS, it is useful to remember three fundamental principles these standards adhere to:

  • Completeness: Financial statements must reflect the company’s entire activity and limit off-balance-sheet information.
  • Comparability: Financial statements are standardized and identical for all companies.
  • Neutrality: Standards should not allow companies to manipulate their accounts.

The application of these standards today

Today, IFRS constitute the main framework for international accounting standards, used in 147 countries (98% of European countries and 92% of Middle Eastern countries). Some IAS, developed before 2001, continue to apply (such as IAS 1 on the presentation of financial statements) as long as they have not been replaced by an equivalent IFRS.

In France, the application of IFRS is mandatory for all listed companies, particularly for the preparation of their consolidated financial statements. Large unlisted companies and certain mid-sized enterprises can also choose to apply them in order to harmonize their international reporting, although this is not compulsory. In contrast, SMEs remain largely subject to the French General Accounting Plan (PCG “Plan Comptable Général”), which provides simplified rules suited to their size and structure.

Impact of IFRS

The impacts of IFRS on companies have been numerous and have varied by industry. However, overall, these impacts have remained relatively limited. For instance, according to a FinHarmony study on the transition to IFRS, the equity of CAC 40 companies changed by only 1.5%.

Three IFRS standards that have led to significant changes in corporate accounting are presented below.

IFRS 16: Leases in the Balance Sheet

Before the introduction of IFRS 16 in January 2019, the accounting treatment of leases was governed by IAS 17 (leases). This standard distinguished between two types of leases:

  • Finance leases, for example when a company leases a machine with a purchase option, for which the company recognized an asset corresponding to the leased item and a liability corresponding to future lease payments.
  • Operating leases, for example when a company rents office space, which were recorded as expenses in the income statement and remained off-balance-sheet.

With IFRS 16, this distinction disappears for most leases: now, all leases must be recognized in the balance sheet as a “right-of-use” asset and a lease liability. The only exceptions are short-term leases (less than 12 months) or leases of low-value assets (less than 5,000 USD). This reform aims to improve the transparency and comparability of financial statements by reflecting all lease obligations on the balance sheet.

As a result, companies with numerous operating leases, such as retail chains or airlines, have seen their assets and liabilities increase significantly, thereby affecting certain financial ratios and indicators (such as debt-to-assets or EBITDA).

Let’s take the example of an airline that leases 10 aircraft under operating lease contracts, with a total annual rent of €10 million over a 10-year period. The company generates revenue of €500 million, an EBITDA of €100 million, and has debt of €250 million.

  • Before IFRS 16, these contracts were classified as operating leases, with an annual lease expense of €10 million recorded in the income statement and no recognition on the balance sheet, despite this significant long-term financial commitment.
  • With IFRS 16, the company must now recognize a right-of-use asset on the balance sheet (corresponding to the present value of future lease payments) along with a lease liability of the same amount. Assuming a discount rate of 2%, the present value of the lease payments over 10 years is approximately €90 million, recorded as both an asset and a liability.
    In the income statement, the lease expense is replaced by depreciation expenses on the right-of-use asset and interest expenses on the lease liability.

The EBITDA, which excludes depreciation and interest, therefore increases to €110 million, compared to €100 million under the previous treatment. The former annual lease expense of €10 million no longer affects EBITDA because it has been replaced by depreciation and interest. However, the apparent leverage increases significantly, as the lease liability rises by €90 million (from €250 million to €340 million). Consequently, the debt-to-EBITDA ratio, for example, moves from 2.5 (250/100) to 3.1 (340/110), which can affect the perception of investors and banks.

This example illustrates that the increase in EBITDA and debt results from a change in accounting standards rather than a real improvement in the company’s economic performance.

IFRS 13: Historical Cost vs Fair Value

A significant change introduced by IFRS 13 in January 2013 concerns the measurement of assets and liabilities. Indeed, under certain IAS and in many national practices, assets were often recorded at historical cost, meaning their original purchase price.

By contrast, IFRS 13 promotes the concept of fair value, which represents the price at which an asset could be sold in a market at the closing date.

Fair value accounting can lead to significant fluctuations in the balance sheet and income statement, particularly for companies holding financial assets, securities, or significant real estate, as it reflects market variations. Companies in sectors such as finance, real estate or hotel industry may thus see their balance sheets and financial ratios change from one period to another, reflecting market realities. However, this approach provides a more realistic and transparent view of the financial situation.

Let’s take the example of a real estate group that owns a portfolio of buildings recorded at a historical cost of €500 million. In other words, the total purchase price of all the group’s buildings amounts to €500 million, whether they were acquired recently or several years ago. The company also has a bank debt of €200 million.

  • Before IFRS 13, the buildings were recorded under “property, plant, and equipment” in non-current assets at their historical cost of €500 million, regardless of changes in the real estate market. Equity and financial ratios therefore reflected this fixed value, without taking market fluctuations into account.
  • With the application of fair value as defined by IFRS 13, buildings are now valued at their market value at the reporting date. This fair value corresponds to the price at which the asset could be sold under normal market conditions and is generally estimated using real estate appraisals or comparable transactions.

