Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting Standards and IFRS 29 Bogatyrev S.Yu

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* For information on the journal publication frequency change please visit: http://www.fin-izdat.ru/journal/digest/about.php CONTENTS

RISK, ANALYSIS AND EVALUATION Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment of Creditworthiness of Economic Agents 3 Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows 16

FINANCE OF ORGANIZATIONS. ANALYSIS OF ACCOUNTING SYSTEMS Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting Standards and IFRS 29 Bogatyrev S.Yu. Analytical Capabilities of Modern Information Systems as Part of the Income-Based Business Valuation Method 41 Fedorova E.A., Komarova E.O. The Impact of Foreign Stockholders on the Dividend Policy of Russian Companies 55 Butuzova A.S. Capitalization of International Uniсorn Companies: To What Extent Is It Reasonable? 63 SECURITIES AND FINANCIAL MARKETS Il'yasov R.Kh., Kurazova D.A. Forecasting the Situation in the Financial Market and Evaluating Its Impact on the Industry Development 68 Zvonova E.A., Pishchik V.Ya. On Conceptual Approaches to Developing the EAEU Common Financial Market 81

FINANCIAL CONTROL Sukharev A.N. Minimum Reserve Requirements for Commercial Banks: Theory and Practice 90 INNOVATION AND INVESTMENT Filimonova N.G., Ozerova M.G., Ermakova I.N. Distinctions of the Crowdfunding Model in Agriculture 98

FINANCIAL THEORY Akberdina V.V., Chernavin N.P., Chernavin F.P. Application of the Committee Machine Method to Forecast the Movement of Exchange Rates and Oil Prices 108 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15 pISSN 2073-8005 Risk, Analysis and Evaluation eISSN 2311-9438

Translated Article† THE BUSINESS CONTINUITY CONCEPT IN THE ASSESSMENT OF CREDITWORTHINESS OF ECONOMIC AGENTS

Nadezhda E. BABICHEVA Voronezh State University, Voronezh, Russian Federation [email protected] Corresponding author

Nikolai P. LYUBUSHIN Voronezh State University, Voronezh, Russian Federation [email protected]

Roman Yu. KONDRAT'EV Lipetsk Branch of Financial University under Government of Russian Federation, Lipetsk, Russian Federation [email protected]

Article history: Abstract Received 2 October 2017 Importance The article analyzes the existing contradictions in the implementation of the going concern principle Received in revised form and securing the creditworthiness. 6 October 2017 Objectives The article presents our original comprehensive study of the business continuity concept in relation to Accepted 12 October 2017 creditworthiness of economic agents to synthesize two accounting concepts, i.e. the dynamic and static balance Translated 12 January 2018 sheet. Available online 27 March 2018 Methods We employ general scientific principles and research methods, namely, a historical approach, analysis and synthesis, induction and deduction, grouping, comparison, abstraction, generalization, and analogy. JEL classification: O12, Q01 Results The paper proves the hypothesis that entity's creditworthiness is a complex accounting and analytical characteristic reflecting the continuity of operations. If the entity does not ensure its creditworthiness, it puts its business continuity at peril. Poor financial solvency leads to bankruptcy, and the economic entity may cease its operations. Conclusions and Relevance The existing contradictions in the business continuity and creditworthiness Keywords: business continuity assessment appeared in the 19th century. We suggest that the theory and practice of accounting and economic management, BCM, going concern, analysis should be developed by synthesizing both accounting concepts of dynamic and static balance sheet creditworthiness, sustainable through integrated reporting. This will create an information pool to assess the entity's creditworthiness and development solvency and subsequently identify and avert the continuity threat.

Continuous and† sustainable extended reproduction A.E. Shevelev, B.A. Amanzholova, N.N. Ovchinninkova depends on the availability of working assets in [5, 6], unavailability of net working assets, incompliance the entity. The extended reproduction process is with advisable solvency and creditworthiness indicators interpreted through the following transformation chain: signify the entity’s financial problems, being a serious … money → inventories → settlements (amounts due) reason for auditors and creditors to doubt the entity’s → money... If some external and internal factors disrupt ability to continue as a going concern. The above the chain in a certain point, the reproduction process is reasoning proves that there are contradictions in discontinued as well, thus causing breaches in the going evaluating whether the entity is still a going concern concern principle, loss of financial sustainability and and able to repay. Further studies are required in this corporate crisis. L.A. Mendel'son concludes that many respect. bourgeois economists tend to evaluate the severity of Numerous approaches to creditworthiness evaluation crises by their effects on distribution. Bankruptcy, bank were presented in researches led by D.A. Endovitskii. smash, dropping prices and their implications are We adhere to the definition given in the monograph aspects that those economist focus on, first of all. From referred to in [7, p. 174] stating that the borrower’s the individual capitalists’ perspectives, this approach is creditworthiness (the entity) shall mean quite understandable. Profit margin, prices, loss of their a comprehensive legal and economic characteristic creditworthiness determine their wealth, don’t they? To embodied through financial and non-financial adequately evaluate the crisis, its severity, it is indicators. It helps evaluate whether the borrower necessary to consider its multiple forms in each aspect (entity) is able to fulfill its debt obligations to of economy, including lending [1, p. 205]. the creditor in the future and within timelines stipulated To ensure the continuing production process, the in the loan agreement. It is also the basis to assess owner shall have net working capital, the share of which the risk associated with a certain borrower. In addition shapes the balance structure. The share is calculated as to financial characteristics of the borrower, this the ratio of net working assets to total current assets1. definition of creditworthiness involves legal ones (legal This indicator is viewed as a source for finance of capacity, business reputation) and emphasizes current assets, being an underlying element of liquidity the legitimacy and necessity of considering ratios banks consider to evaluate borrowers’ non-financial indication for analysis purposes. creditworthiness. This is mentioned by many As said in the research referred to herein [8], liquidity, researchers, such as V.V. Kovalev, E. Al'tman, R. Chelik working capital-to-current assets ratio come into et al. [2, pp. 486–488, 3, 4]. the spotlight as The Law of the Russian Federation On On the one hand, if the entity has no net working Insolvency (Bankruptcy) in the 1992 edition pronounces capital, it has to utilize borrowed sources of finance in the ability to repay debts as a solvency criterion. order to observe the going concern principle. According The entity is deemed insolvent if its accounts payable to V.V. Kovalev, creditors in the balance sheet usually exceed the property value. As the law was further imply that the entity has an additional source of enforced, the Russian Government adopted Resolution finance. That is, the entity may utilize the creditor’s No. 498 On Some Actions for Enforcement of Insolvency funds for some time, which shall ultimately be returned (Bankruptcy) Law (edition of October 3, 2002) and accounts payable shall be repaid at a certain promulgating two financial ratios: moment of time2. On the other hand, according to • current liquidity ratio kcur.ldt, with the statutory value of kcur.ldt ≥ 2; †For the source article, please refer to: Бабичева Н.Э., Любушин Н.П., Кондратьев Р.Ю. Концепция непрерывности • working capital-to-current assets ratio kfin.sust, with деятельности в оценке кредитоспособности экономических fin.sust субъектов. Экономический анализ: теория и практика. 2017. Т. 16. the statutory value of k > 0.1. № 10. С. 1840–1858. URL: https://doi.org/10.24891/ea.16.10.1840 1 Fig. 1 shows trends in the current ratio and working Net working capital shall mean working assets less current liabilities or a part of equity used to finance working assets. capital-to-current assets ratio. 2 Kovalev V.V., Kovalev Vit.V. Korporativenye finansy i uchet: ponyatiya, algoritmy, pokazateli [Corporate finance and accounting: Concepts, algorithms, indicators]. Moscow, Prospekt, KnoRus Publ., 2010, p. 280.

Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment 4 of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15

Considering the outcome of the ratios trend and (Rosstat)4 do not include the current solvency indicator. forecast evaluation in Fig. 1, the Russian economy is Thus, to evaluate the solvency, current ratio and debt laden because the working capital-to-current working capital-to-current assets ratio are used. For assets ratio has been negative since 1996. The ratios example, in the book Finance of Russia. 20165, paragraph has been far from their statutory values for a long 3.15 refers to the current ratio, working capital-to-total period of time, thus proving the inadequacy of assets ratio, and equity-to-total assets ratio as solvency the regulatory framework effective in the 1990s and and financial sustainability metrics. In our publications, inapplicability of the said statutory values of the ability we reiterated that the current ratio and working capital- to repay debts to the current conditions of the Russian to-current assets ratio describe the entity's ability to economy and, subsequently undermining the going pay. They constituted insolvency criteria before 1998 concern principle. [8].

The current ratio reflects the entity’s ability to fulfill The crisis situation with VIM-Avia Airlines aggravated current liabilities using its current assets, being very issues associated with corporate financial position popular in foreign analytical practices. As the analysis evaluation. As stipulated in paragraph 17 of by V.N. Edronova and S.Yu. Khasyanova shows [9] the methodological guidelines of the Russian Ministry of the Russian law-makers adopted too high statutory Transport, the current ratio is the most frequent metric value of the current liquidity in 1994 (Table 1). to reveal a bankruptcy threat6. It reaffirms the inadequacy of institutional regulation on If we calculate the average statistic of the current ratio, the creditworthiness in various activities in Russia. it will be 1.16 for Russia and approximate the average statistics for Japan, though the use of current assets in There has not been any reduction in numbers of business processes substantially differs in Russia and unprofitable entities for the period of reforms (about 30 Japan. Japan remains the only country in the world that percent nationwide). According to the Central Bank of managed to completely integrate the Just-in-Time Russia, unprofitable entities in the real economy system into business processes. accounted for 34.2 percent in Q1 20177. Naturally, under such circumstances, the primary goal is to ensure Considering the imperfect regulatory framework for the going concern principle and increase steering and organizational procedure of bankruptcy, the creditworthiness of economic entities. which caused the bankruptcy of the Russian major enterprises, law-makers had to adopt new editions of In this respect, we hypothesize that corporate the Federal Law On Insolvency (Bankruptcy) in 1998, 2002 creditworthiness is a comprehensive accounting and and alter the bankruptcy criteria to the inability to pay. analytical characteristic reflecting the going concern The unsatisfactory structure of balance and its principle. If the entity is not creditworthy, the going recognition as such cease to have legal implications, concern principle is at stake. The ability to pay is being used by credit institutions for reference purposes a constraint on the going concern principle and in deciding on the financial position of borrowers. creditworthiness, which, if lost, may cause their The current ability to pay has been regarded as a metric bankruptcy and discontinuing of their operations. of the entity's insolvency since 1998. It is construed as 4 Methodological Guidelines for Analyzing Financial and Business an ability to satisfy creditors' monetary claims (or) make Operations of Entities, as approved by the Russian State Statistics obligatory payments within three months from the date Service as of November 28, 2002. when they are to be made3. 5 Finansy Rossii. 2016: stat. sb [Finance of Russia. 2016: Statistical Yearbook]. Moscow, Rosstat Publ., 2016, 343 p. However, many publications still describe the URL: http://www.gks.ru/free_doc/doc_2016/fin16.pdf insolvency evaluation with reference to liquidity and use 6 Methodological Guidelines for Evaluating the Financial and indicators set forth in Resolution of the RF Government Business Position of Legal Entities Applied to Civil Aviation Authorities for an Air Operator’s Certificate for commercial purposes, and legal № 498. This has its own background. Methodological entities, which already hold such a certificate: instruction of the RF guidelines of the Russian State Statistics Service Ministry of Transport of May 5, 2012 № ИЛ-62-р (Edition of July 27, 2016). 3 Federal Law On Insolvency (Bankruptcy) of October 26, 2002 7 Doklad o denezhno-kreditnoi politike [Monetary policy report]. № 127-ФЗ (Edition of July 29, 2017) URL: http://www.cbr.ru/publ/ddcp/2017_02_ddcp.pdf (In Russ.)

As G.B. Kleiner points out, the performance of emphasizes the importance of this principle, now economy, i.e. processes of production, distribution, continuity, it is not too much to say, is the leading exchange and consumption of tangibles and conception of science. The complexity of the conception of intangibles, is viewed through the lens of creating, continuity is so great as to render it important wherever it coordinating, transforming and dissolving economic occurs. Now it enters into every fundamental and exact law systems. The undisrupted existence of an entity (and of physics or of psychics that is known. …It seem not operational environment) contributes to the continuity unlikely that if the veritable laws were known continuity of time [10, p. 21]. Therefore, laws of system operations would be found to be involved in them13. imply the continuity of the economic system. In management, accounting and analytical science Operational distinctions of the economic actor scholars single out the business continuity concept and determines the efficiency of the accounting and going concern principle. As a rule, this concept implies analytical framework. The accounting and analytical a system of views concerning the given aspect or system is based on a structural approach discerning an phenomenon, while principles mean the fundamental entity as a complex unit, which consists of several framework underlying theoretical and practical subsystems. In the subsystems, accounting and activities. In the Russian language, the business analytical processes are irreversible and continuity concept and going concern principle predetermined, unlike simple systems in classical semantically convey the same meaning, while they are physics. It is impossible to predict and foresee how this not synonyms in English. For example, the going accounting system will behave within protracted concern principle is understood as the entity's periods of time. possibility (concern) of continuing its operations within Let us refer to G.B. Kleiner's researches assuming that, a foreseeable period of time, without going bankrupt or once originated, an economic system generally carries becoming insolvent14. Business continuity management on continuously and survives all interim points of time, constitutes the management process identifying from its inception to its dissolution. Thus the period of potential threats to the entity's business operations. the economic system shall represent the interval <а, b> This process is the basis for corporate sustainability to on the number line of time –∞ ≤ a, b ≤ ∞. The bounds of effectively protect interest of its key stakeholders, this interval become indefinite, if one or both integers reputation, brand and value creation15. In the Russian a,b are unknown or equal –∞ or +∞. Notwithstanding practice, corporate sustainability activities are that the life cycle of a certain entity or life expectancy of attributed to crisis management, thus restricting the a person are finite, business customs and community interpretation of this principle in accounting and life rely upon the assumption that the operating entity auditing. This may be due to the fact that issues of the and human life are perpetual [10, p. 14]. Russian entities’ escalated in the early 1990s, when the Being a common concept in philosophy and law of centrally planned economy was abolished, and were metaphysics and logic, the continuity principle was attributed to managerial tasks. corroborated and unfolded in proceedings by Business continuity management researches gained 8 9 10 11 G.W.F. Hegel , I. Kant , G.W. Leibnitz , C.S. Peirce , traction in the late 20th century in proceedings by 12 E. Schrödinger and other scholars. C.A. Peirce scholars from Great Britain, USA, Japan, Australia and 8 Hegel G.W.F. Nauka logiki: v 3 t. Tom 1 [Wissenschaft der Logik. 13 Buch 1]. Moscow, Mysl' Publ., 1970, 590 p. Peirce C.S. Printsipy filosofii: v 2 t [Russian edition. Principles of philosophy. Two volumes]. St. Petersburg, Saint Petersburg 9 Kant I. Sochineniya: v 6 t. Tom 1 [Works. Six Volumes. Volume 1]. Philosophic Society Publ., 2001, 224 p. Moscow, Mysl' Publ., 1963, 543 p. 14 Accounting Standards Update 2014-15 Presentation of Financial 10 Leibniz G.W. Sochineniya: v 4 t. Tom 3 [Works. Four Volumes. Statements – Going Concern (Subtopic 205-40). Disclosure of Uncertainties Volume 3]. Moscow, Mysl' Publ., 1984, 734 p. about an Entity’s Ability to Continue as a Going Concern 11 Peirce C.S. Printsipy filosofii: v 2 t [Russian edition. Principles (An Amendment of the FASB Accounting Standards Codification®, of philosophy. Two volumes]. St. Petersburg, Saint Petersburg August 2014). URL: http://www.fasb.org/resources/ccurl/599/128/ASU Philosophic Society Publ., 2001, 224 p. %202014-15.pdf 12 Schrödinger E. Izbrannye trudy po kvantovoi mekhanike [Russian 15 GOST Р 53647.1-2009 Business Continuity Management. Part 1. edition. Selected works on quantum mechanics]. Moscow, Nauka Publ., Practical Guide: Order of the Federal Agency on Technical Regulating 1976, 422 p. and Metrology of December 15, 2009 № 998-ст.

Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment 6 of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15 other developed nations. Nowadays, they are case of incidents and its breaches if viewed through an important discipline of strategic management, which the system of processes designated for producing links various business processes and economic goods, work and services and ensuring the continuity of activities. According to Lyndon Bird, Technical Director business practices at the tolerable level. Such of the Business Continuity Institute, business continuity processes, which are based on the business continuity management is the only discipline of management concept, include the accounting and controlling system which helps build a high protection wall and that govern accounting and analytical processes, and sustainability of an entity. However, it is inseparable of information and telecommunication technologies, thus security issues, management and communications in proving that the business continuity concept is emergency and crisis situations16. the cornerstone of the corporate accounting process.

Issues of business creditworthiness and continuity draw In Russia, Accounting Concepts in the Market Economy of much attention of actors from financial markets. To Russia is the first regulatory document on accounting, evidence this, the Financial Stability Forum and Bank of which pronounces business continuity as England organized a business continuity symposium in the accounting basis. Business continuity is put there as summer 2004. As the symposium follow-up, the Joint an assumption that the entity will continue as a going Forum working group was set up uniting concern in the foreseeable future, and has no representatives of the Basel Committee on Banking intentions and need to wind up or reduce its Supervision, International Organisation of Securities operations. Therefore, liabilities will be performed in Commissions, International Association of Insurance a due manner, thus contributing to the primary Supervisors. The resultant guiding principles were purpose of accounting, i.e. the compilation of released in December 2005 taking the form of information on the financial position, financial results the consultation document called High-Level Principles and changes in the financial position of the entity, which for Business Continuity. This document is intended to many interested users need for decision making19. support the stability of the global financial system. Afterward The Regulation on Accounting and Financial Although the Joint Forum addressed issues of critically Reporting in the Russian Federation was adopted. It important actors of the financial market, first of all, required entities to formulate accounting policies in the principles mentioned below and creditworthiness accordance with the business entity convention, going issues (Principles 2, 3, 5, 7) can be applicable to any concern principle, consistency of accounting policies economic agent (Table 2). and temporary determination of business facts and The regulatory and legal framework for the business other distinctions in business operations20. continuity concept is set forth in national standards on As per paragraph 77 of the Conceptual Principles of management in various countries. In Russia, this Accounting and Financial Reporting21, business concept is scrutinized in the national standards of continuity is viewed as an assumption that Russia (GOST standards), which are identical to the accounting entity (reporting entity) will continue its the national standards of the United Kingdom17. As per operations, perform its rights (functions) and GOST Р53647.1-2009. Business Continuity Management. obligations within at least four years starting from Part. 118, business continuity shall mean the strategic and tactic ability of the entity to plan its operations in 19 Accounting Concept in the Market Economy of Russia was 16 Petrenko S.A., Belyaev A.V. Upravlenie nepreryvnost'yu biznesa. Vash approved by the Methodological Board for Accounting under the RF biznes budet prodolzhat'sya. Informatsionnye tekhnologii dlya inzhenerov Ministry of Finance, Presidential Board of the Institute of Professional [Business continuity management. Your business will go on. IT for Accountants of the Russian Federation, as of December 29, 1997. engineers]. Moscow, DMK Press, Kompaniya AiTi Publ., 2011, 400 p. 20 Order of the RF Ministry of Finance On Approval of the Accounting 17 For example, GOST Р 53647.1-2009. Business Continuity and Financial Reporting Regulation in the Russian Federation, July 29, 1998 Management. Part 1. Practical Guide is identical to the national № 34н. standard of Great Britain BS 25999-1:2006 Business Continuity 21 Order of the RF Ministry of Finance On Approval of the Federal Management. Part 1: Code of Practice. GOST Р53647.1-2009 consists Accounting Standard for Public Entities – Conceptual Principles of of three parts. Accounting and Financial Reporting for Public Entities, of December 31, 18 Ibid. 2016 № 256н.

Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. 7 https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15 the year of its last financial statements (hereinafter However, I.N. Dmitrienko, I.N. Belousova refute referred to as the foreseeable future), and the owner the novelty of the going concern assumption and refer (founder) has no intentions and (or) needs to dissolve to representatives of accounting schools. The first the accounting entity (reporting entity) or wind up its mention of the going concern principle was found in operations in the foreseeable future. As per paragraph proceedings by Adolphe Guilbault, Eugene Leautey 5 of Russian Accounting Standards (PBU) 1/2008, (1860). They illustrate this with the entity that has accounting policies shall be based on the assumption the financial result on an ongoing basis at any point of that the entity will remain a going concern in time24. The business continuity concept was further the foreseeable future and has no intentions and (or) unveiled by H.V. Simon (1861) in his monograph on needs to discontinue or significantly reduce its the balance sheet studies, which substantiate the legal operations. Hence, liabilities will be duly performed nature of the static accounting theory based on (going concern assumption). The management usually the continuity statics. The static accounting theory states in the explanatory note that the going concern contravened the rule, then in force, for evaluating assumption underlies financial statements. the entity’s ability to fulfill its obligations only in case of its dissolution since the static accounting theory The entity’s ability to continue as a going concern laid required property items and liabilities be concurrently the basis for an international standard on auditing. measured to be reported in the static balance sheet [15, ISA 570 Going Concern22 states that the going concern 16]. principle is fundamental for financial reporting. Thus, auditors must verify that financial statements are The term continuing is also discussed as part of one of compliant with this principle notwithstanding the definitions of bookkeeping coined by Bonneau, requirements of standards, local or institutional laws, a representative of the French accounting stream. He etc. As per paragraph 14 of the Federal Standards on opined that accounting is a science of orderly recording Auditing23, auditors shall analyze assessments of continuing movements of various items driving the auditee’s management makes with respect to the exchange or transformation (production) so that the entity’s ability to continue as a going concern within users can easily understand, in their totality, how they at least 12 months following the reporting period. mutually correlate, and third parties’ accounts or each 25 Table 3 collates business continuity requirements of account, in particular . the Russian and international standards on accounting We believe that this definition is a dialectical approach and auditing. to the nature of accounting. That is, notwithstanding Analyzing the data in Table 3, we conclude that the continuing movement of items (agents), requirements to the relevance of the going concern the accounting process may still be disrupted. It may assumption are based on the static balance sheet well be influenced by Marx’s works. However, concept and conditions for ensuring the ability to pay. the continuity principle was crystallized in 1961 in proceedings of M. Munitz and R. Sprouse, The number of studies into this principle significantly increased as a result of global economic crises and 24 I.N.Dmitrienko and I.N. Belousova studied the definition business accounting scandals [11]. Foreign scholars consider continuity from three perspectives, i.e. syntactical, sematic and the going concern principle as an accounting pragmatic, adhering to the logic-linguistical approach of E.S. Hendriksen fundamental, urging to develop techniques for and M.F. Van Breda. 25 evaluating and analyzing going concern factors [12–14]. Eternal and continuous motion underlies such dialectical laws as the law of unity and struggle of opposites and transformation of quantity into quality. The continuity concept is studied in various scientific disciplines. For example, quantum physics,... large discontinuous and erratic changes occurred in the bacterium, we could not 22 International Standard on Auditing 570 (revised) Going Concern then trace its identity with the passage of time. The continuity also insures was enacted with Order of the RF Ministry of Finance of November 11, that the bacterium will “stay put” long enough to allow it to be seen and 2016 № 207н. recognized. That is, even if it is changing, the effect of changes can always 23 Standard No.11 – Applicability of the Going Concern Assumption be made arbitrarily small by choosing a sufficiently small interval of time in to the Audited Entity, as approved by Resolution of the RF Government which to observe it (Bohm D. Kvantovaya teoriya [Quantum Theory]. of September 23, 2002 № 696. Moscow, Nauka Publ., 1965, 729 p.).

Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment 8 of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15 representatives of the Anglo-American school of As F.Kh. Doronina puts it, the business continuity accounting26. However, its inception is attributed to principle is a key concept of the accounting theory and the 1930s, when the first collective attempts were made practice in the world. Information based on in order to establish the unified accounting principles in the continuity principle and presented in financial the USA [15]. Ya.V. Sokolov’s studies confirm that statements is very important for investors to evaluate the continuity principle shall be examined further and their investment in a certain economic agent [18]. qualified as systemic. Eight of nine sources mention Financial statements shall indicate breaches in the continuity principle among other accounting ones27. the continuity principle, such as a significant reduction in production, banks' loan rejection in case of Ya.V. Sokolov compares the continuity principle with customers' breaches, suppliers' denial of a grace period, the first law of mechanics and states that it facilitates and unavailability of additional loans to offset financial the effective computation of financial results and deficiency of the entity. It reflects the creditworthiness eliminates senseless attempts to remeasure and solvency of the entity. accountable items. Why shall the entity’s assets be remeasured if it is supposed to live forever? On In Gestion de L'entreprise et comptabilité (1975), Lexique the contrary, if the entity is dissolved, its assets shall be de comptabilité (1990), P. Lasseque mentioned that it is measured at the current market value, rather than their necessary to give account of factors undermining the loss of creditworthiness and causing historical cost. Moreover, relying upon the going the bankruptcy. During 1914–1960, when giant concern assumption, we can treat the reporting year corporations came out, and many economies were only as if it relates to the business cycle distinctions, submerging into a crisis, statisticians recorded multiple without being pegged to the calendar year. Each sector instances of bankruptcy and discontinued operations of of economy has its own cycle. Thus, every management, small and middle-sized entities. Creditors and owners owners are entitled to determine the length of had to compile accounting information and analyze a business year for themselves and their company. solvency, liquidity, creditworthiness of respective 29 Furthermore, continuity implies that the accounting entities . One hundred years later creditors still do methodology, valuation and carried forward balances need proper and reliable sources of information about are consistently preserved. Enders, Whitefield and solvency and creditworthiness of economic agents. This Maure built the requirements into balance sheet information grew even more important as new forms of capital flows and institutions appear. In this respect, principles. The most important thing is that N.A. Breslavtseva, I.N. Bogataya state that balance sheet the continuity principle enables the entity to circumvent accounts remain the only reliable sources of the preparation of the balance sheet in case of information for decision making purposes and need to the ownership changes28. be constantly improved for better use30. Starting from the 1980s, the going concern assumption The content of financial statements depends on became a systemic principle of accounting in such purposes and objectives of users, national policy for countries, as the USA, Great Britain, Germany, etc. accounting and control, and operating environment, in [15–17]. According to I.N. Dmitrenko, I.N. Belousova, which the entity works and develops. The owner the continuity principle was included into the generally analyzes financial results of the respective entity in accepted accounting principles in order to support order to secure more capital. In its fiscal pursuits, the profit measurement theory and use the historical the State imposes legal requirements in various cost (cost) instead of the disposal value [15]. disciplines of law, accounting and taxation. Creditors seeking the repayment will consider accounting data 26 Sokolov Ya.V. Bukhgalterskii uchet: ot istokov do nashikh dnei and the statement of financial results to assess [Accounting: From the inception to present days]. Moscow, YUNITI Publ., the debtor’s ability to pay/repay the debt and overall 1996, 638 p. financial position. 27 Sokolov Ya.V. Bukhgalterskii uchet: ot istokov do nashikh dnei [Accounting: From the inception to present days]. Moscow, YUNITI Publ., 29 Ibid. 1996, 638 p. 30 Balansovedenie [Balance sheet studies]. Rostov-on-Don, Feniks 28 Ibid. Publ., 2004, 475 p.

In Le parfait négociant (1675), Jacques Savary was Hence, we conclude that the existing contradictions in the first who suggested preparing the balance sheet in evaluating the business continuity and creditworthiness line with its purpose31. The static balance sheet concept date back to the 19th century, stemming from two is believed to originate due to insolvency of entities. It is opposite accounting concepts of the static and dynamic intended to protect the creditor’s interests. That is why balance sheet. The dynamic balance sheet reflects in the balance sheet shall itemize accounts payable, first the business continuity concept, while the static one of all. However, scientific literature often states that conveys the discontinued operation concept that rests the borrower’s creditworthiness is evaluated to assess upon the creditworthiness of economic agents. It the balance liquidity (assets), thus making verifies our hypothesis stating that the entity’s the creditworthiness evaluation focus primitive. creditworthiness is a comprehensive accounting and analytical metric that embodies business continuity. If Eugen Schmalenbach, the author of the dynamic creditworthiness is not ensured, this may put balance sheet concept, proved the incompatibility of the borrower’s business continuity at peril since the two accounting concepts since the dynamic one solvency is a constraint on the business continuity stems from the business continuity principle, while principle and, subsequently, creditworthiness. the static one deals with the discontinued operation Insolvency may cause entities to go bankrupt and principle (Table 4). That is, the dynamic balance sheet is discontinue their operations. supposed for owners’ interests, while the static one is useful for creditors [19, p. 416–419]. It fuels Thus, the theory and practice of accounting and contradictions in enforcing the business continuity economic analysis shall synthesize accounting concepts principle and ensuring the creditworthiness. However, through integrated financial reporting. This will create scholars tried to synthesize both accounting theories in an information pool to assess the entity’s the 19–20th centuries, but this attempt led to nothing creditworthiness and solvency and subsequently (E. Schmalenbach, F. Schmidt, A.P. Rudanovsky) [20, 21]. identify and avert the continuity threat.

