El proceso de donación y trasplante

Balance sheets provide third parties (stakeholders, financers, suppliers, partners, debenture holders etc.) with information on company assets and liabilities. However, entrepreneurs can also use this information to understand the company’s state of health and assess whether any changes need to be made to company policies.

In Italy joint stock companies must draw up and file their balance sheets. This procedure is governed by the Civil Code and National Italian Accounting Standards and, as regards listed companies, international accounting standards (IAS). Balance sheets consist of the following compulsory documents: Asset and Liability statement, Profit and Loss Account and Supplementary Note.

The regulations governing balance sheets are those set out in articles from 2423 to 2426 of the Civil Code, as amended by Legislative Decree No 127 of 9 April 1991 in acknowledgement of EEC Directive IV and subsequent amendments made by Legislative Decree No 6 of 17 January 2003 reforming company law.

In particular, the law states that the supplementary note must contain a series of in-depth information on the items entered therein. However, the asset and liability statement and profit and loss account do not provide management type information in the way they are structured in accordance with the law.

Therefore, the accounting layout prescribed by the law must be interpreted differently in order to extrapolate management type data both from the asset and liability statement and profit and loss account. “Reclassification” could be defined as a way of better interpreting company dynamics thus favouring the comparison of data over time (in the case of data used by the same company in different balance sheets) and/or space (in the case of different companies) by identifying a series of intermediate results.

It should be noted that reclassification does not aim to ascertain the quality and truth of the data entered.

As regards reclassification methods, it should be noted that balance sheet analysis is constantly being updated and developed. In fact, it is not necessary to identify an absolute method as it is up to the analyst to choose the most suitable model for the purpose.

The most widespread method used for reclassifying the profit and loss account is production value and added value as most similar to that set out in the Civil Code. In particular,

reclassifying the profit and loss account according to an added value model highlights how much of the sales revenue, net of costs sustained, is turned into cash.

Lastly, it should be noted that business analyses should always consider the consolidated balance sheet, if drawn up, in order to analyse the economic values net of intercompany relationships.

a) Profit and loss account reclassification.

The main principle that should guide analysts in their work is whatever the configuration adopted in drawing up the Profit and Loss Account the economic results must reconcile at an operating income level.

This added value criterion, reclassification method often used to assess how the operating result was generated and moreover the only one that can easily be used starting from data present in civil law balance sheets, highlights the most significant margins in the profit and loss account and enables results to be analysed in detail.

According to this model, the Profit and Loss Account maintains its step-by-step structure that is reaching the operating result progressively by passing through intermediate results necessary for correct analysis.

The production value and added value profit and loss account layout can be summarised as follows:

The above layout satisfies a basic principle: separating typical from atypical management. In particular overall company management is dividend into three macro-areas:

• typical management: relating to typical company activities including all purchasing-

transformation-sales cycle related items;

• financial management: relating to the management of financial means including

interest on third party capital borrowed and any resources borrowed;

• extraordinary management: this generally includes all economic items relating to

operations that do not fall within normal entrepreneurial activities.

A further item is often added to the above-mentioned management areas when revenue and cost flows do not refer to typical purchasing, transformation and sales activities. This macro- area is called additional management. This is only found, by way of example, in the case of

Production value and added value Profit and Loss Account

Sales Revenue

net of discounst, returns and allowances

+/- Variations in stock of finished and semi-finished products and those in progress

+/- Variations in work in progress

+ Increases in fixed assets due to internal work

+ Other proceeds and revenue Production value

- Cost to purchase external production factors

Added value

- Employee related costs

Gross operating margin (EBITDA)

-

Net operating margin (EBIT) +/- Balance financial management

Current income

+/- Balance additional management +/- Balance extraordinary management

Pre-tax income - Income taxi

civil buildings leased to third parties or financial flows linked to the investment of vast liquid assets generated by the management.