Let’s assume that the current market value of the portfolio is €600 million. The balance sheet increases by €100 million in assets and equity. In practice, this revaluation directly affects certain financial ratios. For example, the debt-to-equity ratio decreases from 0.4 (200/500) to 0.33 (200/600). Investors and banks then perceive the company as less leveraged and with a larger asset base, even though the company’s actual operating activity has not changed.
By contrast, if the market value drops to €400 million, equity decreases by €100 million, and the debt-to-equity ratio rises from 0.4 to 0.5 (200/400), which could negatively affect the perceived risk of the company.

This example illustrates that fair value accounting more accurately reflects the current economic situation of assets, but leads to visible fluctuations in the balance sheet and financial ratios.

IFRS 15: Revenue from Contracts with Customers

IFRS 15, which came into effect in January 2018, replaced IAS 18 (Revenue) and IAS 11 (Construction Contracts), introducing a single and standardized approach to revenue recognition.

Before IFRS 15, revenue was recognized differently depending on its nature:

  • Under IAS 18, revenue from goods was recognized at delivery, and revenue from services was recognized at the time they were performed.
  • Under IAS 11, revenue from construction contracts was recognized over time based on the percentage of completion of the project.

With IFRS 15, revenue recognition is based on a single principle: the transfer of control of the good or service to the customer, regardless of physical delivery. In other words, revenue is recognized when the customer obtains control of the good or service. In practical terms, this means:

  • For goods sold, revenue is recognized when the customer can use the item and benefit economically from it.
  • For services (subscriptions or IT services for instance), revenue is recognized progressively as the service is provided, in proportion to the progress or consumption by the customer, rather than at the end of the contract or at invoicing.
  • For construction contracts, revenue is allocated to each stage of the contract as the customer gains control of the corresponding performance.

This approach standardizes revenue treatment across all sectors and reduces discrepancies between companies and countries. IFRS 15 has changed the way companies record revenue in the income statement. Some transactions must now be spread over time, while others can be recognized more quickly, depending on when the customer obtains control of the good or service. The most affected sectors are construction, technology, telecommunications, and services. This standard therefore improves comparability and transparency of revenue, enabling investors and financial analysts to better understand a company’s actual economic performance.

Let’s take the example of a construction company that signs a contract to renovate a residential complex for a total amount of €50 million, over a period of 2 years. Let’s suppose the total estimated cost of the project is €20 million.

  • Before IFRS 15, revenue recognition could differ depending on the applicable standard: under IAS 11, revenue was generally recognized progressively based on the percentage of completion of the project, but some companies could wait until invoicing or delivery to record revenue. This could lead to divergent practices, for example recognizing revenue too early to artificially improve performance, or on the contrary, postponing revenue to smooth results.
  • With IFRS 15, revenue recognition is based on the unique principle of transfer of control to the customer. In practice, this means that the company must recognize revenue as the customer obtains control of the work performed, even if payment has not yet been received.

Let’s assume that, at the end of the first year, 60% of the work is completed and the customer can use this part of the complex: the company will then record €30 million of revenue (60% of the total contract) in its income statement, and the corresponding costs of €12 million (60% of the project costs). The net profit for this part of the project is therefore €18 million (30 – 12).
On the balance sheet, assets increase by €30 million: in cash if the customer has already paid, or in accounts receivable if payment has not yet been received. Equity increases by €18 million, corresponding to the net income from this portion of the project. On the liabilities side, a trade payable of €12 million is recorded, corresponding to costs incurred but not yet paid. This debt will disappear when the company pays its suppliers, reducing cash and maintaining the balance sheet equilibrium.

This approach allows the financial statements to more accurately reflect the economic reality of the contract and makes results more transparent for investors. Without this method, revenue for the first year could have been zero, thus hiding the true performance of the project.

What about US GAAP ?

In addition to IFRS, there are also US GAAP (Generally Accepted Accounting Principles), which constitute the accounting framework used in the United States (US). US GAAP are mandatory for all U.S. listed companies, as IFRS are not permitted for the preparation of financial statements of domestic companies. However, foreign companies listed in the United States may publish their financial statements under IFRS without reconciliation to US GAAP.

US GAAP have existed since 1973 and are developed by the Financial Accounting Standards Board (FASB). They are based on a more rules-based approach, with a much larger volume of standards and interpretations than IFRS, often estimated at several thousand pages (compared with only a few hundred pages for IFRS). This approach reduces the degree of judgment and interpretation but makes the framework more complex.

Why should I be interested in this post?

Understanding the differences between IAS and IFRS standards is essential for any student in finance, accounting, auditing, or corporate finance who wishes to pursue a career in finance. International accounting standards directly influence how companies present their financial performance, measure their assets and liabilities, and communicate with investors. Mastering these concepts makes it easier to read and understand financial statements and to develop a more critical view on a company’s actual performance.