31 Zabbarova O.A. Balansovedenie [Balance sheet studies]. Moscow, KnoRus Publ., 2007, 256 p.

Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment 10 of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15

Table 1 Values of current ratio in different countries Industry USA United Kingdom EU Japan Light industry 2.5 1.75 1.8 1.75 Food industry 1.2 1.2 1.4 1.3 Machine building 1.1 1.1 1.5 1.1 Trade 1.7 1.4 1 1.1 Average 1.3 1.2 1.2 1.15 Source: [9]

Table 2 Definitions and guidelines for business continuity management Definitions and principles Contents Business continuity Strategic and tactic ability of the entity to plan its performance in case of incidents and disruptions in order to ensure continuing business operations at the tolerable level Incident A situation that may occur and cause a disruption of the entity’s operations, destruction, losses, emergency or business crisis Principle 1 Business continuity management requirements apply to all actors of the financial sector and financial institutions. The board of directors and top executives are totally responsible for business continuity management, unlike management of other risks Principle 2 Entities shall have a sound assessment of threats and have a major operational disruption plan. The approach is not common for may entities, but it is worth observing since instances of considerable operational disruptions become more frequent Principle 3 Actors of the financial sector shall set up recovery goals in line with the potential risk of the actors in relation to financial operations. Recovery goals are formulated consistently with the risk level, which may be associated with any actor so to actually ensure the reasonable level of sustainability Principle 4 Business continuity plan shall address all aspects of internal and external communications in case of a big operational disruption. It will help tackle the crisis and preserve public confidence Principle 5 Particular cases of cross-border communications are reported in case of a big operational disruption Principle 6 Business continuity plans shall be effective and constantly updated following regular tests Principle 7 Financial authorities should also check the business continuity management process as part of their duties and use the results to evaluate actors of the financial market Source: Rukovodyashchie printsipy obespecheniya nepreryvnosti biznesa. Rekomendatsii po nablyudeniyu za nepreryvnost'yu deyatel'nosti dlya sistemno znachimykh platezhnykh sistem [Guidelines for business continuity management. Recommendations for monitoring the going concern for systemically important payment systems (SIPS)]. URL: http://www.cbr.ru/publ/Default.aspx?PrtID=prs&code=78 (In Russ.)

Table 3 Requirements of Russian and international standards of accounting and auditing to ensuring the going concern principle by economic entities Regulation Definition of continuity principle Requirements to evaluating the reasonableness of the going concern assumption 1. IAS 1 Presentation of Financial Statements When preparing financial statements, In assessing whether the going concern [IAS 1.25, 1.26]* management shall make an assessment of an assumption is appropriate, management takes entity’s ability to continue as a going concern. into account all available information about An entity shall prepare financial statements on the future, which is at least, but is not limited to, a going concern basis unless management twelve months from the end of the reporting either intends to liquidate the entity or to cease period. The degree of consideration depends on trading, or has no realistic alternative but to do the facts in each case. When an entity has so a history of profitable operations and ready

access to financial resources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate 2. PBU 1/2008 Corporate Accounting Policies** An entity will continue its operations in the If the financial reporting process is coupled with foreseeable future and has no intentions and considerable uncertainty about events and need to discontinue or considerable reduce its conditions, which may raise significant doubts operations. Thus, liabilities will be performed in concerning the applicability of the going a due manner concern assumption, the entity shall indicate such uncertainty and explicitly describe the reason 3. GAAP, The Going Concern Principle Considering the available financial information, The going concern principle allows for unless otherwise stated, there is an assumption measurement of non-current assets as if they based on a professional judgment that the will be used in corporate operations, rather than entity will continue as a going concern sold. indefinitely Furthermore, the following aspects are determined: – period of time, during which the entity is able to meet its obligations; – information and analytical framework used to evaluate whether the entity is able to meet its obligations; – the effect of subsequent events on the entity’s ability to meet its obligations 4. Statement on Auditing Standards 1 There is substantial evidence of the entity’s Analytical procedures identify any indication of Codification of Auditing Standards and ability to continue as a going concern for a the entity’s inability to continue to meet its Procedures, Section 341, The Auditor’s reasonable period of time, not to exceed one obligations, use assets outside the ordinary Consideration of an Entity’s Ability to Continue year beyond the date of the financial course of business, restructure debts, and in as a Going Concern (AU Section 341)*** statements being audited case of externally forced revisions of its operations 5. ISA 570, Going Concern4* Financial statements are prepared under the When the use of the going concern assumption assumption that the entity is viewed as is appropriate, assets and liabilities are recorded continuing in business for the foreseeable on the basis that the entity will be able to future realize its assets and discharge its liabilities in the normal course of business * Order of the RF Ministry of Finance On the Enactment of International Financial Reporting Standards and Clarifications of International Financial Reporting Standards in the Russian Federation and Abolishing of Some Other Orders (Certain Clauses) of the RF Ministry of Finance, of December 28, 2015 № 217н ** Order of the RF Ministry of Finance On Approval of Accounting Principles (along with the Accounting Regulation – Corporate Accounting Policies (PBU 1/2008), Accounting Regulation – Changes in Estimates (PBU 21/2008), of October 6, 2008 № 106н (Edition of April 6, 2015). *** Statement on Auditing Standards 1 Codification of Auditing Standards and Procedures. URL: http://www.aicpa.org/research/standards/auditattest/downloadabledocuments/au-00341.pdf 4* International Standard on Auditing 570 Going Concern. URL: http://www.ifac.org/system/files/downloads/a031-2010-iaasb-handbook-isa-570.pdf Source: Authoring

Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment 12 of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15

Table 4 Disclosure of dynamic and static balance sheets Balance sheet type Purpose Corporate property appraisal Recognition of accounts payable in approaches the balance sheet Dynamic Recognition of financial results from Assessment of the existing capabilities The balance sheet presents only perspectives of ideal assets and and financial results from the property actually received amount of debt (loan), liabilities to protect owners’ interests use by recognizing the property value including interests accrued in the as needed to calculate the annual current year for the use of borrowings profit under the going concern assumption. The return on equity is the key indicators of the efficient property use Static Regular assessment of the property The precise definition of the property Voluntarily or coercively recognized status to protect creditors’ interests. value, i.e. the resource endowment of debt (loan) is recognized in the balance Assurance of the sufficiency of an entity, through the discontinued sheet, including interests accrued for monetary proceeds from conditional operation concept. Property shall be the entire period of the loan. Liquidity sale of assets to discharge liabilities to stated at the price of possible sale as ratios are used for assessment creditors. of the balance sheet date. purposes According to J. Richard, the static Value of net assets is the key indicator balance sheet theory results from of solvency understanding of a protracted period of practical evaluation of entities' financial position using the accounting methodology, which is based on the legislative culture of the Roman law. It implies that the less frequent instances of insolvency and bankruptcy, the higher legal stability of civil turnover Source: Authoring, based on Zabbarova O.A. Balansovedenie [Balance sheet studies]. Moscow, KnoRus Publ., 2007, 256 p.; [19, 20]

Figure 1 Changes in and forecast of current liquidity ratio and net working capital

Source: Authoring, based on Rosstat data. URL: http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/finance/#

Acknowledgments

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Please cite this article as: Babicheva N.E., Lyubushin N.P., Kondrat'ev R.Yu. The Business Continuity Concept in the Assessment 14 of Creditworthiness of Economic Agents. Digest Finance, 2018, vol. 23, iss. 1, pp. 3–15. https://doi.org/10.24891/df.23.1.3 N.E. Babicheva et al. / Digest Finance, 2018, volume 23, issue 1, pages 3–15

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Translated Article† EXPANDING ANALYTICAL CAPABILITIES OF THE RATIO ANALYSIS OF ENTITIES' SOLVENCY THROUGH CASH FLOWS

Lyubov' Yu. LASKINA ITMO University, St. Petersburg, Russian Federation [email protected]

Article history: Abstract Received 6 July 2017 Importance The article studies ratios assessed through cash flows, i.e. cash flow ratio and interest coverage ratio, Received in revised form and their application to capture a more reliable and comprehensive view of the entity's solvency and financial 19 September 2017 sustainability. Accepted 23 October 2017 Objectives The research examines cash flows of the entity as an additional source of information to manage Translated 16 March 2018 corporate solvency. Available online 27 March 2018 Methods The research is based on financial statements of airport operators for the period spanning from 2011 until 2014. I also compare the cash flow coverage ratio and cash interest coverage ratio with traditional ratios, JEL classification: G39, L25, L93 such as current ratio and interest coverage ratio respectively. Conducting a correlation analysis, I trace the nexus between the above pairs of ratios. Results As the research proves, the current ratio and cash flow coverage ratio do not correlate strongly. Users should better use respective cash flow ratios to get more full and accurate information. Relying on their strong correlation, the cash interest coverage ratio can be applied to a greater extent to analyze the financial standing of entities. Conclusions and Relevance As I conclude, if supplemented with the cash interest coverage ratio, the interest coverage ratio can not only provide a broader and deeper view of the entity's financial standing, but also be used Keywords: solvency, current ratio, cash to specify the credit rating of the entity. It will be more adequate and accurate to assign a credit rating on flow coverage ratio, credit rating the basis of the cash interest coverage ratio since it allows for cash flow.

Doing† business in today's world turning to Entities attain an appropriate solvency if they are able the innovative development path, the Russian entities to perform their payment obligations in a timely and outright face the need to act and evolve under new adequate manner. This raises one of the crucial issues, circumstances. Living this period, they realize the sheer which contemporary companies consider their first importance of being financially sustainable and healthy. priority to address. Therefore, they should not only improve the solvency management process but also refine their methods for its analysis and evaluation.

†For the source article, please refer to: Ласкина Л.Ю. Расширение Such procedures are applied by business proprietors аналитических возможностей коэффициентного анализа and external users. If the entity is insufficiently solvent, платежеспособности предприятий на основе денежных потоков. Экономический анализ: теория и практика. 2017. Т. 16. № 11. this may cause the loss and waste of its own and raised С. 2145–2162. URL: https://doi.org/10.24891/ea.16.11.2145

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 16 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28 resources, to say nothing about its publicity and finance, it is worth mentioning that it is not reputation. the assessment of relative indicators that becomes one of the principal steps in the procedure, but rather The concept of solvency is customarily linked to interpretation of the findings. The validity of liquidity, i.e. the entity's ability to convert its assets into the financial position assessment considerably depends cash and satisfy current liabilities with it only [1]. on the quality of the conclusion inferred upon The ratio analysis has gained traction in the modern the assessment of the ratios. practice of evaluating the solvency level. These are financial ratios and their assessment that still attract I shall note that the ratio analysis entails some issues of attention of many specialists, notwithstanding other assessing traditional solvency ratios [3–5]. The financial techniques exist. standing cannot be perennially assessed in an adequate way even if the resulting ratios are compared with In Russia, the so called official1 and originally designed standard ones. Furthermore, analyzing trends in techniques (V.V. Kovalev2, A.D. Sheremet with financial ratios, users often overlook benchmarks or co-authors3, N.P. Lyubushin and N.E. Babicheva4) are determine optimal bounds of the ratios, focusing only more in use, having just a different mix of underlying on their changes. metrics. Relative indicators play a key role in this respect, with liquidity ratios prevailing. Zooming in the issues, it is noticeable that the comparison of the resulting ratios and their Other ratios also shed light on the entity's ability to pay benchmarks comes across significant limitations since and repay. For example, the interest coverage ratio may individual operational conditions are not taken into be an additional metric describing the entity's ability to account [5]. The resulting ratios and their benchmarks pay. SPARK is one of the largest databases providing are often difficult to compare since sectoral specificsis comprehensive financial, statistical and other neglected. Rating agencies outside Russia set and information on companies from various sectors. It also release such benchmarks on a regular basis [4]. refers to this metric for purposes of solvency analysis. The interest coverage ratio is a sort of indicator Moreover, the validity of the ratio analysis results also measuring the likelihood of the entity's default. It is depends on initially available information used for extremely important from perspectives of the solvency evaluation purposes. However, financial reporting data level. As mentioned in the research [2], the ratio shall do not necessarily assure the accuracy and reliability of exceed 1 to mean that the entity is able to repay information to describe the entity's financial position, interests in due time and manner. solvency and liquidity. The reason is that financial reporting data tend to be unrelated (first of all, As for the importance of the ratios to evaluate accounting revenue and profit) [6]. Users more often corporate solvency and make managerial decisions on than not complain about their poor representative quality for further assessment and managerial decision- 1 Federal Law of the Russian Federation On Insolvency (Bankruptcy) of October 26, 2002 № 127-ФЗ; Resolution of the RF Government On making on corporate finance since such data can be Approval of Financial Analysis Rules for Court-Appointed Administrators of manipulated by owners and management in order to June 25, 2003 № 367; Order of the RF Ministry of Economic disguise the real situation. Furthermore, traditional Development On Approval of the Methods for the Federal Tax Services to Consider and Analyze the Financial Position and Solvency of Strategically ratios complicate a fair presentation of the financial Important Entities and Organizations of April 21, 2006 № 104. positions due to distinctive valuation of assets and 2 Kovalev V.V. Finansovyi analiz: metody i protsedury [Financial accrual accounting. analysis: methods and procedures]. Moscow, Finansy i Statistika Publ., 2002, 559 p. Specialists suppose that the matter of traditional ratios 3 Sheremet A.D., Saifulin R.S., Negashev E.V. Metodika finansovogo can be resolved if cash flow data are used inter alia. It is analiza [Financial analysis methods]. Moscow, INFRA-M Publ., 2001, cash that measures all the financial relationships 208 p. the entity enters into. Irregular and uneven proceeds 4 Lyubushin N.P., Babicheva N.E. [Analysis of methods for evaluating corporate financial standing]. Ekonomicheskii analiz: teoriya i praktika = and payments may engender some negative Economic Analysis: Theory and Practice, 2006, no. 22, pp. 2–7. implications, thus undermining, say, liquidity, that is URL: https://cyberleninka.ru/article/v/analiz-metodik-po-otsenke- a solvency maintenance factor [7]. finansovogo-sotoyaniya-organizatsii (In Russ.)

