Part four of FaBEducation.com's Financial Statements presentation on their active learning programme in business finance for non-financial managers and entrepreneurs

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Financial statements
④
Enterprise
Formations and
The Venture
Triangle
of ⑤

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The rules for preparation and presentation of financial statements are set out in the
International Financial reporting Standards (IFRA) laid down by the International
Accounting Standards Board (IASB)
The United States uses the US Generally Accepted Accounting Principles (US GAAP)
but are in the process of moving to the IFRS
Public companies – i.e. those listed on a
stock exchange are governed by strict
rules in terms of when and what they
publish in terms of their financial
statements
Private companies do not have to publish
financial statements and the information
they must file with the companies offices
in their jurisdiction is extremely limited.
The key accounting principles discussed earlier apply to both listed and private firms as
does the basic content and structure of the financial statements.
The 52 largest stock exchanges in the
world together have only 46,000
listed companies.
Private and Public Companies
Europe has 28 million private
companies and the US 27 million. [IASB
“A Guide to the IFRS for SMEs” March
2012]

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An extension of the
person who owns it
A separate legal entity to
the owners with “Articles
of Association”
Sole Trader v Limited Companies
Owns the assets AND
Owes the liabilities
Profit/Loss is combined
with other income for tax
No rules & regulations
other than general law
and activity specific
licences etc.
Owners’ liability limited to
the share capital invested
Files and pays tax
Set up costs but may be
well justified by protection
Subject to regulations and
must submit annual
returns to CRO

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Partnerships
Two or more individuals own, run and are responsible
for liabilities of the enterprise. Authorities and profit
shares defined by a partnership agreement
A legal entity in and of itself – can sign contracts and
borrow money
Partnership creditors usually have recourse to the
personal assets of each partner for settlement of debt
Partnership must file an income tax return but does not
typically pay tax: the individual partner income is part
of their overall personal tax liability

5. Pros and Cons
Company
• Incorporation incurs set up costs
• Companies Acts
– Keep accounting records
– Produce audited accounts*
– File accounts and annual return
with CRO
– Keep Statutory Books
• Companies have greater
borrowing potential and can use
current assets as security for a
“floating charge”
• Shares may be transferred to
maintain continuity
• Incorporation give impression of
a soundly based organisation.
There may be prestige attached
to directorship
Sole Trader/Partnership
• No formation costs but written
partnership agreement is advised
• Annual accounts are not required
by law but are necessary as
Revenue compute tax based on
them
• Unrestricted in amounts they can
borrow but can’t create floating
charges.
• A partnership cannot exist
separately from the partners and
so a change in partners means
the end of one business and the
commencement of another.
• The unincorporated business
does not carry the same prestige.
www.fabeducation.com* Subject to size threshold

6. Business
Concept
Financial
Model
Business
Model
What we are
Vision, products / services, customers, unique selling proposition and capabilities
What we do
• Buying and selling
activities including policies
on inventory, debtors and
creditors
• Overheads – managing
and administering the
business
• Funding the business
(Liabilities, share capital
and retained profits)
• Fixed asset acquisition and
disposal
How we make the best if what
we have
Dynamic models showing the
Profit and Loss
Account, Balance Sheet and
Cash Flow that would result
from the business model
The Venture Triangle
Look before you leap!
Functions like a flight
simulator to safely explore
and test options for the
business model before
committing to them
Good business ideas deserve smart business models validated by effective financial models