Related posts on the SimTrade blog

   ▶ Samia DARMELLAH My experience as an accounting assistant at Dafinity

   ▶ Louis DETALLE A quick review of the accountant job in France

   ▶ Alessandro MARRAS My professional experience as a financial and accounting assistant at Professional Services

   ▶ Louis DETALLE A quick review of the Audit job

Useful resources

IFRS

FASB

US GAAP vs IFRS

YouTube IFRS 16

YouTube IFRS 13

YouTube IFRS 15

Academic resources

Colmant B., Michel P., Tondeur H., 2013, Les normes IAS-IFRS : une nouvelle comptabilité financière Pearson.

Raffournier B., 2021, Les normes comptables internationales IFRS, 8th edition, Economica.

Richard J., Colette C., Bensadon D., Jaudet N., 2011, Comptabilité financière : normes IFRS versus normes françaises, Dunod.

André P., Filip A., Marmousez S., 2014, L’impact des normes IFRS sur la relation entre le conservatisme et l’efficacité des politiques d’investissement, Comptabilité Contrôle Audit, Vol.Tome 20 (3), p.101-124

Poincelot E., Chambost I., 2015, L’impact des normes IFRS sur les politiques de couverture des risques financiers : Une étude des groupes côtés en France, Revue française de gestion, Vol.41 (249), p.133-144

About the author

The article was written in February 2026 by Maxime PIOUX (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2022-2026).

   ▶ Read all articles by Maxime PIOUX.

My experience as an Accounting Assistant at Dafinity

by
Samia DARMELLAH

In this article, Samia DARMELLAH (ESSEC Business School, Global BBA, 2020-2024) shares her professional experience as an Accounting Assistant at Dafinity.

About Dafinity

Dafinity is a well-established accounting firm in France, dedicated to providing tailored financial services to its clients.

They offer three main services: Part-Time CFO Services, Transaction Advisory Services (TAS), and Digital Transformation Consulting (TD).

Part-Time CFO Services

This means they provide expert financial leadership to companies that may not need a full-time Chief Financial Officer. They help guide these businesses through financial challenges and support their growth.

Transaction Advisory Services (TAS)

This service helps businesses with important financial transactions, like mergers or acquisitions, ensuring everything goes smoothly.

Digital Transformation Consulting (TD)

Dafinity assists companies in automating and optimizing their financial processes, making their operations more efficient.

The firm has worked with several notable clients, including BPI France, Deepki, and Djoko. Its dedication to quality service has made it a trusted partner for many businesses.

During my three-month internship at Dafinity (Spring 2021), I had the chance to work as an Accounting Assistant. In this role, my primary responsibilities included entering accounting entries, preparing tax returns, and assisting in the monthly review of accounts. This experience allowed me to gain valuable insights into the financial processes of a leading accounting firm and sharpen my analytical skills as I learned to assess the financial health of various clients.

Logo of Dafinity.
Logo of Dafinity
Source: Dafinity.

My missions

During my three-month internship as an accounting assistant at Dafinity, I had the opportunity to dive into a variety of tasks that significantly contributed to my professional growth. Each responsibility offered a unique learning experience that enhanced my understanding of the accounting field.

One of my key tasks was entering accounting data into the firm’s systems. This role was crucial because it emphasized the importance of accuracy and attention to detail in financial reporting. I quickly learned that even the smallest error could lead to larger discrepancies down the line.

I also participated in the review of monthly accounts, where I checked financial statements for accuracy. This process provided me with valuable insights into how businesses manage their finances and maintain their financial health. It was fascinating to see firsthand the level of scrutiny that goes into ensuring financial statements are precise and reflective of reality.

Additionally, I contributed to preparing tax returns, including VAT (Value Added Tax) and other corporate taxes. This task introduced me to the complexities of tax regulations and the necessity of compliance, revealing just how critical it is for businesses to stay on top of their tax obligations.

Interacting with clients was another significant aspect of my role. I managed document requests and provided guidance, which greatly improved my communication skills. These interactions taught me the importance of understanding clients’ needs and being able to offer solutions that align with their goals.

Finally, I assisted in the preparation of documents for annual audits. This experience underscored the significance of transparency and accuracy in financial reporting. I realized that thorough preparation is key to a successful audit, reinforcing the importance of diligence in all aspects of accounting.

Required skills and knowledge

During my internship, I learned that several important skills and knowledge areas are essential for success in accounting. First, being comfortable with accounting software, particularly Excel, was crucial for tasks like entering data and analyzing financial information. Understanding basic accounting principles and tax regulations was also necessary to prepare accurate tax returns and ensure compliance with laws.