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. 17 https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Figures from cash flow statements are much more puts the development of aviation land infrastructure as problematic to be manipulated since they rely upon one of the priority goals. cash flow, which is specific and real by nature, rather Airport operations become the subject of multiple than conditional. This is the reason why cash flow studies in Russia not only because the transportation figures lay the basis for some ratios, which elucidate sector needs to be converted into an industry, which the corporate financial position in a more complete and would be adequate to current needs and prospects of reliable manner (Table 1) [8]. the national development, but more due to the fact that Assuming that cash flows are used to assess cash flow the quality and state of airport infrastructure leave ratios, users focus on the most liquid part of working much to be desired. Airports have been reducing in assets – cash and cash equivalents. It also helps them numbers for a long time. Currently, according to look into the future financial situation. Hence some the Federal Air Transport Agency, there are 297 scholars suggested using cash flows to assess liquidity. operational airports in Russia. As compared with Moreover, cash flows are more convenient to ensure the 1990s, as specialists note [13, 14], the number is higher precision of traditional ratios applied to financial four times as low as it used to be (Fig. 1). analysis [9, 10]. Therefore, for purposes of analyzing The situation especially affected the regions where corporate solvency in a short run, some scholars the availability and accessibility of transport drastically suggest that users should compare such ratios as cash differs from that in the European part of Russia, though flow coverage ratio and current ratio, critical needs cash air flights are the only transportation option for some coverage ratio and quick ratio, cash interest coverage regions. The Siberian and Far Eastern Federal Districts ratio and interest coverage ratio (Table 2). are both cases in point. I should note that, although foreign experts (I mean While the number of airports are falling, ridership is those ones outside Russia) do assess cash flow ratios, observed to rise, thus causing wear and tear of fixed foreign literature does not specify the extent to which assets, which ranged from 40 to 80 percent in 20116. the given pairs of ratios correlate. Although the Russian specialists raise the question of applying such ratios As the federal special-purpose program, Development of more frequently, such ratios are almost out of use to Russia's Transport System (2010–2020), the current evaluate and describe corporate financial standing. circumstances inhibit a growth and use of transit capabilities, development of the common economic To provide the rationale for cash flow ratios, I study to space in the country. Tremendous financial injections what extent the cash flow ratios and traditional ratios are needed to make the things going forward [15]. correlate in a solvency analysis. Therefore, to make development investments, most In this case, I review such cash flow ratios as cash flow airports have to obtain substantial loans or search for coverage ratio and cash interest coverage ratio. external investors. Both options imply that airport The assessment is based on figures of the Russian operators shall maintain their solvency and stable airport operators. financial position.

Relating to infrastructure, airport operations are fairly For analysis purposes, I selected twelve Russian airport one of the key vessels of economy worldwide and operators from five federal districts within 2011 and nationwide. The condition of such sectors, their 2014 inclusive. development and respective processes shape These are the competitiveness of national economies [11, 12]. The same idea is corroborated in the federal special- • AO Vnukovo International Airport (Moscow); purpose program5, which defines the transportation • OAO Volgograd International Airport; system development as a premise for implementing an innovative model of economic growth. The program • OAO Anapa Airport;

5 Resolution of the RF Government On the Federal Special-Purpose Program, Development of Russia’s Transport System (2010–2020), 6 Air transport review. Aviation Business Portal. of December 5, 2001 № 848. URL: http://www.ato.ru/ (In Russ.)

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 18 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

• OAO Pobedilovo Airport (Kirov); Spearman’s rank correlation coefficient between the current ratio and cash flow coverage ratio amounts • OAO Kazan International Airport; to 0.4097, thus signifying a frail relation, albeit • AO Ulyanovsk Airport; an existing one, between both ratios.

• OAO Irkutsk International Airport; Similarly, I assessed correlation coefficients of the other pair of ratios to test to what extent the interest • AO Tolmachevo Airport (Novosibirsk); coverage ratio KIVC and cash interest coverage ratio KCICR • OAO Omsk Airport; correlate (Table 4). The interest coverage ratio of airport operators exceeds • OAO Vladivostok International Airport; the average ratio of the other infrastructure-related • OAO Khabarovsk Airport; industry – transport, being 4.259. Values of the interest coverage ratio reveal some tendency. The lowest • AO Yakutsk Airport. interest coverage ratio is observed in smaller regional As stated in reporting forms for 2011–20147, the above companies (Pobedilovo Airport – Kirov) or those ones pairs of ratios were assessed per each company and with a decline in operating profit (Vnukovo International analyzable year: current ratio Кcur.lqdt and cash flow Airport – Moscow). These are the airport operators coverage ratio KCFCR (Table 3). which faced the toughest difficulties in repaying interests. Few of the sampled companies have the current ratio within the generally advisable range of values, with The cash interest coverage ratio is slightly higher than the average value in the industry as a whole (from 1.2)8. its traditional analogue (in most of the companies) and This is evidence of a most challenging situation, when changes in the same way throughout the analyzable entities are unable to perform their current liabilities period (Fig. 4). without any difficulties and using their available current There are unusual cases indeed concerning the way assets. Regional airports were found to be exposed to the ratios change. For instance, the ratios of Vladivostok the highest repayment risk (those ones operating in International Airport changed throughout the last year the Volga Federal District and Far Eastern Federal of the analyzable period in different directions, ranging District). from 0.73 to –17.38 of KIVC and from 6.27 to 8.53 of KCICR As compared with the traditional current ratio, the cash (Fig. 5). flow coverage ratio, as a cash-based one, gives much To get a more accurate view of the extent to which more meager results. It means that entities virtually the interest coverage ratio and cash interest coverage generate insufficient cash (or critically little). ratio correlate, and understand the trends of their However, the current ratio and cash flow coverage ratio movement, I carry out a correlation analysis. According mostly develop and change in a synchronized way in to the Chaddok scale, the pair of analyzable ratios has most cases (Fig. 9). a strong positive relationship. When I additionally analyze the interest coverage ratio and cash interest In the mean time, another situation can be seen. When coverage ratio by assessing Spearman’s rank correlation one indicator rises, the other one changes in coefficient, I find a strong direct relationship between an opposite way (Fig. 3). the ratios. The rank correlation coefficient is 0.627.

That is the reason why I conducted a correlation Therefore, the research reveals a frail correlation analysis and calculated Pearson’s product-moment between the current ratio and cash flow coverage ratio. correlation coefficient and Spearman’s rank correlation coefficient, tracing such an untypical trend among 9 Laskina L.Yu. [Features of determination and estimation of financial homogeneous values of coefficients behavior. leverage: Domestic and foreign experience]. Finansy i kredit = Finance and Credit, 2012, no. 38, pp. 55–61. 7 Center for Corporate Disclosures. URL: http://www.e-disclosure.ru/ URL: https://cyberleninka.ru/article/v/osobennosti-opredeleniya-i- (In Russ.) otsenki-finansovogo-leveridzha-otechestvennyy-i-zarubezhnyy-opyt 8 Federal State Statistics Service. URL: http://www.gks.ru/ (In Russ.) (In Russ.)

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. 19 https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Internal users and would-be investors may get more n = 1 + 3.222 lgN, representative and reliable information by using where n stands for a number of groups; the cash-based option from the other pair, i.e. cash interest coverage ratio and interest coverage ratio. As N is the number of observation points (values of they demonstrate a close correlation, they enable the ratios); certain users to guess that the cash interest coverage ratio has a broader scope of application to analyze lgN is the common logarithm of N. the financial position of entities. Thus, I find out that the resulting range of values gives Some rating agencies are known to use the traditional n=5.56, or 5–6 groups. Breaking down the values into interest coverage ratio as a tool to assign a credit rating five ranges, I assign likewise a lower rating to a range to an entity, which characterizes its ability to timely with lower values (Table 6). repay interests and financial injections made by Applying the grouping method, I classify the sampled creditors and investors [16]. companies by their value of the cash interest coverage For example, as S&P treats entities that hold ratio into groups, which match the ranges of the given borrowings made up of bank loans and have no credit ratio for 2014 (Table 7). I do the same manipulations rating, they assign the so called synthetic credit rating with the interest coverage ratio (Table 8). just on the basis of the interest coverage ratio (Table 5). Based on this distribution, I conclude that the entities Moreover, the interest coverage ratio shows how many has equally low credit ratings by cash interest coverage times for the reporting period the entity has managed ratio and traditional interest coverage ratio, and, vice to earn so as to repay interests and loans. However, it versa, high ratios make them eligible for better credit says nothing as to whether the entity has enough ratings [18]. Hence, the more often entities coincide by money to do so. It will definitely be more reasonable area of the same rating if grouped by a certain rating, and reliable to assign a credit rating on the basis of the more complete and reliable the financial standing the cash interest coverage ratio since it allows for information. Should the entity mismatch the same the category of cash flow [17]. group in terms of its rating, a more thorough study be needed. Relying upon the calculations, I conclude that if Assuming a close correlation between the traditional the interest coverage ratio is supplemented with and cash flow ratios – interest coverage ratio and cash the cash interest coverage ratio to evaluate corporate interest coverage ratio, it is possible to gauge solvency, it will not only give a broader and deeper view an approximate range of the cash interest coverage of the financial standing and stability, but may be used ratio for large entities of a certain sector. Ranking to determine the entity’s credit rating [19]. Investment the cash interest coverage ratio by value in opportunities of entities may be adequately evaluated if the descending order and using Sturge’s rule, I their credit ratings are specified in accordance with determine how many groups they make: the international standards [20].

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 20 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Table 1 Financial ratios of entities by cash flow analysis Ratios Assessment Formula Economic Substance

Cash Flow to Debt Ratio КCFD = CFо / TDL, A predictor of financial inability to pay to evaluate the corporate

where CFо is net cash flow from operations; creditworthiness TDL is gross debt liabilities

Dividend payout to CAPEX ratio КCAPEX = (Dо – Dpaid) / CAPEXtotal, A metric showing the entity’s ability to finance its future growth

where Dpaid is dividends paid; through its operations. It is used to evaluate the entity’s ability to pay debts and dividends CAPEXtotal is the amount of capital expenditures

Cash-based Return on Assets КCROA = (Dо + Ipaid + T) / A, A metric showing the ability of the entity’s assets to generate

where Ipaid is interests paid; cash flows. It is used to check whether the accounting return is T is taxes paid; secured with real cash proceeds A is total assets Source: [8]

Table 2 Comparison of traditional liquidity ratios and cash flow ratios Ratio Assessment Formula Traditional Ratios

Current Ratio Кcur.lqdt = CA / CL, where CA is current assets; CL is current liabilities

Quick Ratio Кql = (CA – Inv) / CL, where Inv is inventories

Interest coverage ratio КIVC = EBIT / Ibrw where EBIT is earnings before interests and taxes;

Ibrw is the amount of interests on loan Cash-based Ratios

Cash Flow Coverage Ratio КCFCR = CFо / CL,

where CFо is net cash flow from operations

Critical Needs Cash Coverage Ratio КCNCCR = ( CFо + Ibrw) / (CL + Ibrw),

where Ibrw is the amount of interests on loans

Cash Interest Coverage Ratio КCICR = ( CFо + Ibrw + Н) / Ibrw, where T is taxes paid Source: [9]

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. 21 https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Table 3

Current ratio Kcur.lqdt and interest coverage ratio KIVC of airport operators, 2011–2014 Entity 2011 2012 2013 2014

Kcur.lqdt KIVC Kcur.lqdt KIVC Kcur.lqdt KIVC Kcur.lqdt KIVC Vnukovo International Airport 8.62 0.79 18.17 3.4 9.5 0.9 9.54 –0.13 Volgograd International Airport 1.52 0.17 2.17 1.48 3.17 1.96 4.06 2.43 Anapa Airport 21.88 5.91 1.78 –0.04 5.27 0.78 4.88 0.51 Pobedilovo Airport – Kirov 0.7 –1.35 0.73 –2.38 0.2 –0.54 1.54 –3.3 Kazan International Airport 0.72 –0.17 1.08 –0.05 0.79 0.06 1.88 –1.28 Ulyanovsk Airport 0.99 0.39 0.3 0.7 10.45 –1.04 0.7 0.21 Irkutsk International Airport – – – – 1.36 1.37 1.78 1.07 Tolmachevo Airport 1.43 1.12 1.1 0.85 1.62 1.46 3.86 2.85 Omsk Airport 0.69 1.26 1.03 0.99 1.46 1.63 2.07 1.88 Vladivostok International Airport 12.29 8.1 0.96 0.64 0.61 0.18 0.21 0.18 Khabarovsk Airport 1.19 0.72 1.78 0.49 2.57 0.36 2.23 0.05 Yakutsk Airport 0.88 0.43 1.3 0.68 1.72 0.57 1.71 1.62 Source : Authoring

Table 4

Interest coverage ratio K IVC and cash interest coverage ratio K CICR of airport operators, 2011–2014 Entity 2011 2012 2013 2014

KIVC KCICR KIVC KCICR KIVC KCICR KIVC KCICR Vnukovo International Airport 2.74 3.5 1.05 3,21 1.09 1.56 0.87 0.92 Volgograd International Airport 16.65 7.33 43.65 76,71 – – – – Anapa Airport – – 20.6 1,13 5.28 13.35 3.51 9.03 Pobedilovo Airport – Kirov 8.18 –7.37 –17.61 –13,85 –8.06 –7.99 12.2 –4.54 Kazan International Airport 1.94 –2.6 11.05 0,2 13.82 6.03 25.49 –225.07 Ulyanovsk Airport 16.35 97.35 359.59 3 267,59 1.23 –0.42 1.2 1.76 Irkutsk International Airport – – 9.58 2,39 8.55 9.89 13.01 12.83 Tolmachevo Airport 3.15 5.03 7.78 8,64 6.74 5.87 7.19 7.08 Omsk Airport 7.42 17.95 28.63 39,02 48.36 74.01 1,875.41 2,145.95 Vladivostok International Airport 6.73 7.05 11.97 12,43 0.73 6.27 –17.38 8.53 Khabarovsk Airport 45.45 51.42 5.87 6,43 6.17 5.2 6.55 2.22 Yakutsk Airport 34.6 52.96 4,487 10,278 – – – – Note . Some companies have been operating without making any interest payment, thus impeding the assessment for the last period. Source : Authoring

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 22 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Table 5 A correlation of credit ratings and interest coverage ratios of large entities: S&P's method Bounds of interest coverage ratio Rating < 0.2 D 0.2–0.65 C 0.65–0.8 CC 0.8–1.25 CCC 1.25–1.5 B– 1.5–1.75 B 1.75–2 B+ 2–2.25 BB 2.25–2.5 BB+ 2.5–3 BBB 3–4.25 A– 4.25–5.5 A 5.5–6.5 A+ 6.5–8.5 AA > 8.5 AAA Source: [16]

Table 6 The range of the cash interest coverage ratio in large entities operating in airport operations Range number Range of the interest coverage ratio The number of CICR values within the respective intervals 1 Up to 3 6 2 3–6 5 3 6–9 7 4 9–20 4 5 Over 20 4 Source : Authoring

