Recast Financial Statements – Definition

Cite this article as:"Recast Financial Statements – Definition," in The Business Professor, updated December 11, 2018, last accessed May 29, 2020, https://thebusinessprofessor.com/lesson/recast-financial-statements-explained/.

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Recast Financial Statements Definition

Companies adjust their financial statements in order to reflect the actual financial benefits earned by the company. This is known as recasting, and the adjusted statements are known as recast financials. Companies recast their statements to express the actual cash-flow benefits of the company in a given period of time. They adjust the financial statements in accordance with the industry standard ratios.

A Little More on What is Recasting Financial Statements

Businesses may adjust their balance sheet or the profit-loss statement as part of the recasting.
In the balance sheet, the account receivables can be modified by removing uncollectible accounts as the bad debt expense. One can do this by reviewing the account receivable aging report. Damaged and obsolete inventory need to be adjusted out. The amounts due from shareholders as assets or due shareholders as liabilities are to be removed from the statement. After a business transaction, the prepaid expense can be removed from the statement if that does not remain with the buyer. While purchasing an asset which loses its value over the time the businesses may adjust these to their fair market value. The higher basis for asset depreciation gives a tax advantage to the business.

Real estate owned by the company needs to be removed from the statement if that is not a part of the business purchase. A balance sheet is to be adjusted to state the amount of cash required for running the operations of the business.

Intangible assets such as company goodwill can be adjusted in recast finance. Any unpaid liabilities must be included in a balance sheet.

The Profit and Loss Statement can be adjusted as well to reflect the actual earning. The cost of the good needs to be adjusted as per the historic averages. The salary of the owner and owner’s family members working with the company are to be adjusted according to market rates. The depreciation expense of the assets can be adjusted by reviewing its expected useful life. If the company owns the real estate property from where the business is being operated, a fair market rent needs to be added as a business expense. The expenses incurred at the owner’s discretion can be adjusted during recast finance. Any one-time transaction needs to be excluded from recast finance. Only those revenues and expenses that are directly related to the normal operations of the business are to be included in recast finance. Unusual and one-time transactions are to be kept out from the statement.

References for Recast Financials

https://www.genequityco.com/insights/recasting-financial-statements-vital-to-your-business-valuation
https://financial-dictionary.thefreedictionary.com/recast

Academic Research on Recast Financials

  • ·       Financial statement recasting and credit risk assessment, Batta, G., Ganguly, A., & Rosett, J. (2014). Accounting & Finance54(1), 47-82. The main aim of this paper is to explain the importance of the adjustment made to the corporate financial statement as regards the credit risk assessment. Another significance of this paper is that it tends to examine the individual adjustment made at a time. According to the research made in this paper, we find out that financial statement recasting adjustment aims at getting a better reflection of the firms’ financing cost, indebtedness and recurring income than the reported financial numbers which are basically reflected in the bond yield spreads and also have an economically significant impact on loss forecasting and credit pricing.
  • ·       The reaction of Share Prices to Issue of IPOs from the NSE: Empirical Evidence, Waweru, J. M. (2010). Unpublished MBA Project, University of Nairobi. According to this paper, the stock exchange market is defined as a market that basically deals in the exchange of securities allotted by publicly quoted governments and private companies.  This paper aims of the paper are to study the relationship between the new price of the IPO and the price movement of the securities of companies stated in the NSE. This paper aims to establish if there is an existing relationship between the stock prices as it might have been influenced by the news of initial public offerings in the Nairobi Stock Exchange market. The study time period has stated in this paper was the period between 2004- 2009.
  • ·       Disclosure-derived financial statement adjustments in equity valuation, Batta, G., Ganguly, A., & Rosett, J. G. (2014). Review of Pacific Basin Financial Markets and Policies17(02), 1450008. According to this research thesis, the equity value relevance of disclosure-derived financial statement adjustments was studied. According to the return test and price level test carried out in this paper, it was reported that the financial number have relatively higher explanatory power over the adjustment numbers. The result gotten from this paper suggests that for the summary valuation inputs like assets, liability and the operating profitability, analysts should not change the adjusted numbers for reported numbers.
  • ·       The direct relevance of accounting information for credit default swap pricing, Batta, G. (2011). Journal of Business Finance & Accounting38(9‐10), 1096-1122. This study tests the direct importance of the accounting information for the pricing of the credit default swap (CDS). Before the research on the impact of accounting information for the pricing of the CDS, this pricing has however neglected to include either the output or the theoretically analyzed CDS pricing model or the credit rating of which they both should be in form of a stored credit relevance accounting information. This result notes the empirical findings which give a larger and indirect role for the accounting information in the pricing of the credit default swap (CDS) which helps to play a pertinent role in the discovery of the credit risk prices.
  • ·       Preparing financial graphics: principles to make your presentations more effective, Fulkerson, C. L., Pitman, M. K., & Frownfelter-Lohrke, C. (1999). The CPA Journal69(6), 28. This paper explains the principles to adopt when analyzing the strategies employed to make financial presentations more effective. This study also designed the means of preparing financial graphics.
  • ·       Private company accounting: A concept whose time has come, Love, V. J. (2011). The CPA Journal81(2), 16. This research paper basically explains the concept by which private companies adopt to explain their accounting method. It should be noted that the accounting method of private companies will be different from government accounting strategies. Hence, this paper helps to shed more light on the differences between these two sectors.
  • ·       Why are CFO insider trades more informative?, S. Knewtson, H., & R. Nofsinger, J. (2014). Managerial Finance40(2), 157-175. The main aim of this paper is to test maybe the stronger information content of the chief financial officer (CFO) insider trading relative to that of the chief executive officers was as a result gotten from a different motive to exploit the information as regards the form that exists between outside stakeholders and executives or from differing financial acumen between the Chief Executive Officers and the Chief Financial Officers. These issues were studied in this paper and the way forward was explained as well.
  • ·       A Close Look at Valuation Methods, Price, J. (2011). Equity25(3), 3. This research paper explains the valuation methods explored in the financial accounting sector. Rapt attention was placed on the valuation processes and these methods were totally explained in this paper.
  • ·       Evaluating corporate performance within the frame of the expert systems technology, Xidonas, P., Ergazakis, E., Ergazakis, K., Metaxiotis, K., & Psarras, J. (2009). International Journal of Data Mining, Modelling and Management1(3), 261-290. According to this research thesis, evaluating corporate performance within the frame of the expert system technology was studied in this paper.

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