Additionally, effective communication was important because I frequently interacted with clients. Being able to explain information clearly helped build trust and ensured that clients felt supported. Attention to detail was vital, as even small errors in accounting can lead to significant issues. Finally, being able to think critically and solve problems was important when faced with challenges, like discrepancies in financial records.

Overall, these experiences helped me grow and prepared me for future opportunities in finance.

What This Experience Brought Me

My time at Dafinity has been incredibly rewarding for several reasons:

Skill Development

I gained hands-on experience in accounting and finance, which complements what I’ve learned in school. This practical knowledge will be invaluable as I continue my career.

Understanding the Firm’s Environment

Working at Dafinity gave me a clear picture of how an accounting firm operates. I learned about the services they offer, like part-time CFO support and transaction advisory services, and how these help businesses succeed.

Interpersonal Skills

Working with clients improved my communication skills and taught me how important it is to build good relationships in a professional setting. Understanding client needs and providing solutions is key to success.

Financial concepts related my internship

Cash-flow

Cash flow refers to the movement of money in and out of a business, indicating its liquidity and financial health. It is essential for maintaining operations and meeting obligations. During my internship at Dafinity, I gained insights into how businesses manage their cash flow by monitoring receivables and payables. Understanding cash flow was crucial for helping clients develop strategies to optimize their financial resources, ensuring they have enough liquidity to support their operations and growth initiatives.

Depreciation

Depreciation is the method used to allocate the cost of a tangible asset over its useful life, reflecting the asset’s reduction in value over time. This accounting concept is vital for accurate financial reporting and tax calculations. In my role as an accounting assistant, I was involved in preparing financial statements where I learned how depreciation impacts a company’s profit margins and tax liabilities. Properly accounting for depreciation helps businesses provide a clearer picture of their financial position and comply with accounting standards.

Fixed Assets

Fixed assets refer to the long-term tangible assets that a company owns and uses in its operations, such as buildings, machinery, and equipment. These assets are critical for generating revenue and sustaining operations. During my internship, I analyzed the fixed assets of clients to assess their asset utilization and long-term financial planning. Understanding the implications of fixed assets helped me recognize how investments in these assets can drive growth and efficiency, emphasizing the importance of strategic asset management in financial decision-making

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Louis DETALLE A quick review of the Accountant job in France…

   ▶ Lou PERRONE Free Cash Flow: A Critical Metric in Finance

Useful resources

Dafinity

About the author

The article was written in October 2024 by Samia DARMELLAH Samia DARMELLAH (ESSEC Business School, Global BBA, 2020-2024).

Long-Term Liabilities

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Long-Term Liabilities

Shruti Chand

In this article, Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022) elaborates on long-term liabilities.

This read will help you get started with understanding long-term liabilities and how it is used in making investment decisions.

Introduction

Long-term liabilities are financial liabilities of the firm that are due in a period more than one year. These long-term obligations are also referred to as non-current liabilities.

You can find the long-term liabilities in the balance sheet including various items such as all long-term loans, bonds, and deferred tax liabilities.

While the current liabilities of a business represent the funds used by a company to cover its liquid assets, the non-current part of the liabilities are used to cover primary business operations and purchase of heavy long-term assets.

The current and non-current liabilities are separated from each other to help readers understand the financial prosperity of the businesses in different time scenarios.

The most common examples of long-term liabilities are as follows:

● Bonds payable
● Long term loans
● Pension liabilities
● Deferred income taxes
● Deferred revenues

Final Words

Understanding the level of long-term liabilities of the business helps the reader to assess the risk behind meeting the financial obligations of a business. To be able to measure this risk level, it is very important for the investor to understand the concept of leverage. It helps the reader understand how much capital comes from debt. This
helps one understand the position of a company towards its ability to meet its financial obligations. High levels of leverage can be risky for the business. You can measure this using various financial ratios. Common leverage ratios include debt-equity ratio and equity multiplier.

Relevance to the SimTrade certificate

Understanding long term liabilities and its significance in the books of accounts of a company will help you better understand the financial health of companies you would like to invest in.

About theory

  • By taking the market orders course, you will know more about how investors can use various strategies to invest in order to trade in the market.

Take SimTrade courses

About practice

  • By launching the series of Market maker simulations, you can extend your learning about financial markets and trading approaches.

Take SimTrade courses

Related posts on the SimTrade blog

   ▶ Shruti CHAND Balance sheet

   ▶ Shruti CHAND Liabilities

About the author

Article written in October 2021 by Shruti CHAND (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2022).

Cash flow statement

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Cash flow statement

Bijal Gandhi

In this article, Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the meaning of cash flow statement.

This read will help you understand in detail the meaning, structure, components of cash flow statement along with relevant examples.

Cash Flow statement

The cash flow statement is one of the three most important financial statements which acts as a bridge between the balance sheet and the income statement. It is a summary of all the cash and cash equivalents that have entered or left the company in the previous years. It helps to understand how well a company manages its cash position. In many countries, it is a mandatory part of the financial statements for large firms.