Table 7 Grouping of entities ranked by cash interest coverage ratio

Rating by Range ofKCICR values KCICR Airport

KCICR C < 3 1.56 Vnukovo International Airport B From 3 to 6 5.2 Khabarovsk Airport 5.87 Tolmachevo International Airport BB From 6 to 9 6.03 Kazan International Airport 6.27 Vladivostok International Airport A From 9 to 20 9.89 Irkutsk International Airport АА Over 20 74.04 Omsk Airport Source : Authoring

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. 23 https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Table 8 Grouping of companies ranked by the interest coverage ratio

Rating by KIVC Range of KIVC values Values of KIVC Airport D < 0.2 – – C 0.2–0.65 – – CC 0.65–0.8 0.73 Vladivostok International Airport CCC 0.8–1.25 1.09 Vnukovo International Airport B– 1.25–1.5 – – B 1.50–1.75 – – B+ 1.75–2 – – BB 2.00–2.25 – – BB+ 2.25–2.5 – – BBB 2.5–3 – – A– 3–4.25 – – A 4.25–5.5 – – A+ 5.5–6.5 6.17 Khabarovsk Airport AA 6.5–8.5 6.74 Tolmachevo International Airport AAA > 8.5 8.55 Irkutsk International Airport 13.82 Kazan International Airport 48.36 Omsk Airport Source : Authoring

Figure 1 Trends in changes of the number of airports in Russia, 1991–2015

Source : Federal Air Transport Agency

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 24 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Figure 2

Trends in values of K cur.lqdt and K CF : Evidence from Vnukovo International Airport, 2011–2014

Source : Authoring

Figure 3

Trends in values of K cur.lqdt and K CF : Evidence from Ulyanovsk Airport, 2011–2014

Source : Authoring

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. 25 https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

Figure 4

Trends in values of K IVC and K CICR : Evidence from Vnukovo International Airport, 2011–2014

Source : Authoring

Figure 5

Trends in values of K IVC and K CICR : Evidence from Vladivostok International Airport, 2011–2014

Source : Authoring

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 26 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 L.Yu. Laskina / Digest Finance, 2018, volume 23, issue 1, pages 16–28

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I, the author of this article, bindingly and explicitly declare of the partial and total lack of actual or potential conflict of interest with any other third party whatsoever, which may arise as a result of the publication of this article. This statement relates to the study, data collection and interpretation, writing and preparation of the article, and the decision to submit the manuscript for publication.

Please cite this article as: Laskina L.Yu. Expanding Analytical Capabilities of the Ratio Analysis of Entities' Solvency Through Cash Flows. 28 Digest Finance, 2018, vol. 23, iss. 1, pp. 16–28. https://doi.org/10.24891/df.23.1.16 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40 pISSN 2073-8005 Finance of Organizations. eISSN 2311-9438 Analysis of Accounting Systems

Translated Article† HARMONIZATION OF IRAQI ACCOUNTING OF FIXED ASSETS USING THE RUSSIAN ACCOUNTING STANDARDS AND IFRS

Bilal A. ALSAEGH University of Mosul, Mosul, Republic of Iraq [email protected]

Natal'ya V. ZYLEVA Tyumen State University, Tyumen, Russian Federation [email protected] Corresponding author

Article history: Abstract Received 19 April 2017 Importance This article deals with the issues related to Iraqi accounting rules, which do not include an equivalent Received in revised form of Russian PBU 6/01 Accounting for Fixed Assets, and IAS 16 Property, Plant and Equipment, containing instead 16 May 2017 just several procedures for organizing the accounting of fixed assets established in the Uniform Accounting Received in final form System, the Federal Accounting Law of the Republic of Iraq. 2 September 2017 Objectives The article aims to substantiate proposals for the harmonization of Iraqi accounting for fixed assets Accepted 30 October 2017 providing a draft national standard for discussion. Translated 20 December 2017 Methods We have analyzed the information contained in the regulatory documents (IAS 16, PBU 6/01, Uniform Available online 27 March 2018 Accounting System of the Republic of Iraq), with a view to comparing the proposed options for accounting for fixed assets, compiling positives and identifying ways of reforming Iraq's accounting for fixed assets. JEL classification: Е23, М20, М41, N40 Results The article demonstrates the need for a national standard for accounting for fixed assets to harmonize the accounting system in Iraq. In order to harmonize Iraqi accounting of fixed assets, we recommend that the draft standard Property, Plant and Equipment (Fixed Assets) presented in the article be used as a new national standard for the Republic of Iraq. Keywords: fixed assets, reforming, Conclusions and Relevance The proposed draft is close enough to the international accounting practice. However, accounting system regulation it focuses on the real possibility of its practical application in the Republic of Iraq.

Property, Plant and Equipment (PP&E)† constitute being very significant for productivity. Please refer to a substantial portion of the total assets of any entity, Table 1 for information on a share of PP&E in total assets of industrial entities listed in the Iraq Stock †For the source article, please refer to: Алсаег Б.А.М., Зылёва Н.В. Exchange (ISX). Only 13 out of 25 industrial companies Гармонизация иракского бухгалтерского учета основных средства listed in the ISX (as of August 31, 2017) submitted с использованием норм российского стандарта и МСФО. Международный бухгалтерский учет. 2017. Т. 20. № 23. С. 1350–1363. financial statements for FY 2015. URL: https://doi.org/10.24891/ia.20.23.1350

In Iraq, the procedure for fixed asset accountingis system inter alia by adopting the international stipulated only in the Uniform Accounting System1, accounting standards. which is the law promulgating the principles of national PP&E valuation and accounting issues underlie formal accounting. proceedings by such Iraqi scholars as J.E. Al-Thabi, The Uniform Accounting System has been a vehicle for I.S. Mohammed [2], Sawsan Ahmad Saeed [3], the centralized economic planning, economic and social H.H. Hussein, A.H.N. Bni lam [4], O.H.A. Alkarimsalum, development, control and compliance with principles of H.H. Hashim [5], Ali Mal-Allah Abd-Allah [6]. However, the economic system at the governmental level for they mostly focus on the way the valuation influences many years, ensuring appropriate use of economic financial results, without analyzing accounting resources. Although Iraq is the place where both State- regulations. owned and private companies operate, this national Magdalena Lech and Małgorzata Kamieniecka analyzed document still remains in effect, being the sole PP&E valuation during the transition to IFRS [7]. In guidelines for the fixed asset accounting process since the mean time, issues of PP&E valuation methods and the Iraqi Accounting Standards simply do not exist. approaches were reviewed by Anna Majtánová, Lívia It should be mentioned that the Uniform Accounting Sojková [8], Lisa Deane [9], economists of Municipal System encompasses such principles that prove to be Development & Lending Fund [10], Elizabeth S.R.M. Cole irrelevant not only to ordinary users but also focusing on depreciation issues [11]. accountants. This fact avers that the Uniform We should point out Steven M. Bragg [12], Daniela Accounting System shall be updated. Cretu [13], who dealt with PP&E accounting. Jörg Siebert PP&E are defined as movable and immovable property and Dieter Schlagenhauf [14] reported on SAP software, of tangible and intangible nature, which contradicts which combines asset accounting concepts and the fact that nonphysical items are classified as determines the effect of requirements to PP&E intangible assets. valuation under IFRS and US GAAP.

Disputable issues also arise from requirements to initial Scholars actively study issues that arise during and subsequent valuation of PP&E. For instance, the reform of the Russian accounting system from the useful life of a PP&E item does not influence perspectives of the market economy and IFRS. the depreciation amount since depreciation is The Russian researchers also concern issues of computed at the legally prescribed rate, rather than harmonizing PP&E valuation and accounting. through a formula. Among recent researches, we shall point out In our opinion, it is the right time for the Republic of a comparison of the PP&E accounting terminology used Iraq to reform the PP&E accounting practice since in the Russian accounting standards (Russian PBU) and practical discrepancies of accounting principles and IFRS (E.S. Druzhilovskaya) [15], analysis of PP&E assessment of the financial result make financial valuation approaches based on international practices reporting data of entities incomparable [1, p. 44]. (V.S. Kazakova [16] and A.V. Novikova, E.V. Kudinova [17]), study into the effect of initial and subsequent As part of this research, we attempt to draft the Iraqi measurement at fair value on the tax burden of national standard on PP&E accounting mainly by the Russian entities (O.N. Kuznetsova) [18], comparison adopting the IFRS practices so as to harmonize of the Russian accounting requirements with IFRS the accounting rules. However, we also rely upon (T.V. Zav’yalova, E.V. Gudozhnikova, E.A. Vasil’eva [19], the positive outcome of Russia's accounting reform I.V. Rybalkina, N.N. Kosteva [20]). since Russia succeeded in harmonizing its accounting We believe that the Republic of Iraq should rely upon

1 other countries’ expertise and practices of accounting Federal .(الموحد المحاسبي النظام) Uniform Accounting System Board of Supreme Audit of Iraq. URL: http://www.d-raqaba- reforms. Russia has come a long way in developing m.iq/pages_ar/system_muwahad_ar.aspx/ its accounting system and adopting IFRS. We consider (Access date: March 16, 2017)

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting 30 Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. https://doi.org/10.24891/df.23.1.29 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40

Russia’s experience as the most valuable for Iraq since 9. Accounting information in financial reporting. accounting systems of both countries have similar Any accounting standard shall start with the General traits, i.e. predominant governmental regulation of Provisions section. The section shall pronounce accounting processes and an impact of taxation laws on the purpose of the standard, stating, for example, that the way figures are recognized in accounting records this standard regulates the generation of information [1, p. 38]. on the availability and movement of PP&E in accounting Exploring and summarizing requirements of IAS 16 records and its disclosure in financial reporting. Property, Plant and Equipment2, considering Furthermore, there should be mentioned assets, which the imperfection of accounting processes in Iraq and are out of the scope of the standard. For example, the need for national accounting standards that would biological assets associated with agriculture. govern the way PP&E are accounted for, and analyzing The above section shall also enlist definitions and terms requirements of Russian PBU 6/01 Accounting for Fixed used in the standard, such as PP&E (fixed assets), useful Assets3 driving the convergence of the Russian life, wear and tear, depreciation, impairment, historical companies with international practices, in this article we cost, residual value, etc. set out our own draft Iraqi Accounting Standard Fixed Assets, describe its possible sections and clarify As per PP&E accounting principles, that are currently the inadequacy of some clauses of Iraq’s Uniform effective in Iraq and set forth in the Uniform Accounting Accounting System, which is currently in effect. System, PP&E are regarded as movable and immovable property of tangible and intangible nature, which has Drawing upon principles of IAS 16 and Russian been acquired or constructed internally by the entity PBU 6/01, we outline the general design of and situated in or outside Iraq. Such property is the proposed Iraqi Accounting Standard Fixed Assets. acquired to produce goods or deliver services, rather 1. General provisions. than to be sold.

2. Recognition criteria and determination of In our opinion, this definition is incorrect since a classification group. the intangible nature is characteristic of intangible assets, i.e. other items, which are accounted for in 3. Initial valuation of PP&E. accordance with another Iraqi Accounting Standard. Furthermore, the definition fails to mention 4. Depreciation on PP&E. the intention of using the asset for a long time and 5. Expenditures for upgrade (retrofitting) and ongoing administrative purposes of the entity. repair. Russian PBU 6/01 does not unfold the idea of fixed 6. Impairment of PP&E. assets, but it sets forth four conditions for recognizing the asset as a PP&E item (paragraph 4, PBU 6/01). As we 7. Valuation of PP&E upon their recognition. see it, the definition is too large for the Iraqi standard, but the definition of fixed assets shall definitely specify 8. Disposal of PP&E. that the item is intended for long-term use, i.e. the period of time exceeding 12 months or usual operating cycle, if it 2 International Accounting Standard 16 – Property, Plant and is more than 12 months. Equipment: Addendum № 8 to Order of the RF Ministry of Finance, On the Adoption of International Financial Reporting Standards and IAS provide a more concise definition of fixed assets. As Clarifications to International Financial Reporting Standards in the Russian Federation, of December 28, 2015 № 217н (edited as of June 27, 2016). per IAS 16, PP&E are tangible items that are held for use in URL: http://www.consultant.ru/document/cons_doc_LAW_193590/ the production or supply of goods or services, for rental to (In Russ.) (Access date: 16.03.2017) others, or for administrative purposes and expected to be 3 Russian Accounting Standard PBU 6/01 Accounting of Fixed Assets: used during more than one period. Order of the RF Ministry of Finance of March 30, 2001 № 26н (edited as of May 16, 2016). URL: As opposed to IAS, the Iraqi law and Russian standard http://www.consultant.ru/document/cons_doc_LAW_31472/ (In Russ.) envisage that the entity shall not plan any subsequent (Access date: March 16, 2017).

– useful life is the period of time, during which the asset PP&E are carried in accounting records at their will be held so that the entity could use it in line with historical cost (cost). The following section of the Iraqi the expected productivity or capacity and anticipated Accounting Standards – Recognition Criteria and Determination of the Classification Group – shall specify wear and tear that depends on operating conditions the case, in which the cost of a PP&E item shall be (the number of shifts), natural conditions and effect of recognized as an asset. We guess IFRS provisions may an aggressive environment, repair system; be used in this respect, i.e. the cost of an item of – depreciation on PP&E is a regular allocation of Property, Plant and Equipment shall be recognized as the asset value throughout its entire useful life; an asset only if there is a probability that the entity will receive economic benefits from this item and the cost – impairment is a decrease in the value of an item due of the item can be accurately measured. to wear and tear, obsolescence or changes in market prices; The idea of probability shall be incorporated to reflect the extent of uncertainty, to which the entity may lose – impairment loss is the difference between or receive future economic benefits from a respective the carrying amount of the asset and its fair value less accounting item. Certainty can be ensured if principal the cost of disposal; risks and economic advantages are transferred to – historical cost is the value, at which the asset is initially the factual holder of assets. In this respect, it is recognized in accounting records; important to remember about such an accounting assumption as substance over form. Thus – carrying amount is the value, at which the asset is the ownership right is out of question at all. If economic recognized in financial statements after accumulated benefits are not obvious, acquisition costs are posted to depreciation and impairment losses; expenses of the current period.