Now let us examine each of the intermediate results that are obtained from this type of reclassification:

• production value: this is the algebraic sum of sales revenue, net of discounts, returns

and allowances, variation in stock of finished products and those in progress, variation in fixed assets in progress for work to order or in economy. This value represents actual production activities carried out by the company or wealth created during the course of the year gross of those factors that have contributed to its achievement, whether intended for distribution outside the company (as normally happens) or stock, work in progress to order or to increase those fixed assets intended for internal use;

• added value: this is the difference between the production value and external

production factors used in the production process. Typically they include: raw material consumption, service purchasing costs, enjoyment of third party assets and sundry management charges. Added value identifies the company’s margin net of production costs, without considering staff and depreciation costs. This margin is particularly significant as it expresses the wealth that, following production, may be distributed amongst those taking part in the activities carried out by the company;

• gross operating margin (EBITDA, earning before interest taxes depreciation

amortization): this margin, resulting from the difference between added value and labour

costs, is highly significant as it could almost be considered an operating cash flow (if all revenue and costs were collected and paid, the cash flow generated by the operating management would be the gross operating margin) and when compared with the turnover indicates the company’s theoretical capacity to produce cash (finance itself). Moreover, this value is special in the fact that, not including highly subjective items such as depreciation and provisions, it is more immune to budget policies. The EBITDA is a very significant value for assessing a company’s ability to meet its commitments. In fact, it indicates a company’s ability to finance itself and therefore generate the resources necessary to pay sources of finance;

• net operating margin (EBIT, earning before interest and taxes): this margin is

result of company transformation, therefore the result the company is able to generate with typical management, without bearing in mind financial, extraordinary and fiscal aspects. This margin measures the operating result before remunerating those who hold the capital (credit, with financial charges, risk, with net profit) and the State (taxes);

• current income: this is the algebraic sum of Net Operating Margin and financial

management;

• pre-tax income: this is obtained adding current income to extraordinary management;

• net income: this is obtained subtracting taxes to be paid from gross profit.

b) Asset and liability statement reclassification.

As regards asset and liability statements, these are revised according to the data needed. Therefore, two different models may be constructed: management type and financial type asset and liability statements.

In particular, management type asset and liability statements define, on the one hand, investments, that is how company resources are used, divided according to their propensity to remain within the company or renew themselves cyclically according to the production process. Whereas in the finance related section, that is those subjects that have contributed capital to the company, a distinction is made between third party capital related sources (finance in the true sense of the word) and those linked to shareholders underwriting capital. Asset and liability statements aim to highlight what part of the capital, whether it be rapid or slow turnover, is invested in typical company management (also called operating) and what part represents additional/functional type investments.

c) Management type asset and liability statement.

Asset and liability statements reclassified according to the management criteria adopt a logic linked to the nature of the investment or source.

Investments are studied according to their function. If relating to assets necessary to run the company production cycle properly they are operating investments; whereas, if they relate to investments not linked to the production cycle they are financial or extra-characteristic

investments.

Sources of finance are divided according to whether they originate or not from the production process. Debts arising during the normal purchasing-production-sales cycle are operating

sources; those resulting from the desire to obtain external sources of finance to be invested within the company are financial sources; lastly come the net worth items.

Therefore, the reclassification procedure follows a functional logic.

In practice, items need to be reorganised according to: a) their involvement in typical company operating activities; b) their rotation distinguishing between investments and circulating and structural sources.

Investments are divided into:

• rapid turnover investments: this group includes receivables to customers, receivables

to subsidiaries, affiliates and parent companies, stock of raw materials, finished and semi- finished products and those in progress, advances to suppliers, receivables to others and accruals and deferrals;

• structural investments: these include all fixed asset items to be used within the

company production cycle, such as intangible fixed assets, tangible fixed assets (unless they are purely additional investments) and part of the financial fixed assets. In this regard, it

Intangible fixed assets Tangible fixed assets

Strategic shareholdings Net structural investments Additional investments Liquid assets Receivables to customers Intergroup credits Non-strategic financial fixed assets

Financial credits Cash Cheques ASSETS Stock Commercial circulating capital Accruals and deferrals

Bank and postal accounts Building for civil use

should be noted that fixed investments should only be included in this group if relating to shareholdings in companies that are of strategic importance for company activity. Whereas, shareholdings that are solely a financial investment should not be included;

• additional investments: this group includes all investments made outside typical

company activities, such as for example those in companies not operating within company activities (not strategic), fixed assets not of industrial use, receivables to subsidiaries, affiliates and parent companies of a financial nature, other securities and shareholdings held for investment purposes only;

• liquid assets: this includes cash balances, cheques and bank and postal current

Sources are divided into:

• operating sources: these include payables to suppliers, advances from customers,

payables to subsidiaries, affiliates and parent companies of a commercial nature, tax debts and those with social security institutes, the tax fund if relating to taxes resulting from typical activities (tax funds resulting from inspections and sanctions are excluded);