Structure of Cash Flow statement

The cash flow statement is divided into three of the following major activity categories: operating activities, investing activities and financing activities.

Cash from operating activities

The operating activities includes all the sources and uses of cash related to the production, sale and delivery of the company’s products and services. Few examples of the operating activities include,

• Sale of goods & services
• Payments to suppliers
• Advertisements and marketing expenses
• Rent and salary expenses
• Interest payments
• Tax payments

Cash from investing activities

As the name suggests, investing activities includes all those sources and use of cash from a company’s investments, assets, and equipment. A few examples of investing activities include,

  • Purchase and sale of an asset
  • Loans to suppliers
  • Loans received from customers
  • Expenses related to mergers and acquisitions

Cash from financing activities

Financing activities are those that include all the sources and use of cash from investors. All the inflow and outflow of cash such as,

  • Capital raised through sale of stock
  • Dividends paid
  • Interest paid to bondholders
  • Net borrowings
  • Repurchase of company’s stock

LVMH Example: Cash Flow Statement

Here, we again take the example of LVMH. The French multinational company LVMH Moët Hennessy Louis Vuitton was founded in 1987. The company headquartered in Paris specializes in luxury goods and stands at a valuation of $329 billion (market capitalization in June 2021). It is a consortium of 75 brands controlled under around 60 subsidies. Here, you can find a snapshot of LVMH Cash flow statement for three years: 2018, 2019 and 2020.

Importance and use of cash flow statement

The cash flow statement is a very important indicator of the financial health of a company. This is because a company might make enough profits but might run out of cash to be able to operate. Also, it indicates the company’s abilities to meet its interest obligations and dividend payments if any. Basically, it provides a true picture of a company’s liquidity and financial flexibility. Therefore, a cash flow statement used in conjunction with the income statement and the balance sheet helps provide a holistic view of a company’s strength and weaknesses. The cash flow statement is therefore of great use to the following stakeholders:

  • Potential and current debtholders (creditors and bondholders)
  • Potential and current shareholders
  • Management team and company’s directors

Related posts on the SimTrade blog

   ▶ Bijal GANDHI Income statement

   ▶ Bijal GANDHI Revenue

   ▶ Bijal GANDHI Cost of goods sold

About the author

Article written in July 2021 by Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Operating vs Non-Operating Revenue

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Bijal GANDHI

In this article, Bijal GANDHI (ESSEC Business School, Master in Management, 2019-2022) explains the difference between operating and non-operating revenue.

This read will help you understand in detail various terminologies related to revenue and income statement.

What is operating revenue?

The revenue generated from the primary or core activities of a company is referred to as operating revenue. It is important to differentiate between operating and non-operating revenue to gain insights into the efficiency of a firm’s core operations.

For example, the revenue generated from the total sale of iPhones worldwide is an operating revenue for Apple, whereas the revenue generated from sale of old office furniture would be a non-operating revenue.

What is non-operating revenue?

Non-Operating revenue refers to the revenue generated from operations that are not part of a company’s core business. The items in this section are generally unique in nature and therefore they do not show a true picture of the efficiency of a company’s core business. It is rather attributable to a company’s managerial and financial decisions.

For example, research grants obtained by universities are non-operating revenues as they are not generated from the core business (tuition fees).

How are revenue recorded in the income statement?

We know from the income statement that the COGS is deducted from revenue to derive the gross profit. The operating expenses are further deducted from the gross profit to attain the operating profit. The non-operating revenues and expenses are then combined and deducted from the operating profit to derive the net profit.

LVMH example

Let us once take the example of Moët Hennessy Louis Vuitton (LVMH). The French multinational company LVMH was founded in 1987. The company headquartered in Paris specializes in luxury goods and stands at a valuation (market capitalization in June 2021) of $329 billion. It is a consortium of 75 brands controlled under around 60 subsidiaries. Here, you can find a snapshot of LVMH Income statement for three years: 2018, 2019 and 2020.


LVMH financial statements
Here, you can see that the highlighted part; “other financial income and expenses” are combined to derive the net profit before taxes

Related posts on the SimTrade blog

▶ Bijal GANDHI Income statement

▶ Bijal GANDHI Revenue

▶ Bijal GANDHI Cost of goods sold

▶ Bijal GANDHI Operating profit

About the author

Article written in August 2021 by Bijal GANDHI (ESSEC Business School, Master in Management, 2019-2022).

Gains vs Revenue & Losses vs Expenses

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Gains vs Revenue & Losses vs Expenses

Bijal GANDHI

In this article, Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains the difference between gains and revenue, and losses and expenses.

This read is for the students who wish to have a clear and theoretical understanding of the basic terms used in accounting and finance.