– residual value of the asset is an estimated amount, In the list of conditions for recognizing an accounting which the entity would have received from item as PP&E, Paragraph 4г, PBU 6/01 states that the disposal of the asset at the current moment after the entity intends to derive economic benefits (income) deduction of expected disposal costs, if the useful life from PP&E in the future, but overlooks the reliability of of the asset expired and the state of the asset were the item’s cost measurement. typical of its expired useful life; In fact, the reliability of the asset measurement seldom – fair value is the amount that has been received upon becomes a challenging point. However, the sale of the asset or paid to transfer the obligation the measurement may appear too biased in certain as part of the orderly transaction of market actors as cases or have no cases to rely upon. For example, of the valuation date. the case when a new type of assets is constructed

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting 32 Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. https://doi.org/10.24891/df.23.1.29 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40 through financial subsidies, being unparalleled in only to provide information on the groups in financial the market. It is problematic to assess future economic reporting, but also use them in the revalued benefits from such an asset. amount-based accounting model. Reviewing the composition of the Iraqi PP&E groups, we point out Many different PP&E were grouped so to align their that the latter two groups (biological assets intended for accounting treatment and recognition in financial water supply and production, and deferred operating reporting. The Uniform Accounting System of Iraq expenses) can be excluded out of the list since their classifies Property, Plant and Equipment into accounting specifics is set forth in Iraqi Accounting the following main groups, such as land, buildings, Standard 11 – Accounting in Agriculture4 and Iraqi facilities and transportation routes, machines and Accounting Standard 2 – Intangible Assets5. After the two equipment, vehicles, tools and templates, furniture and groups are deleted from the list, the remaining office equipment, biological assets for water supply and classification groups of PP&E will be compliant with IAS. production, deferred operating expenses (expenses for acquisition of services to be delivered within a period Initial Measurement of Property, Plant and Equipment is exceeding one year, including incorporation expenses). another important section of the Iraqi Accounting In this grouping, PP&E are kept in accounting records Standards. The cost of PP&E is formed depending on and subsequently disclosed in financial statements by the way the entity obtains each particular fixed asset. specified group. Sale-purchase agreements are the most popular method to acquire PP&E. IAS 16 also classifies Property, Plant and Equipment, (a) land plots; (b) land plots and buildings; (c) machines As for initial recognition of purchased PP&E, and equipment; (d) vessels; (e) aircraft; (f) motor the Uniform Accounting System of Iraq clarifies that, in vehicles; (g) furniture and add-in engineering fittings; this case, the value of the asset includes the purchase (h) office equipment. In IAS this classification is given as price, all acquisition expenses and cost of putting part of the accounting model at revalued amount. the item into operation for its intended use. Assuming that a class of PP&E is a group of fixed assets, The regulation refers to the situation when the land plot which are similar in the nature and corporate use, if with an old building on it is purchased. In this case, a certain PP&E item is remeasured, the same shall be the historical cost of the land includes expenses for done with the other assets relating to the same class of the demolition of the old building, clearing and recovery fixed assets. of the land.

PBU 6/01 does not distinguish classification groups, Considering that provisions of the Iraqi Accounting with paragraph 5 only specifying that Property, Plant Standards on the historical cost of purchased PP&E do and Equipment include buildings, facilities, not contradict IAS, though being less illustrative, we materials-working and power machines and equipment, suggest outlining the draft Iraqi Accounting Standard on measuring and controlling instruments and devices, the basis of IAS 16.16–16.20 on the measurement of computing equipment, vehicles, tools, production and Property, Plant and Equipment to be recognized as household stock, draught animals, productive livestock assets. As per Russian PBU 6/01, when purchasing and cattle, breeding stock, perennial plantings, local an item of Property, Plant and Equipment, its historical roads and other relevant items. On the one hand, they cost is made up of actual costs for acquisition, may be regarded as assets, which can be accounted as construction and production net of Value Added Tax PP&E, but, on the other hand, as groups of items and other recoverable taxes. Enlisted in the Russian stipulated in paragraph 18 of the Russian PBU, i.e. the entity shall use one of the methods for charging 4 Iraqi Standard of Accounting 11 – Accounting in Agriculture, Federal Board .(المحاسبة فـي النـشاط الزراعـي) depreciation on a group of homogeneous items of PP&E of December 31, 1998 throughout the entire useful life of the items within of Supreme Audit of Iraq. URL: http://www.d-raqaba- m.iq/pdf/rule11.pdf (Access date: March 16, 2017). the group. 5 Iraqi Standard of Accounting 2 – Intangible Assets (as edited as of Federal Board of Supreme .(الموجودات غير الملموسة) (Thus we believe that classification groups shall be January 1, 2013 stipulated in the draft Iraqi Accounting Standards not Audit of Iraq. URL: http://www.d-raqaba-m.iq/pdf/rule2.pdf (Access date: March 16, 2017).

PBU, actual costs included into the cost of an item do value of the asset received seems to be more evident. not contravene international standards. Neither Russian, nor international standards stipulate how the difference between the cost of the asset As per the Uniform Accounting System of Iraq, received and asset given up shall be accounted for, exchanging PP&E from different classification groups, which is important for the Iraqi Accounting Standards. the entity may make a capital loss (gain) as the difference between the carrying and market value Having analyzed all information, we conclude that of the transferred property. The regulation provides no the draft Iraqi Accounting Standards shall feature explicit instruction but we can infer that their market the following aspects in the paragraph Initial Recognition value indicated in the exchange contract will be of Property, Plant and Equipment in Exchange: Initial the historical cost of PP&E acquired as a result of recognition of PP&E received in exchange depends on the exchange. This aspect is envisaged in paragraph 11 a loss or gain from the exchange as the difference of Russian PBU 6/01, the historical cost of Property, Plant between the carrying amount and market value of and Equipment acquired under non-pecuniary contracts is the property transferred, classification group, to which made up of the value of assets transferred or to be the transferred items pertain, and cash flows in transferred by the entity, which is determined through the exchange transaction: the price the entity usually asks for similar assets in – if the exchange results in a loss, notwithstanding comparable circumstances. the classification group of the asset, the asset Exchange transactions are the more thorough area of received shall be measured at fair value indicated in IAS. Measuring a PP&E item acquired in exchange at fair the exchange contract; value, the international standards also describe cases – if the exchange of PP&E from different groups results when it is not applicable to the cost of a PP&E item: in gain, the asset received shall be measured at fair (a) the exchange transaction lacks commercial value indicated in the exchange contract; substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If – if the exchange of PP&E from the same group results the acquired item is not measured at fair value, its cost in a gain without monetary proceeds, the asset is measured at the carrying amount of the asset given received is measured at fair value indicated in the up. exchange contract;

IAS regulates the way the entity determines whether – if the exchange of PP&E from the same group results the exchange transaction has commercial substance, in gains and monetary proceeds, the asset received is considering the extent to which future cash flows are measured at fair value indicated in the exchange expected to change as a result of the transaction contract net of the entire unrecognized gain, but (IAS 16.25). To ascertain commercial substance of including a percentage of gains derived from the exchange transaction, the value of a portion of the exchange. the entity's operations, that is typical of the entity, shall Gains (losses) from exchange of PP&E is carried as reflect cash flows net of taxes. The result of the analysis investment profit (losses). may be obvious even if the entity does not make similar computations. Lease as a type of finance lease helps to acquire PP&E on deferred terms. However, Iraqi law and Russian As per IAS, fair value is reliably measurable if limits of standards do not refer to this method of acquiring reasonable measurement of the asset value vary PP&E. withing an insignificant deviation span for the asset, or it is possible to reliably assess the extent to which Whereas the Iraqi laws on accounting do not set any different estimates are probable within the limits and national standards governing lease accounting issues, use it to measure the fair value. If the entity is able to these issues shall be stipulated in the fixed asset reliably measure the fair value of the asset received or accounting standard. It will be easier for an Iraqi given up, the fair value of the asset given up is used to accountant to apply PP&E accounting requirements, if measure the cost of the asset received, unless the fair all of them are consolidated in the same regulation.

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting 34 Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. https://doi.org/10.24891/df.23.1.29 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40

The accounting treatment of lease transactions can be the carrying amount of the asset, it is recognized in profit clarified in IAS. These are the provisions which will and loss over the life of a depreciable asset as a reduced underlie the draft Iraqi Accounting Standard. As per depreciation charge. IAS 17 – Leases6, at the commencement of the lease term, Fair value (market value) of PP&E acquired under lessees shall recognize finance leases as assets and a deed of gift (donation), i.e. free of charge, is regarded liabilities in their statement of financial positions at as the historical cost of such assets. This principle exists amounts equal to the fair value of the leased property or, if in both the Iraqi and Russian regulations and shall lower, the present value of the minimum lease payments, remain in the draft Iraqi Accounting Standard. each determined at the inception of the lease. The discount rate to be used in calculating the present value of The Uniform Accounting System and Iraqi Accounting the minimum lease payment is the interest rate implicit in Standard 3 – Capitalization of Borrowing Costs set forth the lease, if this is practicable to determine; if not, issues of initial recognition of PP&E acquired under an the lessee's incremental borrowing rate shall be used. Any investment loan8. As per the Uniform Accounting initial direct costs of the lessee are added to the amount System, the historical cost of an asset shall include recognized as an asset. Subsequently, these assets are interests on loans, which directly relate to depreciated equally with other PP&E of the entity. the acquisition, construction or production of the asset taking considerable time for its preparation for The entity may acquire Property, Plant and Equipment intended use. However, the Uniform Accounting System as a pecuniary subsidy from the State. Neither the Iraqi does not specify the moment when costs are no longer accounting regulations, nor the Russian PBU on capitalized. Iraqi Accounting Standard 3 suggests accounting of Property, Plant and Equipment provide ceasing to capitalize borrowings costs, when all work is recommendations on acquisition of PP&E and lease almost completed to prepare the asset for intended use accounting. In our opinion, the draft Iraqi Accounting or sale. Iraqi Accounting Standard 3 also indicates that Standard should be supplemented with the information interests on the investment loan are treated as on the historical cost of PP&E acquired with the State expenses reducing the current profit after borrowing subsidies as per paragraphs 24, 26, 27 of IAS 20 – costs are no longer capitalized. These requirements for Accounting for Government Grants and Disclosure of accounting of borrowing costs are similar to those ones Government Assistance7. in paragraph 8 of PBU 15/08 Accounting of Borrowing As per IAS 20, PP&E acquired through government grants Costs9 and IAS 23.20 Borrowing Costs10. are initially recognized at fair value. Grants may be Hence the draft Iraqi Accounting Standard shall govern accounted for as deferred income or by deducting it in the initial recognition of PP&E acquired under arriving at the carrying amount of the asset. If the grant is the investment loan agreement, indicating that interests recognized as deferred income, it is posted to profit or loss on loans, which directly relate to the acquisition, on a systematic basis over the useful life of the asset. If construction or production of the asset taking the grant is accounted for by deducting it in calculating

8 Iraqi Accounting Standard 3 – Capitalization of Borrowing Costs 6 International Accounting Standard 17 – Leases: Addendum № 9 (edited as of March 1, 2013) ( ). Federal Board of رسملة كلف القتراض to Order of the RF Ministry of Finance to Order of the RF Ministry of Supreme Audit. URL: http://www.d-raqaba-m.iq/pdf/rule3.pdf Finance, On the Adoption of International Financial Reporting Standards (Access date: March 16, 2017). and Clarifications to International Financial Reporting Standards in the Russian Federation, of December 28, 2015 № 217н (edited as of June 27, 9 Russian Accounting Standard PBU 15/2008 – Accounting Regulation: 2016). Order of the RF Ministry of Finance of October 6, 2008 № 107н (edited URL: http://www.consultant.ru/document/cons_doc_LAW_193591/ as of April 27, 2012). URL: http://base.consultant.ru/cons/cgi/online.cgi? (Access date: March 16, 2017). req=doc;base=LAW;n=131607 (Access date: March 16, 2017) 7 International Accounting Standard 20 – Accounting of Government 10 International Accounting Standards 23 – Borrowing Costs: Grants and Disclosure of Government Assistance: Addendum 12 to Order Addendum № 14 to Order of the RF Ministry of Finance to Order of of the RF Ministry of Finance to Order of the RF Ministry of Finance, the RF Ministry of Finance, On the Adoption of International Financial On the Adoption of International Financial Reporting Standards and Reporting Standards and Clarifications to International Financial Reporting Clarifications to International Financial Reporting Standards in the Russian Standards in the Russian Federation, of December 28, 2015 № 217н Federation, of December 28, 2015 № 217н (edited as of June 27, 2016). (edited as of June 27, 2016). URL: http://www.consultant.ru/document/cons_doc_LAW_193537/ URL: http://www.consultant.ru/document/cons_doc_LAW_193569/ (Access date: March 16, 2017). (Access date: March 16, 2017).

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. 35 https://doi.org/10.24891/df.23.1.29 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40 considerable time to get ready for its intended use, are the useful life ingrained in it. The law sets up included into the historical cost of the asset and the depreciation rate in line with the useful life of interests on the investment loan are treated as different PP&E items. For example, building – 3%, tow – expenses reducing the current profit after borrowing 15%, motorbike – 25%, tent – 50%, furniture – 10%, costs are no longer capitalized. Afterward it is necessary books – 100%. Types of PP&E and respective to make a reference to Iraqi Accounting Standard 3 with depreciation rates are enlisted on more than 20 pages more detailed information on the capitalization of of the legislative regulation. Therefore, the entity is not borrowing costs. entitled to set up a useful life of a PP&E item since law-makers have decided on it. The entity can construct an asset on its own, instead of purchasing it in the market. As per the Iraqi Accounting In our opinion, entities shall be empowered to have its System, such assets are measured as an amount of own say on the term, during which they intend to use actual costs. The Russian standard sets up identical the asset so as to derive profit from it. We suggest requirements, without distinguishing the historical cost adhering to factors stipulated in IAS 16.56. Russian PBU of PP&E purchased and produced (constructed). IAS 6/01, paragraph 20, also presents detailed guidelines offers the most exhaustive recommendations for for determining the useful life of PP&E. assessing the historical actual cost of PP&E that Although the Uniform Accounting System of Iraq the entity has constructed. According to IAS, the actual prescribes four methods of depreciation (straight line, cost is assessed in line with all costs for designing, sum-of-the-years' digits (SYR), units of production and construction (assembling), mounting and delivery. Costs revaluation), most of them are virtually impracticable. cease to be attributable to the value of PP&E For example, as the regulation rules, the revaluation constructed, when a PP&E item is installed at method shall be applied only to calculate a depreciation the intended place of operation and used for its on livestock and perennial bearer plantings. immediate purpose. The regulation gives incorrect representations of Costs incurred to use or relocate the item are not the SYR method. The useful life is not used in such included into its carrying amount. Costs for putting calculations at all. The law only states that the item into full operation, losses at the initial stage of the depreciation rate under the SYR method doubles. If PP&E operation are not capitalized. As per IAS, costs for this provision is interpreted closely to the original text, it dismantling of equipment from a land plot and land will be difficult to trace the annually reducing rehabilitation are not included into the value of the land depreciation unless we assume the depreciation rate plot, being subject to depreciation. shall be calculated through the carrying amount, rather than the historical cost. The units of production method The value of PP&E is reduced through depreciation. In is applied to air transport since depreciation is this respect, Iraqi Accounting Standards shall have calculated in line with flight hours. a section dedicated to depreciation of Property, Plant and Equipment. Thus, the straight line method appears to be the only practicable method as compared with those PP&E Depreciation depends on the historical (recoverable) depreciation methods permitted by the Iraqi law. cost, useful life and depreciation methods. According to However, we agree with IAS (paragraphs 43–62) that the Russian and international standards, the entity the applicable depreciation method shall reflect establishes the useful life of a PP&E item and the expected way the entity plans to consume economic depreciation method for groups of assets when benefits from the asset. As opposed to IAS, inour the item is entered into its accounting records. opinion concerning PP&E depreciation, it is necessary to Iraqi accounting laws do not provide for this possibility regularly (every three to five years unless significant for entities. Thus the useful life of a PP&E item has no economic events take place) revise not only impact on the amount of depreciation since the depreciation method applicable to the asset, but depreciation is calculated at the legally prescribed also its useful life. If the expected consumption of depreciation rate, rather than a specific formula with future economic benefits embedded in the asset