• structural sources: these typically include items relating to the reserve for risks and

charges and severance pay. There are various indications in law that lean towards including these inn operating liabilities; however, said funds, even though of an operational importance, are usually of a structural nature (for example the severance pay fund is linked to work, typically a component of the company “structure”). This leads to consider these sources as structural sources and not commercial liabilities;

• financial sources: these include all those liabilities of a financial nature, irrespective

of their due date. Therefore, they include debentures (even convertible), payables to partners and other financiers, payables to banks and share of payables to subsidiaries, affiliates and parent companies of a financial nature;

• risk capital related sources: these include all net worth items, such as capital stock

paid-in share issue related reserves, company asset appreciation related capital reserves, Financial sources Operating sources Capital Paid-in surplus reserve Write-up reserve Legal reserve

Debentures and other financial debts Payables to banks Payables to suppliers Statutory reserve Profits (losses) carried forward Structural sources SOURCES OF FINANCE Net worth

Reserve for risks and charges Tax debts and tax

fund

Profit reserves Severance pay fund

Intergroup commercial debts Intergroup financial debts Operating profits (losses)

profit reserves in accordance with the law, articles of association and meeting resolution and analysed year’s profit.

It is possible, on the one hand, to determine the weight of slow or rapid turnover capital invested in the company with this type of configuration; on the other the composition of sources of finance between own capital and that loaned by third parties.

The first phase involves moving operating liabilities to those assets with inverse sign, used to calculate operating assets. This results in net circulating capital, that is, rapid turnover capital invested in typical company activities.

Net circulating capital, especially if its variation is determined over time, is an important monetary cycle indicator, as closely linked to the production process. Typically those companies able to collect cash payments from the sale of their products and defer payments to suppliers are able to invest these liquid assets in production activities, and even generate them to invest in other management sectors. Whereas, those with a positive monetary cycle that, although deferring payments to suppliers are unable to collect cash payments from sales, need additional financial resources to meet increasing sales volumes.

The presence of positive net circulating capital is particular to industrial enterprises, as starting a production process implies incurring costs before collecting the relative payments from sales.

The second aggregate is obtained deducting structural sources from structural investments, in order to identify net structural investments. Said value identifies those fixed assets that are instrumental in carrying out the production process, net of those sources that, due to their nature, are characterised as consolidated liabilities.

The capital invested in operating management (COIN) is determined adding net circulating capital to net structural investments. This value differs from the total assets of the asset and liability statement in that it only includes investments in typical activities without including additional or ex-operating investments.

Lastly, it is common practice to deduct cash and liquid financial asset items from financial sources, identifying in this way an aggregate called net financial standing. This measures the company’s exposure to third party financiers and may be determined in the intercompany or extra group configuration. Liquid assets are deducted from financial sources possibly to reduce exposure to holders of loaned capital.

The aforementioned items must be moved with caution as, although aiding interpretation, contribute to the loss of information or misinterpretation of financial phenomena and if the data obtained is misleading it may be best to keep it separate.

4.2.1. Maflow S.p.A. balance sheet analysis.

Analysing the economic and financial results of past balance sheets is an effective way of understanding the origin and dynamics of a company’s economic equilibrium.

This analysis was carried out on Maflow S.p.A.’s 2005-2008 balance sheets. The aim was to highlight the most significant variations in the period considered using historical data obtained from the Company’s balance sheets.

Maflow S.p.A.’s profit and loss account was reclassified according to the added value model.

Maflow S.p.A.’s profit and loss account.

The economic analysis bears in mind the 2005-2008 period.

Currently, Company activities are carried out in 2 plants and precisely:

• Trezzano sul Naviglio, covered surface area of around 14.000 m² where activities to machine steel and aluminium pipes, assemble them with rubber hoses from the Ascoli Piceno plant, as well as research, development and quality control for the entire Maflow Group are also carried out here. Activities are ISO TS 16949:2002 certified;

• Ascoli Piceno, surface area of around 12.000 m², where rubber (both vulcanised and “green”) hose production activities are located. These are sold both to other companies of the Maflow Group for assembly and third parties. Activities are ISO TS 16949:2002 certified.

The following table reclassifies profit and loss account data, taken from the Company’s approved balance sheets, according to the added value model.