Revenue

We know from revenue, that it is referred to the money brought into a company from the sale of either goods, services, or both. Revenue is synonymous to sales and top line. This is because it first line on the income statement and it is a good indicator of a business’s performance. Revenue consists of two components, the price and the number of products/services sold. It is then calculated in the following manner:

Gains

Gains refers to the income generated through non-primary operations of the company. Any positive monetary value (profit) generated from secondary sources is a capital gain. For example, profit from the sale of real estate is to be treated as capital gain. Other such examples include the following,
• Profit from sale of equity holdings in any company
• Profit on investment in mutual fund
• Profit from winning a lawsuit.
• Profit from disposing an asset.

Gains can be from short-term holdings or long-term holdings. Short term could be defined as one to two years depending on accounting standards and type of financial instrument. It is important to take this in consideration while investing as both have different taxation guidelines.

Expenses

Expenses refers to the cost of operations incurred by a company. The basic goal of any company is to keep the expenses in check to ensure maximum profits. Expenses are broadly defined under the following two categories,
• Operating Expenses: The costs related to the main activities of the company such as cost of goods sold, salary, rent, legal, advertisement, etc.
• Non-Operating Expenses: These are the expenses that are not directly related to the core operations of a business. For example, profit from the sale of real estate would be a non-operating expense for a company who does not regularly deal in real estate. Similarly, the expenses such as interest payments on debt is also a non-operating expense since it does not arise from the company’s core business.

Losses

A loss in accounting terms refers to the money lost through non-primary operations of the company. Any negative monetary value (loss) incurred due to secondary sources is recorded as a capital loss. For example, the loss on an investment in equity shares of another company is a capital loss.
Like gains, it is important to identify whether a loss is from a short-term holding or a long-term holding. This is because in taxation, gains can be offset against corresponding losses.

Related posts on the SimTrade blog

   ▶ Bijal GANDHI Income statement

   ▶ Bijal GANDHI Revenue

   ▶ Bijal GANDHI Cost of goods sold

   ▶ Bijal GANDHI Operating profit

About the author

Article written in July 2021 by Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Depreciation

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Depreciation

Bijal GANDHI

In this article, Bijal GANDHI (ESSEC Business School, Master in Management, 2019-2022) explains briefly the meaning of Depreciation.

This reading will help you understand the concept of depreciation, its main components and types with examples.

What is depreciation?

Depreciation is the accounting technique of dividing the total cost of a physical asset over its useful life period. The amount allocated is the value of the asset used up in that particular financial year. Depreciation is used by companies to spread the cost of an asset over time. This method eliminates the cost burden in one particular year. If not for depreciation, the company’s profits would seriously be affected in the year of purchase.

Depreciation for long-term assets may also be practiced by companies for tax benefits in a particular year. The reduction in taxable income can be achieved through tax deduction for the cost of an asset. Note that there are standard rules regarding the accounting practices of depreciation and firms cannot do what they want.

Types of depreciable assets

The guidelines for the types of assets to be depreciated is set by Internal revenue service (IRS) in the U.S. The following criteria are to be met with,
• The asset should be owned by the company.
• The asset should be used in the business to generate income.
• The life of the asset is determinable and is more than a year.

The most common examples of depreciable assets include plant and machinery, equipment, furniture, computers, software, land and vehicles.

Components of a depreciation schedule

A depreciation schedule is a detailed document that comprises of the information pertaining to depreciation for each asset owned by the company. It generally includes the following,
• Description and purchase price of asset
• Date of purchase and expected useful life.
• Depreciation method and salvage value.

Depreciation types with examples

Depreciation can be carried in several ways. The company can use any one of the four depreciation methods highlighted by Generally accepted accounting principles (GAAP) guidelines. GAAP is the set of rules and guidelines that are to be adhered to by accountants. The four methods for depreciation include the following,

Straight-line depreciation

Straight-line is one of the simplest methods of depreciation. In this method, the value of the asset is split evenly over the useful life of the asset. The value of the asset is calculated by subtracting the salvage value (scrap value) from the original cost incurred to purchase the asset. For example, if an equipment is bought for 10,000 euros, with a useful life of 10 years and a salvage value of 1,000 euros, the depreciation is computed as follows:

Depreciation per year= (asset cost – salvage value) / useful life
= (10,000-1,000) / 10
= 900 euros per year.
Therefore, 900 euros will be written off each year for 10 years.

Declining balance depreciation

The declining balance method of depreciation is an accelerated version of the straight-line method. Instead of an equal amount of depreciation for each year of useful life, unequal amounts depending upon the use are written off. In this method, more of the assets value is depreciated in the initial years than afterwards. This method is practiced by businesses who wish to recover maximum value upfront. For example, the equipment bought for 10,000 euros with a useful life of 10 years and salvage value of 1,000 will be depreciated by 20% each year,

For first year, the depreciable amount will be (9,000*20%) = 1,800 euros
For second year, the depreciable amount will be ((9,000-1,800) *20%) = 1,440 euros and so on.

Sum-of-the-years’ digits depreciation

This method serves a similar purpose as the declining balance method. It allows to depreciate more in the initial years as compared to the later years. It is a bit more even in terms of distribution per year as compared to the declining balance method.