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting 36 Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. https://doi.org/10.24891/df.23.1.29 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40 significantly changes, the useful life shall be modified charge depreciation on PP&E. However, we may guess accordingly11. that depreciation is no longer charged, if the item is disposed of in any manner. Provisions of IAS 16 help to As for possible methods for charging a depreciation on illustrate the process, depreciation of an asset ceases at PP&E, the draft Iraqi Accounting Standards shall the earlier of the date that the asset is classified as held for explicitly prescribe options to calculate depreciation sale and the date that the asset is derecognized. amounts under each depreciation methods, drawing upon examples of IAS (paragraph 62) or Russian PBU We suggest the proposed draft should indicate (paragraph 19): accounting options for subsequent costs incurred for PP&E maintenance, such as overhaul or ongoing repair – straight-line depreciation method implies charging (Costs for Retrofitting (Rehabilitation) and Ongoing a default depreciation amount throughout the entire Repair). Thus subsequent costs may be attributable to useful life of the underlying asset unless the residual costs incurred during the period, or capitalized. Costs value remains unchanged. The depreciation amount is are included into the asset value if it is substantially calculated on the basis of the historical cost retrofitted or rehabilitated, while similar costsfor (recoverable amount) of the item and depreciation overhaul, that is the recovery of original properties and rate assessed in line with the respective useful life; qualities, are attributable to expenses incurred during – sum-of-the years' digits method implies reducing the period. So are costs for ongoing repair. the depreciation amount throughout the entire useful life of the underlying item. The depreciation amount is The asset value may happen to fall significantly during calculated on the basis of the historical cost the useful life of PP&E. For example, more rapid aging (recoverable amount) of the item and the ratio of of an asset than expected, physical damage, etc. In this the number of years remaining before the expiry of case, it is necessary to consider the impairment of the useful life and the sum of digits of the useful life a PP&E item and disclose it in the following section of years; the draft Iraqi Accounting Standard, Depreciation of Property, Plant and Equipment. – units of production method implies charging the depreciation amount in line with the expected use or IAS give a good insight into depreciation of assets. As 12 productivity. The depreciation amount is based on the per IAS 36 Impairment of Assets , at the end of each physical indicator of output (work) in the reporting reporting period, an entity is required to assess period and the ratio of the historical cost (recoverable whether there is any indication that an asset may be amount) of the item and the expected output for impaired. Impairment of assets may result from the entire useful life. significant changes in the technological, economic conditions, obsolescence of an asset, physical damage Whereas the revaluation method of depreciation is to an asset and changes in the market environment, permitted in Iraq only to calculate depreciation on etc. If any of such indications is in place, the entity shall the core herd animals and perennial bearer plantings, measure the recoverable amount of the asset. The we believe that this method shall be integrated into recoverable amount is the higher of two values: fair Iraqi Accounting Standard 11 Accounting in Agriculture, value of the asset less costs of disposal and value in rather than the national standard. use. In our opinion, value in use is difficult to measure, The Uniform Accounting System of Iraq outlines especially in the Iraqi market. Thus only fair value can the only instance when the entity ceases to charge be used. depreciation, i.e. it no longer uses the item due to military operations. This mention definitely stems from 12 International Accounting Standards 36 – Impairment of Assets: the political situation in the country. The regulation Addendum № 23 to Order of the RF Ministry of Finance to Order of does not enumerate other cases when entities cease to the RF Ministry of Finance, On the Adoption of International Financial Reporting Standards and Clarifications to International Financial Reporting Standards in the Russian Federation, of December 28, 2015 № 217н 11 Mohammad B.A., Zyleva N.V. [Reforming the accounting for oil (edited as of June 27, 2016). wells depreciation in Iraq]. Mezhdunarodnyi bukhgalterskii uchet = URL: http://www.consultant.ru/document/cons_doc_LAW_193674/ International Accounting, 2016, no. 12, pp. 16–28. (In Russ.) (Access date: March 16, 2017).

The asset gets impaired, its carrying amount exceeds the entity may incur additional expenses and receive the fair value. As mentioned above, the international some earnings, which are to be posted to the Profit and standard scrutinizes the impairment testing process Loss. These issues shall be reviewed in the section of and requirements to the way impairment amounts shall the Iraqi Accounting Standards Disposal of Property, be accounted for. We suggest that the Iraqi Accounting Plant and Equipment. Standard should refer to this international standard in Like in all standards on accounting, the section terms of impairment accounting issues. Accounting Information in Financial Reporting shall The draft Iraqi Accounting Standard shall have become the final part. We believe that the Iraqi entities' the section Measurement of PP&E after Recognition that financial statements shall disclose such information of differentiates the valuation of an asset after recognition PP&E as (a) assets classified as held for sale; depending on an accounting model. As per IAS, (b) existence and scope of titles for PP&E, and PP&E the entity shall choose one of two PP&E accounting pledged to secure the fulfillment of obligations. models, i.e. accounting at the historical cost (actual Following sections of financial statements shall present costs) (IAS 16.30) or at revalued amount (IAS 16.31–42). information on each group of PP&E, such as Would-be investors need to know which model the accounting model upon recognition, useful life; the entity adheres to in PP&E accounting after their depreciation method; fair value of PP&E, if it recognition since various models imply different ways significantly differs from the carrying amount (the cost for collecting financial reporting information. model); impairment losses included into (reinstated as The cost model conveys the historical cost principle, part of) profit or loss (the cost model); growth or drop in being preferable under IAS. As this model implies, the value resulting from revaluation (the revaluation financial statements shall present the cost of PP&E less model). accumulated depreciation on PP&E and accumulated If PP&E items are carried in accounting records and impairment losses. As per the revaluation mode, financial statements at the revalued amount, the time, during which PP&E are used, is one of the following information shall be disclosed: (a) the critical factors for PP&E, increasing the probability the revaluation date; (b) involvement of of changes in the market value and divergence of the independent appraiser; (с) the carrying amount, the historical and fair value of an item. When such which would be recognized, if assets were not divergence is impossible to neglect, IAS 16 provides for accounted through the cost model, by each class of an alternative approach to defining the subsequent revalued PP&E; (d) growth in the revalued amount, measurement of PP&E, i.e. the current market value, or indicating changes for the reporting period and recoverable amount less accumulated depreciation, restrictions to the distribution of the amount among unless the market value is known. shareholders. In our opinion, the revaluation model give a clearer If the draft Iraqi Accounting Standard on PP&E view of the value of assets, especially in case of real accounting is composed as we describe above, it will be estate, the market value of which increases in contrast convenient to use because it will be compliant with to the carrying amount. the structure of IAS but its captions will be familiar to Although long-term acquisition is a PP&E item, its value the Iraqi users. The proposed recommendations will becomes subject to derecognition at some point of help entities get a better understanding of the way they time. Thus if PP&E are disposed or incapable of should account for PP&E. It will also help national generating economic benefits (income) in the future, accounting principles and international standards their value shall be derecognized. The accounting converge. We hope this comparison and proposed draft treatment of PP&E ends up in derecognition of for PP&E accounting, in some way or another, will be the actual (historical) cost and accumulated embodied in Iraqi regulatory documents governing depreciation on the item. When derecognizing PP&E, the PP&E accounting procedure.

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting 38 Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. https://doi.org/10.24891/df.23.1.29 B.A. Alsaegh et al. / Digest Finance, 2018, volume 23, issue 1, pages 29–40

Table 1 The fixed assets value to total assets value ratio (statistics for 2015) Name of Company Carrying amount of PP&E, IQD Total value of assets, IQD Ratio, % Baghdad for Packing Materials (Private) 650,068,018 1,008,209,537 64 Baghdad Soft Drinks (Private) 89,890,627,879 226,907,311,687 40 Al – Hilal Industries (Mixed) 147,598,044 3,326,096,895 4 Iraqi Company for Carton Manufactures (Mixed) 1,353,853,337 1,739,554,014 78 Iraqi Date Processing and Marketing (Mixed) 4,112,973,379 22,506,071,056 18 Iraqi Engineering Works (Mixed) 1,174,628,215 1,582,025,199 74 Iraqi for Tufted Carpets (Private) 18,366,600 2,790,375,822 1 AL – Kindi of Veterinary Vaccines (Mixed) 1,434,241,056 6,287,325,944 23 Al-Mansour Pharmaceuticals 842,204,861 8,006,206,671 11 Modern Chemical Industries (Private) 1,384,159,820 9,914,364,840 14 Modern Construction Materials Industry (Mixed) 359,284,339 1,639,283,379 22 Ready Made Clothes & General Trading (Mixed) 33,310,233 2,713,658,631 1 The Light Industries (Private) 640,197,367 14,189,524,966 5 Source: Iraqi Stock Exchange data. URL: http://www.isx-iq.net/isxportal/portal/companyGuideList.html

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We, the authors of this article, bindingly and explicitly declare of the partial and total lack of actual or potential conflict of interest with any other third party whatsoever, which may arise as a result of the publication of this article. This statement relates to the study, data collection and interpretation, writing and preparation of the article, and the decision to submit the manuscript for publication.

Please cite this article as: Alsaegh B.A., Zyleva N.V. Harmonization of Iraqi Accounting of Fixed Assets Using the Russian Accounting 40 Standards and IFRS. Digest Finance, 2018, vol. 23, iss. 1, pp. 29–40. https://doi.org/10.24891/df.23.1.29 S.Yu. Bogatyrev / Digest Finance, 2018, volume 23, issue 1, pages 41–54 pISSN 2073-8005 Finance of Organizations. eISSN 2311-9438 Analysis of Accounting Systems

Translated Article† ANALYTICAL CAPABILITIES OF MODERN INFORMATION SYSTEMS AS PART OF THE INCOME-BASED BUSINESS VALUATION METHOD

Semen Yu. BOGATYREV Financial University under Government of Russian Federation, Moscow, Russian Federation [email protected]

Article history: Abstract Received 30 October 2017 Importance The research focuses on new software and information tools for valuation. The research deals with Received in revised form aspects of business valuation based on the income-based valuation method. 1 December 2017 Objectives I scrutinize aspects of adjusting the valuation framework to new analytical capabilities and Accepted 4 December 2017 demonstrate distinctive scope of information and analytical data on ratios and metrics stored in such systems and Translated 6 March 2018 available for financial analysts. Available online 27 March 2018 Methods The research is based on the DCF method from perspectives of income-based business valuation. Results I analyze capabilities of software and technological tools of modern information systems and measure JEL classification: G32 the value of different items using the DCF method through various models. The article displays positive aspects of analytical tools of the information systems and identifies what restrictions and limits they impose on a financial analyst. The article unveils the limited nature of data resources in foreign information systems and indicates the Russian alternative information resources for improving the use of the DCF-based models. Conclusions and Relevance Financial analysts may benefit from new capabilities of model information systems. Keywords: income-based method, They streamline primary data collection and processing for business valuation purposes and standardization of discounting, cash flow, discount rate, financial reporting. The article outlines the future of new information resources and their use in business information system valuation. The findings may prove useful in financial analysis and financial reporting.

Introduction capabilities of modern information systems, such as Bloomberg, Thomson Reuters, Russia’s Prime, etc. The† article examines how information technologies, business valuation methods can be used by financial The Use of Forecasting Capabilities of analysts. The materials are intended to help financial Information Systems as part analysts use new capabilities of information systems of the DCF Model effectively. For purposes of effective value analysis, I unfold specific details of analytical and information Free Cash Flow to Equity and Free Cash Flow to the Firm are assessed on the basis of financial statements. Forecast estimates to be embedded into the valuation † For the source article, please refer to: Богатырев С.Ю. model are made through data extrapolation. Аналитические возможности современных информационных систем при реализации методов доходного подхода к оценке In international literature on valuation, authors стоимости бизнеса. Финансовая аналитика: проблемы и решения. 2018. Т. 11. № 1. С. 43–61. overview different materials that may produce statutory URL: https://doi.org/10.24891/fa.11.1.43

Value analysts may be perplexed with a more Free cash flow of Carrefour SA may be insufficientto complicated algorithm for predicting future figures. extrapolate cash flows since there was a gap in 2013. Appraisers point out situations when specialized assets Extrapolation methods are quite well developed as and conventional profit-making trading businesses are accountants master this area very well as part of measured [2]. Specialized editions on valuation keep on financial reporting under International Financial arguing about the applicability of valuation standards to Reporting Standards [14]. different types of appraisals [3]. Let us have a look at Dollar Tree, Inc. from the USA. Fig. 2 It would be the simplest way to assume that the gained depicts its profile in the Thompson Reuters database. momentum of cash flow growth will remain in I deliberately choose this company as it illustrates the future. The relationship between cash flow and its the U.S. stock market. Dollar Tree, Inc. has good determining factors is incidentally believed to survive. performance results in stock trading and fundamental Modern methods for financial reporting indicators underlying its value. standardization, identification and substantiation of value factors are strongly linked with mathematical After the data are uploaded, I can get the table with models based on real figures [4]. metrics to be used in valuation.

