The French Chart of Accounts: A conceptual framework for financial analysis

Bernard Paris
Jean Fransois des Robert

For many experts, the very idea of a national accounting language invites controversy. On the one hand, its value arises from its contribution to more effective communication within the financial community; on the other hand, standardisation might bring rigidity and formalism in an ever-changing economy.

This article deals with the economic concepts underlying the French chart of accounts and its use by the Bank of France to provide a thorough financial review of enterprises. It focuses on the analysis of the income statement and a calculation of the value added by enterprises.

Presentation of the standard income statement: In the national chart of accounts, charges and revenues are classified under a three-layer statement on the basis of the matching principle. The structure of classes 6 and 7 is symmetrical as shown below.

For recurrent operations, a second criterion of analysis appears with the two-digit codification at the first level of subdivision:

(1) Presentation of the accounts has been simplified to get a better view of the concepts.

The structure of the Chart of account allows the calculation of two key financial concepts: the added value and the Gross operating surplus.

The added value:

The «value added» brought by the enterprise is calculated as the difference between sales of product (account 70-74) and expenses (accounts 60-61-62). From an economic point of view, the accounts 60, 61 and 62 include all expenses purchased from other enterprises, that can be analyzed as a mere «exchange» between economic entities, without creating any value.

As defined, the added value tells the specific contribution of an enterprise in the process of producing and selling goods. This contribution is closely linked with the weight and qualification of manpower as well as the amount of equipment needed to produce and sell the goods. The added value measures the real economic weight of the enterprise. It is a benchmark of performance and an indicator of actual development.

A further analysis of the income statement allows the calculation of intermediate results as follows:

The gross operating surplus

The gross operating surplus, as defined by the French chart of accounts, constitutes the resource obtained from operating activities to a) maintain and develop its working capital and b) to pay financial remuneration for money either borrowed or owned. The gross operating surplus is the basic income of the enterprise and represents the potential to produce liquidity.

According to the standard accounting model, the gross operating surplus appears as one component of the added value:

The gross operating surplus includes annual amortization, provision and financial result and profit before tax. The weight of the gross operating surplus within the added value may depend on the economic sector.

It should be underlined that the standardized codification easily enables the calculation of all intermediate results. This possibility becomes an outstanding advantage for a nationwide analysis of all economic activities.

La Centrale des bilans (Bureau of financial analysis of the Banque de France)

The objective of the «Centrale des bilans» is to analyze the annual reports of companies and to produce a report, which displays a financial review for each company. Dealing on a voluntary basis, enterprises provide the Centrale with a copy of their balance sheet and income statement. It should be reminded that these documents are produced on a standard pattern defined by the national chart of accounts. The Centrale may require additional information on the financing of fixed assets: loans and leases.

The financial report prepared by the Centrale contains the following elements:

1. Performance achieved: Total sales, gross margin and profitability
2. Evaluation of cash flow drawn from business activities
3. Financial structure of the company viewed as the result of performance and financial strategy.

The conceptual approach of the Centrale defines the profitability of an enterprise as the creation of an «income» i.e. the added value whose purpose is to pay off the following items:

• Human and financial resources (labor and invested capital)
• Taxes, levies
• Depreciation of fixed assets and risk incurred by doing business

For a company, the allocation if added value is a split between economic actors in the following pattern:

In the report the analysis of the added value stands as a spotlight of the review and the growth of the added value over years seems more significant that the increase in turnover.

The report of the Centrale indicates the variation of the added value over a four-year period and compares the data with the median figure of the industrial sector.

Company A:

In this example, it appears that company A is faring better than the average of its competitors, both in terms of weight and growth: The added value represents 78% of the turnover (national mean 72%) and increased by 11% in 2000 versus 6% for the sector.

The Gross operating surplus concept is used by the Centrale as a key figure for measuring the performance of a company. It represents a significant means to compare activities. The value of the gross operating surplus should be consistent with the acquisition of fixed assets by the enterprise.

For company A, the annual report prepared by the Centrale indicates that the ratio Gross operating profit/turnover amounts to 4% which is consistent with the national average for this sector.

The report of the Centrale can be viewed as a benchmark study, displaying a quick and comprehensive study of the financial standing of a company. The indicators enlighten the strengths and weaknesses of an enterprise, and focuses on the main issues that deserve a closer analysis. This article is not aiming at providing a full coverage of the report prepared by the Centrale. Nevertheless, it stresses out the usefulness of a well-designed accounting structure that becomes a valuable tool for financial analysis. If the primary objective of accounting is to provide information for decision making, the financial report prepared by the Centrale can be helpful for the entrepreneurs in the preparation of a business strategy.

Bernard Paris and Jean Fransois des Robert are Members of the French Accounting Organisation (OEC). They can be contacted by telephone +331 (44) 15-60-48.