The formula is as follows,
 (Remaining life in years / SYD) x (asset cost – salvage value)
Where, SYD is the sum of the years of the asset’s useful life. SYD for an asset with a useful life of 4 years is equal to 11, which we get from (1 + 2 + 3 + 4).

Units of Production Depreciation

A simple way to depreciate would be to quantify an asset’s use every year. For example, an equipment can be depreciated in proportion to the units produced. This is exactly what the units of production method of depreciation works.

The formula is as follows,
Depreciation: (asset cost – salvage value) / units produced in useful life.
The number will vary each year, depending upon the use of the asset.

Related posts on the SimTrade blog

   ▶ Income statement

   ▶ Revenue

   ▶ Cost of goods sold

About the author

Article written in May 2021 by Bijal GANDHI (ESSEC Business School, Master in Management, 2019-2022).

Revenue

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Revenue

Bijal Gandhi

In this article, Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) delves deeper into the accounting concept of revenue.

This read will help you understand in detail the meaning, types and calculation of revenue  along with relevant examples.

What is revenue?

Revenue is referred to the money brought into a company from the sale of either goods, services, or both. Revenue is synonymous to sales and top line. This is because it first line on the income statement and it is a good indicator of a business’s performance. Revenue consists of two components, the price and the number of products/services sold. It is then calculated in the following manner:

Bijal Gandhi

Gross revenue vs net revenue

Gross revenue is simply the income generated from a sale without consideration for any expenses that might have occurred. Net revenue is the income after subtracting all the cost of goods sold and other expenses related to running the business.

For example, if Alpha sells 2,000 toy cars at $100 each, its gross revenue for the month would be $200,000. If the cost of producing each car was $25, their net revenue would be 2,000 x ($100 – $25) toy cars or $150,000.

Revenue example: LVMH

Let us once again take the example of LVMH. The French multinational company LVMH Moët Hennessy Louis Vuitton was founded in 1987. The company headquartered in Paris specializes in luxury goods and stands at a valuation of $329 billion. It is a consortium of 75 brands controlled under around 60 subsidiaries. Here, you can find a snapshot of LVMH Income statement for three years: 2018, 2019 and 2020.

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Here, the revenue, also known as top line, is 44,651 million euros for the year 2020. The revenue is the sum of income generated from all divisions. In the snapshot below, the revenue is a consolidation of income generated by several brands that sell wines, spirits, fashion, leather goods, perfumes, etc.

Accrued vs deferred revenue

Accrued revenue refers to the revenue earned by a company for which the goods are delivered but the payment is yet to be received. In this type of accounting, the revenue is recorded irrespective of whether the cash is received or not.

Deferred revenue refers to the revenue for which the customer has already made the payment, but the company is yet to deliver the goods. Here, in accounting the company will record the cash payment but that the revenue is unearned, but it will not recognize the revenue on the income statement.

How do revenue & earnings differ?

Revenue refers to the income generated by a company before deducting expenses, while earnings refer to the profit earned by the company after deducting the expenses, interest, and taxes from revenue.

Earnings is synonymous to net income or the bottom line. Along with revenue, it is also a very important indicator of a company’s performance.

How do revenue & cash flows differ?

Cash flow refers to the total amount of cash that moves into or out of the company. While revenue is the indicator of a company’s overall effectiveness, the cash flow is an indicator of liquidity.

Related posts on the SimTrade blog

   ▶ Bijal GANDHI Income statement

   ▶ Bijal GANDHI Cost of goods sold

About the author

Article written in May 2021 by Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Cost of goods sold

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Cost of goods sold

Bijal GANDHI

In this article, Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains Cost of goods sold.

This read will help you understand in detail the meaning and components of cost of goods sold along with relevant examples.

Introduction

Cost of goods sold (COGS) refers the sum of all costs directly related to the production of the goods. It is fundamentally very similar to cost of sales and hence synonymously used. Some examples of items that make up COGS include,

  • Cost of raw materials
  • Direct labor costs
  • Heat and electricity charges
  • Overheads

Components and Formula

The COGS is calculated using the following formula,

COGS = (Beginning Inventory + Purchases) – Ending Inventory

• Beginning Inventory is the total value of the inventory left over or not sold from the previous year.

• Cost of goods is the sum of all costs directly related to the production of the goods or the purchase value of the same (in case of retailer or distributor)

• Ending inventory is the total value of the remaining inventory that was not sold till the end of the financial year. This number is carried forward to next year.

Example: LVMH

Let us once again take the example of LVMH. The French multinational company LVMH Moët Hennessy Louis Vuitton was founded in 1987. The company headquartered in Paris specializes in luxury goods and stands at a valuation of $329 billion. It is a consortium of 75 brands controlled under around 60 subsidiaries. Here, you can find a snapshot: 2018, 2019 and 2020.