The income-based valuation framework can be The simplest method to project cash flows is to assess configured in line with complex models arising from components in the given proportion against sales more advanced mathematical methods, such as options volume of the company [15]. As for Free Cash Flow to [5–7]. Complex models and methods of valuation are the Firm, financial leverage is considered to remain developed with neural networks as well [8, 9]. Such unchanged. This simplified approach implies that new studies indeed are more popular in case of small and investment in fixed assets is made in the same family business [10]. proportion of depreciation charges. For example, this It is noteworthy that scientific literature presents idea is voiced by authors of the multi-step cash-flow studies juxtaposing and complementing income-based prediction model [16]. and cost approaches [11]. It streamlines the reciprocal If the analyst presumes depreciation should reflect development of synthetic valuation methods. For annual costs to be incurred to keep the existing example, valuation based on the residual value [12, 13]. capacity, the difference between fixed capital The first step in cash flow forecasting is to analyze investment and depreciation equals additional the uploaded information on the company as showed contributions to the capital stock. The difference in Fig. 1. depends on an increase in the company’s capacity. The components below are needed to make respective Brief Description of Careffour SA. This company is assessments: interesting for valuation purposes. The company is a blue chip in the French stock market. There is a lot of • projected increase in sales; value analytics on the company. It is examined by • estimates of After Tax Net Operating Profit is for Free leading fundamental analysts and included into many Cash Flow for the Firm (FFCF) or profit margin for Free investors’ portfolios. Here I view it from perspectives of Cash Flow to Equity (FCFE); available analytical and other information. • proportion of additional fixed capital investment For purposes of income-based valuation, Carrefour SA (incremental FCInv) and increase in sales volume (output); is an exemplary case of applying such methods. It demonstrates a growth in its revenue and intends to • ratio of working capital investment (WCInv) and increment its profit even more. In a way, it resembles increase in sales volume (output);

Please cite this article as: Bogatyrev S.Yu. Analytical Capabilities of Modern Information Systems as Part of the Income-Based Business 42 Valuation Method. Digest Finance, 2018, vol. 23, iss. 1, pp. 41–54. https://doi.org/10.24891/df.23.1.41 S.Yu. Bogatyrev / Digest Finance, 2018, volume 23, issue 1, pages 41–54

• estimation of financial leverage (debt ratio, DR). I calculate auxiliary metrics: EBIT margin – 12%, increase in sales volume – USD 2,211 million. As for margin, it is worth mentioning different mentality in approaching relative figures. A Russian accountant, Table 2 provides my calculations of cash flow in say, treats relative values, such as markup, against the forecast period in line with the existing ratios and the base, that is cost. In this respect, the accountant is growth trend. in agreement with a procurement manager. The metric Such relatively scarce cash flow stems from is an effective tool for financial analysis and managerial considerable investment in fixed and working capital. efforts. Margin is a tool employed by the Western The final figure will grow if an increase in sales economists, being an unrelated analytical metric projected by Thompson Reuters is taken into account. gauged as the percentage of cost and markup (as one or another type of profit). It is convenient to compare A separate point of the menu is intended for forecasting a number of companies, trace dynamics, measure an increase in sales volume (Fig. 3). I open it and get proportions and ratios, which would be easy to use in the value of sales volume for the selected period (Fig 4). calculations. It is also possible to choose the average value in the table, which was previously suggested as This shall be kept in mind when handling traditional an optional forecast for three years to come. foreign analytical ratios. This is not about good or bad, but rather just about models of thinking. EBIT margin remains unchanged. However, the absolute increase will be lower: EBIT margin – 12%, increase in It is the way for assessing the ratio of capital sales volume – USD 1,789 million. expenditures net of depreciation expenses to an increase in sales, and the ratio of different sales Therefore, FCFF will be calculated as shown in Table 3. volumes (increase in working capital, increase As seen in the calculation, FCFF rose substantially, in sales). though an increase in revenue is forecast to be 5 Certain ratios are projected for the forecast period percent less. So, it proves the importance of being when future cash flows are predicted. prudent in forecasting.

Indicators of Dollar Tree, Inc. are precisely forecast in The similar scheme based on net investment in fixed accordance with the recent financial statements and working capital can be used to calculate FCFE but uploaded from the Thompson Reuters database. net profit will be an initial component in this case.

Let us examine the financial statements of Dollar Tree Referring to Dollar Tree, Inc., which traders and and make relevant calculations using signed-off fundamental analytics tend to, DLTR.O stock ticker financial statements starting from 2015. acquires source data for calculations likewise. The calculations are based on Income Statements and Net profit is measured through net profit margin, i.e. Cash Flow Statements. Processed data are presented in the ratio of net profit and revenue. Table 1. It is not only net profit that differentiates The company’s revenue grew by 25.7 percent in 2015 the calculation. What makes it different is that it year-on-year. involves net borrowings. Net borrowings are measured The return on an increase in fixed and working capital is on the basis of the target ratio of equity and assessed in the table. borrowings.

I calculate FCFF, that is the cash flow to the entire Source data for the calculation are as follows. Sales invested capital, provided that a 25.7 percent increase volume is USD 10,390.57 million, net profit margin is perseveres. 4.85%, increase in sales is USD 1,789 million (Table 4).

EBIT margin is sourced from the special section of Please note that all leading information systems employ the menu – Estimates. their own valuation models. They more often than not

Please cite this article as: Bogatyrev S.Yu. Analytical Capabilities of Modern Information Systems as Part of the Income-Based Business Valuation Method. Digest Finance, 2018, vol. 23, iss. 1, pp. 41–54. 43 https://doi.org/10.24891/df.23.1.41 S.Yu. Bogatyrev / Digest Finance, 2018, volume 23, issue 1, pages 41–54 use the dividend discount model (for example, the income-based approach or comparative approach is Bloomberg and Thompson Reuters). The valuation used [18]. model is also fitted with an analytical forecast module, The Factsheet report provide principal points needed to which depicts an estimated increase in earnings per examine the financial and economic profile of share as needed for the model. the company. This report is generated in the Thompson The valuation option is activated in the menu of Reuters database, being prepared in three colors, i.e. the company profile Fig.( 5). red, orange and blue.

Fig. 6 reflects how it works in case of Dollar Tree, Inc. in It is worth mentioning the behavioral toolkit used to the Thompson Reuters database. visualize some behavioral strategies with colors. Behavioral factors are considered to form the discount Estimates are given in three formats intended for users, rate [19]. analysts (StarMine affiliated with Thompson Reuters) and industry-specific purposes, review (Fig. 7). Table 5 provides source data to be used in the one stage model through the DCF method and constant increase Value Analysis by the One-Stage Discounted in profit. Cash Flow Valuation Model Under the CAPM model, the discount rate is 23%. After I figure out the cash flow, I apply it to business Therefore, the market value of the share is BRL 77.31, valuation. with the current quotation amounting to BRL 14 per share. First of all, I shall mention that the DCF models are extremely sensitive to input data. Even if an estimated The surprising result may be explained with the Price to increase in revenue changes by 5 percent, cash flow Earnings ratio (P/E ratio). While the average P/E ratio is demonstrates serious modifications. If the discount rate 23 in the sector, it is 9 for Petroleo Brasileiro. is added, the final result will fluctuate even more. The behavioral analysis technique is likely to be appropriate in this case. Hence value analysts usually rely upon the scenario-based approach to analyze business I conduct the scenario-based analysis to delve into valuation results and subsequently make their the issue. Table 6 comprises different metrics for further judgments. assessment of the share price.

The one stage model for equity valuation through Under favorable circumstances, the value increases up the DCF method is expressed as follows: to BRL 90.59 per share. Unfavorable conditions do not cause dramatical changes in the value. V 0=FCFE 0(1 + g )/(r−g), where FCFE0 stands for free cash flow to equity; Two-Stage Discounted Cash Flow Valuation Model g is the rate of cash flow growth; There are models of free cash flow to the firm (FCFF) r is the discount rate on equity. and free cash flow to equity (FCFE).

Let us measure the equity through a common stock of The model features two stages of an increase in cash Petroleo Brasileiro. Scholars majoring in valuation pay flow. At the first stage (estimation), cash flow changes great attention to the way the discount rate is set up in year-on-year, while being fixed during the second stage. post-crisis circumstances. Most analyzable cases relate to situations when a smaller entity needs to be Valuation formulas are as follows: appraised [17]. • in case of cash flow to the firm (FCFF): Assessing the discount rate, it shall not be overlooked Business Value=∑n FCFF /(1 +WACC)t + that the discount rate and assumptions shall be (t=1) t + FCFF /(WACC−g)• 1/(1+ WACC)n ; determined identically, notwithstanding n+1

Please cite this article as: Bogatyrev S.Yu. Analytical Capabilities of Modern Information Systems as Part of the Income-Based Business 44 Valuation Method. Digest Finance, 2018, vol. 23, iss. 1, pp. 41–54. https://doi.org/10.24891/df.23.1.41 S.Yu. Bogatyrev / Digest Finance, 2018, volume 23, issue 1, pages 41–54

• in case of free cash flow to equity (FCFE): The share value at the designated time (present value) is KRW 36,519.73. The sum of values totals Equity Value=∑n FCFE /(1+ r)t + (t=1) t KRW 62,360.44. It results from the StarMine’s model n + FCFE n+1/(r−g)• 1/(1+ r ) . (Thompson Reuters database).

Terminal value, or the value in the post-forecast period, As the forecast reveals, StarMine Agency assigns much can be measured using the P/E ratio. In this case, higher value to one share on the basis of the market the estimated profit is used. value, which significantly exceeds the current quotation.

It is very important for this model to measure Analytical models are generally closed, being kept as the terminal value since it accounts for a significant portion know-how by agencies and advisers. Hence, it is often of the total value. In its simplest expression, the rate problematic to understand the logic of analysts’ actions of cash flow increase is the same at each of the two stages. unless they provides relevant clarifications in For analytical purposes, please refer to Hyundai Steel an addendum to the computational part. South Korea. The company details are stored in Conclusion the Thompson Reuters database. A more detailed profile is uploaded as a pdf-file. Although the income-based approach and respective methods have been expected to become less popular I determine source metrics for valuation purposes. for a long time, they still remain the most frequent They’d better be taken from the Estimates menu in option for valuation and value analysis. The above the relevant section of the system. For convenience material explains the reasoning behind it. purposes, the system can visualize figures as graphs. You may not be subscribed to such leading databases First, modern information systems allow for quick and as Thompson Reuters or Bloomberg. Issuers’ financial proper assessment of all components underlying statements can be found on websites of financial the computational framework of the income-based companies. approach. They are easy to handle and configure.

I upload the data as a table and start the valuation Second, predictive capabilities of the income-based process using them. Sales per share, net profit margin valuation methods rise substantially after various and increase in sales are measured on the basis of techniques of sectoral specialists, financial analysts are the available report. Investment in fixed and working combined in a single information pool used for capital is specified in the Cash Flow Statement. valuation purposes.

Table 7 displays the way input data to be uploaded into Third, trying to attract clients, developers of information the two-stage DCF model are measured by processing systems designed perfect valuation modules, source reporting data of the company. calculators for quick value measurements, which are Equity risk premium, ERP, is applied to gauge the discount evident to rest upon the income-based valuation rate on equity. It is available in Thompson Reuters and method. The calculators have precision settings, with Bloomberg databases. The calculation algorithm is their results being close to the market value of listed conventional as set forth in literature on valuation [20]. stocks. They persuade the clients trading in the stock market to opt for valuation. As for South Korea, this command generates a graphical result in the Thompson Reuters database. Fourth, rich information tools streamline and facilitate Uploading it into an Excel file, I get a convenient body of the convergence of the income-based and comparative data. The beta coefficient of the company is assessed by approaches, ongoing exchange of analytical findings applying the respective command within the system. and sharing of calculations. Table 8 and 9 present the assessment of the discount Upon the onset of popular information systems, rate and value respectively. income-based valuation has reached a new In the forecast period, the share value is KRW 25,840.71. development level. Financial analysts and appraisers Table 10 shows the value measurement in the post- should actively master this tool for conducting effective forecast period. value analysis and valuation.

Table 1 Assessment of metrics Metric 2013 2014 2015 Increase in revenue, % – – 25.7 EBIT margin for three years, % – – 12.43 Effective income tax rate, average for three years – – 35.85 Fixed capital investment, c.u. 312.2 331.2 325.6 Depreciation charges, c.u. 175.3 190.5 205.9 Incremental fixed capital, c.u. 136.9 140.7 119.7 Increase in sales, c.u. – 445 762 Percentage of net investment in revenue increase – 31.62 15.71 Increase in working capital, c.u. – – 97.2 Percentage of increased working capital in revenue increase – – 12.76 Source: Authoring

Table 2 Assessment of cash flow in the forecast period, million USD Metric Value Sales volume 10,812.85 Earnings before interest and tax (EBIT) 1,297.54 Earnings before interests and tax (EBIT) with tax adjustments (tax rate) 832.39 Incremental fixed capital –523.16 Incremental working capital –282.01 FCFF 27.21 Source: Authoring

Table 3 Assessment of cash flow in the forecast period, according to forecasts by Thompson Reuters, million USD Metric Value Sales volume 10,390.57 Earnings before interest and tax (EBIT) 1,246.87 Earnings before interests and tax (EBIT) with tax adjustments (tax rate) 799.88 Incremental fixed capital –423.24 Incremental working capital –228.15 FCFF 148.49 Source: Authoring

Please cite this article as: Bogatyrev S.Yu. Analytical Capabilities of Modern Information Systems as Part of the Income-Based Business 46 Valuation Method. Digest Finance, 2018, vol. 23, iss. 1, pp. 41–54. https://doi.org/10.24891/df.23.1.41 S.Yu. Bogatyrev / Digest Finance, 2018, volume 23, issue 1, pages 41–54

Table 4 Free Cash Flow to Equity from incremental fixed capital, million USD Metric Value Net Income 503.94 Incremental fixed capital –423.24 Incremental working capital –228.15 Net borrowings – increase in non-current accounts payable 252.49 FCFE 105.04 Source: Authoring

Table 5 Input data for the one-stage DCF model with a constant increment in profit Metric Value FCFE, BRL per share 11 Rate of cash flow growth, % 8 Risk-free rate, % 10.23 Equity risk premium, % 6.08 Beta coefficient of the company 2.16 Source: Authoring

Table 6 Scenario-based analysis of changed in value Metric High value Low value FCFE, BRL per share 11 11 Rate of cash flow growth, % 10 5 Risk-free rate, % 10.75 9.5 Equity-risk premium, % 6.5 5.5 Beta coefficient of the company 2.5 1.5 Discount rate, R CAPM, % 27 18 Market value of equity per share 71.18 90.59 Source: Authoring

Table 7 Input data to be uploaded into the two-stage DCF model Metric Value Current sales volume, billion KRW 16,133 Shares issued 131,270,000 Current sales volume per share, KRW 122,899.37 Increase in sales in the forecast period, % 12.82 Increase in sales in the post-forecast period, % 6.34 Net profit margin, % 5.83 Incremental fixed capital, % of an increase in revenue 25 Incremental working capital, % of an increase in revenue 17 Source: Authoring

Table 8 Assessment of the discount rate through the CAPM model, % Metric Value Risk-free rate 4.53 Market premium 8.16 Beta coefficient 1.85 R CAPM 19.63 Source: Authoring

Figure 1 Upload of the company information (screenshot)