Abstract

This master’s thesis deals with accounting issues in the water supply industry. The Danish Financial Statements Act aims at the preparation of value-based financial statements with focus on value creation and earnings potential. This may be challenging for the companies in the water supply industry as they are to be run on a self-sustaining basis.
The thesis addresses three material issues in relation to the preparation of financial statements under the Danish Financial Statements Act. These are: transfer of business without sales fee, recognition of connection fee and statement of opening balance sheet.
Mainly the statement of opening balance sheet has been challenging for the industry. Water supply is typically managed by the local authority and has been run in corporate form since the beginning of 2010. An opening balance sheet had to be prepared in connection with the transition into a company. The calculation of the company’s fixed assets posed a challenge as no sufficient and reliable data basis was available. This, combined with the choice of method of recognition in the financial statements, has been challenging. At the calculation of the fair value of future cash flows generated by the assets, future discounting will result in very low recognition if the discounting is determined as in the general market. Even if adjusted to the conditions of the water supply industry, the determination of fair value will result in a low value of the asset.
The master’s thesis also addresses the transfer of business without sales fee being a challenge in connection with the recognition and measurement in the financial statements. This is a consequence of the Danish Financial Statements Act aiming at recognition of the acquired assets under a value-based approach.
The thesis examines published Annual Reports in order to discuss whether the recognition of property, plant and equipment has given rise to any challenges. In this connection, focus has been on the financial statement user’s assessment of the annual report and on whether the recognition provides a consistent basis for comparison.
The result of my examination and discussions is that there are different methods for recognition of property, plant and equipment, which have a material impact on the company’s balance sheet and income statement. Therefore, the thesis concludes that it is difficult to compare different financial statements in connection with the transition to the Danish Financial Statements Act.
Moreover, the thesis concludes that the value-based approach to financial reporting poses challenges. The value-based approach focuses on earning potential, which is contrary to the legal basis for a water supply. The value-based approach makes a wide-ranging understanding of the methods of recognition available for the companies and their advisors. This means that the financial statements are not comparable in the water industry. It is important to show a comparable financial statement for the industry in order to give a true and fair view of the Annual Report. Therefore, the Danish Financial Statements Act is not suitable for the recognition of transactions and events when the Act requires recognition according to a value-based approach. The provisions of the Danish Financial Statements Act concerning transaction-based financial reporting are more suitable in order to give the financial statement user a true and fair view. The transaction-based approach is built on actual costs and earnings.