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How to build a functional assessment

How to build a functional assessment

Welink Accountants

Welink Accountants

Summary: 

 

1. How to build a functional assessment?

2. What is a functional assessment?

  • a. What is the purpose of a functional assessment?
  • b. How is a functional assessment prepared?
  • c. How to build a functional assessment?

 

1. How to build a functional assessment?

 

The functional balance sheet is a modified representation of an accounting balance sheet. This article helps you understand the financial structure of a company. To establish a functional balance sheet, it is necessary to rearrange or assemble different items of the balance sheet. This complex task must be entrusted to a professional specialised in accounting.

 

 

2. What is a functional assessment?

 

A functional balance sheet is a financial table where uses (assets) and resources (liabilities) are classified by function/use, in this case, the investment, financing, operating and non-operating cycles.

 

This statement uses the same items as the accounting balance sheet, but the terms "assets" and "liabilities" are replaced respectively by "uses" and "resources". It enables the masses of a company's balance sheet to be analysed from a new angle.

 

 

What is the purpose of a functional assessment?

 

Establishing a functional balance sheet is essential to highlight the financial structure of a company, comparing jobs and resources. This balance sheet makes it possible to directly compare certain financial elements:

 

  • durable goods (fixed assets) and stable financing (shareholders' equity and financial debts) ;
  • inventories/receivables and operating liabilities;
  • miscellaneous non-operating receivables and payables;
  • cash and cash equivalents and cash and cash equivalents.

 

The analysis of the functional balance sheet makes it possible to verify the financial health of a company. In fact, the overall networking capital (NWCF) must be positive to confirm the financial equilibrium of the structure. This FRNG represents the difference between stable resources and sustainable jobs. If the result is positive, the surplus will be used to finance the working capital requirement (WCR) related to operations. The balance will be paid to the net cash position (TN).

 

TN = FRNG - BFR

 

A functional financial balance sheet also provides a basis for calculating financial analysis ratios, including financial independence, coverage of stable employment, general liquidity and net debt. Indeed, functional balance sheet ratios help to assess a company's financial equilibrium.

 

 

How is a functional assessment prepared?

 

The certified public accountant must have the raw balance sheet data in front of him to prepare a functional balance sheet. The latter is composed of two columns where the jobs (on the left) and resources (on the right) will be placed. It is also split horizontally to separate stable items from circulating items.

The structure of the detailed functional balance sheet makes it possible to check in great detail whether each job or current asset corresponds to an appropriate method of financing: a resource or a current liability.

 

A sample functional balance sheet is shown below:

 

JOBS                                                                               RESOURCES

Stable jobs                                                                    Stable resources

Gross property, plant and equipment                            Shareholders' equity

Gross intangible assets                         Depreciation, amortisation and provisions

Financial fixed assets                                                  Long-term financial debts

Current assets                                                             Current liabilities

Operating current assets                                          Operating current liabilities

  Stocks                                                                         Supplier debts 

Accounts receivable

Non-operating current assets                                       Non-operating current liabilities

Miscellaneous receivables                                          Tax and social security liabilities

                                                                                       Miscellaneous debts

Active cash flow                                                              Passive cash flow 

   Caisse                                                                            Bank overdrafts

 Bank account                                                                     Bank overdrafts

  

 

How to build a functional assessment?

 

An accountant must build the functional balance sheet from the accounting balance sheet. Indeed, the accounting balance sheet and the functional balance sheet are interdependent. To build the functional balance sheet, the accountant has to reclassify or assemble different elements of the balance sheet. To this end, he must perform certain operations that are complex enough to make up the different cycles.

 

 

  • The investment cycle

 

Fixed assets must be included in stable employment by taking their gross value (excluding depreciation and impairment). The amount of depreciation and impairment of these fixed assets must be added to the shareholders' equity of stable resources.

 

Fixed assets acquired under finance leases are also classified as stable assets, but the accountant must enter their original value.

 

Accrued interest not yet due (ICNE) on loans is to be removed from the "financial fixed assets" item and moved to non-operating current assets.

 

 

  • The funding cycle

 

The capital appearing in the stable resources must be deducted from the possible uncalled subscribed capital (the latter is therefore deducted from the assets). The total bond redemption premiums are allocated to the related mandatory loans.

 

Accumulated depreciation on assets financed by leasing (which would have been applied in the event of purchase of these assets) is added to shareholders' equity. Their residual values must be recorded under stable financial debts.

 

Provisions for justified risks, relating to the long term, are assimilated to hidden reserves. They increase shareholders' equity. Provisions for unjustified risks, on the other hand, are transferred to operating or non-operating debts, depending on their nature.

 

When associates' current accounts are blocked, they must be added to shareholders' equity. However, these will remain as passive cash, if they are exempt from repayment at any time.

 

Accrued interest not yet due on loans must be deducted from the "Loans and borrowings and similar debt" item to be added to cash and cash equivalents. Similarly, bank overdrafts must be included in cash and cash equivalents.

 

  • The operating cycle

 

Inventories in progress are kept in current operating assets. This cycle also contains operating receivables, which are:

  • Advances and deposits paid on orders ;
  • prepaid expenses;
  • deductible VAT and VAT credit, if any;
  • discounted bills of exchange not yet due.

 

Operating liabilities are:

  • advances and deposits received ;
  • VAT, taxes and duties payable;
  • prepaid income.

 

The restatement of translation differences due to exchange rate fluctuations is more delicate:

  • decrease in receivables: translation differences - assets on trade receivables remain in current operating assets and are added to operating receivables ;
  • increase in liabilities: translation differences - assets on trade payables are removed from current operating assets and must then be deducted from operating liabilities;
  • increase in receivables: translation differences - liabilities on trade receivables are removed from current operating liabilities and must then be deducted from trade receivables;
  • Decrease in liabilities: Translation differences - liabilities on trade payables remain in current operating liabilities and are added to operating liabilities.

 

 

  • The non-operating cycle

The "other receivables" item is considered as non-operating receivables. Payables to suppliers of fixed assets, tax liabilities, and "miscellaneous liabilities" are non-operating liabilities. Dividends payable are removed from shareholders' equity and transferred to non-operating liabilities.

 

 

  • The cash cycle

If the marketable securities are rapidly transferable, they will have to be reclassified as active cash. The counterpart of discounted bills that have not yet matured must be recorded in cash and cash equivalents.

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