4. Financial Analysis
4.2 Reformulation of Financial Statements
4.2.2 Reformulation of the Balance Sheet
In this section the balance sheets are reformulated much the same way as the income statements by separating all operating items from financing activities. According to Petersen and Plenborg (2011) it is important to match the operating and financing activities with the analytical income statement. For instance, if “result from equity accounted investment” was considered as an operating activity in the analytical income statement it must also be classified as an operating activity in the balance sheet.
The original balance sheet of the BMW Group’s industrial Business is already included in appendix A.13 and the analytical balance sheet (both operational and financial) for BMW’s industrial Business is found in Appendix A.19. The separation of operating and financial items in the balance sheet allows the calculation of invested capital. Invested capital represents the amount a firm has invested in its operating activities, which requires a return (Petersen and Plenborg 2011).
220.127.116.11 Analytical Balance Sheet – Operational
This part of the analytical balance sheet includes the operating items, and is illustrated in appendix A.17.
Invested capital is calculated in the operational balance sheet as the sum of operating assets less the sum of operating liabilities.
Intangible assets is mainly compromised of capitalized development costs on vehicle and engine projects as well as subsidies for tool costs, licenses, brand-name rights, purchased development and software project (BMW Group 2012). These can all be related to operations and as such classified as an operating asset. Property, plant and equipment is clearly related to operational activities and as such regarded as an operating asset. Leased products are referred to as own products and products of other manufacturers that the BMW Group leases out to customers as a part of its financial services business.
50 However, this post is relatively small for the Industrial Business. Additionally, revenue from the Financial Services business is considered to be part of the group’s primary activities even though the statements are separated. Leased products are as such classified as an operating asset.
Investments accounted for using the equity method was in the analytical income statement changed to an operating item, as this post relate to the BMW Group’s interests in joint ventures and other similar businesses (BMW Group 2012). As such, investments accounted for using the equity method is also considered as an operating item in the analytical balance sheet.
Receivables from sales financing are related to the financial services business and as mentioned earlier it is considered to be part of the Group’s operating activities. It is thus considered to be an operating asset, although it is zero in this case for the industrial Business (see Appendix A.13).
Deferred tax assets are considered an operating asset as it is assumed that the majority of the tax items on the balance sheet relate to operating activities. No specific notes are provided by the BMW Group on deferred tax assets, and additionally accounting practices does not distinguish between tax on operations and financial items (Petersen and Plenborg 2011). Thus, all tax assets and liabilities will be considered as operating items.
Other assets comprises other taxes, receivables from subsidiaries, receivables from other companies in which investment is held, prepayments (e.g prepaid interest), collateral receivables and sundry and other assets (BMW Group 2012). The majority of these items are considered as operating items in the analytical income statement, and as such, other assets are treated as operating assets in the analytical balance sheet. Additionally, according to (Easton et al. 2010), “other” assets and liabilities are normally assumed to be operating unless specific information suggests otherwise.
Inventories and trade receivables are both considered to be part of operations and thus regarded as operating assets. Moreover, receivables from sales financing, current tax and other assets are all considered as operating assets given the explanations above. Cash and cash equivalents are assumed to be operating cash needed to finance operating activities. It is assumed that any excess cash not needed to fund operating activities is invested in securities, used to repay debt, acquire treasury stock or paid out as dividend.
51 Non-current Liabilities
Other provisions comprise obligations for personnel and social expenses, obligations for ongoing operational expenses and “other obligations”. It is assumed that obligations for ongoing operational expenses (mainly warranty obligations) and personnel and social expenses are all related to operations.
BMW does not give any specific information on “other obligations” in their annual reports, thus, it is assumed that all “other provisions” are related to core operations and regarded as an operating liability.
Deferred tax is considered an operating liability given the previous arguments for classifying all tax items as operating. Other liabilities comprises other taxes, social security, advance payments from customers, deposits received, payables to subsidiaries, payables to other companies in which investments are held, deferred income, in addition to “other liabilities” that are not specifically classified. According to (Easton et al. 2010), “other” assets and liabilities are normally assumed to be operating unless specific information suggests otherwise. The majority of the classified items comprising other liabilities are here considered operating items, while no specific explanation has been provided in the annual reports regarding the non-classified “other liabilities”. As such, all other liabilities are regarded as operating liabilities.
Other provisions, current tax and other liabilities are all regarded as operating liabilities given the explanations above. Trade payables are also considered to be part of operations and thus considered as an operating liability.
18.104.22.168 Analytical Balance Sheet – Financial
This part of the analytical balance sheet includes the financial items, and is illustrated in appendix A.17.
The financial part of the balance sheet consists of equity, minority interest and net-interest bearing debt.
Invested capital is calculated in the financial balance sheet as total equity (including minority interest) plus total net-interest bearing debt, and should equal the invested capital derived in the operational analytical balance sheet, also illustrated in appendix A.17.
52 Other investments include investments in non-consolidated subsidiaries, investments in other companies and non-current marketable securities (BMW Group 2012). Investments in other companies and non-current marketable securities are considered financial investments and not part of operations.
It is also assumed that investments in non-consolidated subsidiaries are not part of operations, thus, all
“other investments” are regarded as financial assets.
Financial assets comprise derivative instruments, marketable securities, loans to third parties and
“other” items, and is as such are regarded as financial assets.
Financial assets comprise the items described above, and are the only current assets that are regarded as financial assets in the analytical balance sheet.
The equity items are straight forward except the minority interest. According to Petersen and Plenborg (2011), in valuation of firms, the required rate of return from minority interest would be different from the interest rate on debt and as such a strong argument for treating minority interest as equity capital.
Given this argument minority interest is treated as equity capital.
Pension provisions are recognized as a result of commitments to pay future vested pension benefits and current pensions to present and former employees of the BMW Group and their dependents according to BMW Group (2012). Petersen and Plenborg (2011) suggests that pension liabilities are interest bearing (discounted to present value), and should as such be treated as part of financing activities. Additionally, expenses from reversing the discounting of pensions obligations are treated as financial expenses in the analytical income statement. For these reasons, pension provisions are considered as financial liabilities.
Financial liabilities are also regarded as a financial liability in the analytical balance sheet.
Financial liabilities are the only current liabilities that are considered financial liabilities in the analytical balance sheet.