Bijal Gandhi

In the income statement, COGS is placed just below revenue (Link to the blog) to easily compare the numbers and derive the gross margin. For example, in the snapshot of LVMH income statement below, the cost of sales for the year 2020 is 15,871 million euros for the revenue of 44,651 million euros resulting in a gross margin of 28,780 million euros.

Direct costs vs indirect costs

Direct cost refers to the costs that are directly associated with the production of goods and services. They are generally variable in nature as they fluctuate depending upon the production. Some examples of direct costs include, raw materials, direct labour, manufacturing supplies, fuel, power, wages, etc. Most importantly, direct costs are the ones that can be directly assigned to the product or service.

Indirect costs are those which cannot be assigned to one specific product or service. These costs are those that apply to more than one business activity. For example, rent, employee salary, utility and administrative expenses, overheads, etc. These costs may be fixed or variable in nature.

COGS vs operating costs

Operating costs are expenses that are not directly related to the production of goods or services. The operating expenses are a separate line item in the income statement, and they include indirect costs like salaries, marketing, rent, utilities, legal and admin costs, etc.

It is important to classify the costs correctly as either COGS or operating. This will help managers differentiate well between the two and effectively build a budget for the same.

Related posts on the SimTrade blog

   ▶ Bijal GANDHI Income statement

   ▶ Bijal GANDHI Revenue

About the author

Article written in May 2021 by Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Income Statement

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Income Statement

Bijal GANDHI

In this article, Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) explains briefly the structure of an Income Statement.

This reading will help you understand the structure and the main components of the income statement.

Introduction

Income statement is a financial statement that reports the financial performance of an entity over a specified accounting period. The financial performance is measured by summarizing all income and expenses over a given period. Also known as ‘Profit and Loss’ Statement, the Income statement helps the company have a look at the profits for the year and helps it take financial decisions about costs and revenues. The Income statement is also the basis for the tax institution to compute the income tax that the company has to pay every year. The Income statement also allows shareholders to know the dividends that they can receive from the earnings.

Structure of an income statement

Bijal Gandhi

Main components of an income statement

The income statement may slightly vary sometimes depending upon the type of company and its expenses and income, but the general structure and lines may remain the same.

  • Revenue: Also known as top line, revenue or sales revenue refers to the value of the total quantity sold multiplied by the average price of goods or services sold.
  • Cost of goods sold: The cost of goods sold is the sum of all the direct costs associated with a product or service. For example, labor, materials, equipment, machinery, etc.
  • Gross Profit: Gross profit is derived after subtracting the cost of goods from sales/revenue.
  • Indirect Expenses: Indirect expenses include general, selling, and administrative expenses like marketing, advertisement, salary of employees, office, and stationery, rent, etc.
  • Operating Income: Gross profit less indirect expenses are equal to operating income. It is the firm’s profit before non-operating expenses and income, taxes and interest expenses are subtracted from revenues.
  •  Interest Expenses/Income: Interest expense/income is deducted/added from operating income to derive earnings before tax.
  • Tax: The taxes are deducted from pre-tax income to derive the net income. The taxes can be both current and future. The net income then flows to retained earnings on the balance sheet after deducting dividends.

Example: LVMH

The French multinational company LVMH Moët Hennessy Louis Vuitton was founded in 1987. The company headquartered in Paris specializes in luxury goods and stands at a valuation of $329 billion (market capitalization in June 2021). It is a consortium of 75 brands controlled under around 60. Here, you can find a snapshot of LVMH Income statement for three years: 2018, 2019 and 2020.

Bijal Gandhi

Most important components of an income statement include:

  • Total Revenue= Sum of Operating and Non-Operating Revenues for the accounting period. ($ 44,651)
  • COGS: Cost of goods Sold is the total cost of sales of the products actually sold. ($15,871)
  • Gross Margin = Net Sales – Total COGS ($28780)
  • Total Expenses = Sum of Operating and Non-Operating Expenses (Marketing and Selling Expenses + General and administrative expenses + Loss from joint Venture = ($ 16,792 + $ 3641 + $ 42= $ 20475)
  • EBT: Earning before taxes = Net Financial Income (Income – Expenses before Taxes). ( – $ 608)
  • Net Income = (Total Revenues and Gains) – (Total Expenses and Loses) = $ 4702

Income statement and Statement of cash flow

It is important to know that Income Statement does not convey the cash inflow and outflow for the year; The Cash Flow Statement is used for this. For example, credit sale is not recorded in the cash flow statement while cash sale is. Credit sale refers to sale for which the customer will make payment in the future while for cash sales the customer makes the payment at the time of purchase.

Conclusion

Income statement is the source to obtain valuable insights about factors responsible for company’s profitability.

Related posts on the SimTrade blog

   ▶ Bijal GANDHI Earnings per share

   ▶ Bijal GANDHI Revenue

   ▶ Bijal GANDHI Cost of goods sold

About the author

Article written in May 2021 by Bijal GANDHI (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).