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Financial Reporting under IFRS A Topic Based
Approach 2nd Edition Wolfgang Dick Digital Instant
Download
Author(s): Wolfgang Dick, Franck Missonier-Piera
ISBN(s): 9780470688311, 0470688319
Edition: 2
File Details: PDF, 5.69 MB
Year: 2010
Language: english
WILEY
Financial Reporting
under IFRS
WILEY
Financial
Reporting
under IFRS
A Topic Based Approach

Wolfgang Dick Franck Missonier-Piera

A John Wiley and Sons, Ltd., Publication

This edition first published 2010

C 2010 John Wiley & Sons, Ltd

Registered office
John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United
Kingdom
For details of our global editorial offices, for customer services and for information about how to apply
for permission to reuse the copyright material in this book please see our website at www.wiley.com.
The right of the author to be identified as the author of this work has been asserted in accordance with
the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
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required, the services of a competent professional should be sought.
Library of Congress Cataloging-in-Publication Data
Dick, Wolfgang, 1965–
Franck, Missonier-Piera, 1968-Financial reporting under IFRS : a topic based approach / Wolfgang
Dick, Franck Missonier-Piera.
p. cm. – (Wiley regulatory reporting ; 1)
Includes bibliographical references and index.
ISBN 978-0-470-68831-1 (pbk.)
1. Financial statements. 2. Accounting–Standards. 3. International finance.
I. Missonier-Piera, Franck. II. Title.
HF5681.B2D515 2010
657 .3–dc22
2010021933
A catalogue record for this book is available from the British Library.
ISBN 978-0-470-68831-1 (paperback), ISBN 978-0-470-97385-1 (ebk),
ISBN 978-0-470-97162-8 (ebk), ISBN 978-0-470-97161-1 (ebk)
Typeset in 10/11pt Times-Roman by Aptara Inc., New Delhi, India
Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire
 CONTENTS
Page
Chapter Title No.
Foreword vii
Introduction ix
Acknowledgements xiii
1 Financial Statements and Accounting Mechanisms . . . . . . . . . . . . . . . . . 1
2 Income from Ordinary Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3 Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4 Non-financial Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5 Non-current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
6 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
7 Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
8 Group Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
9 Financial Analysis and Communication . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
10 The IASB and Development of the IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Index 327
 FOREWORD
This textbook is the outcome of collective thinking and the experience of professors from
several institutions. Accountability and responsibility for this book lie with Wolfgang Dick
and Franck Missonier-Piera. Wolfgang Dick is a Professor at the ESSEC Business School
(France) and co-holder of the ESSEC-KPMG Chair in Financial Reporting. The interests
of Wolfgang Dick relate to accounting harmonization, IFRS, intangible assets and corporate
governance. Franck Missonier-Piera is a Professor at the University of Geneva (Switzerland).
His interests relate to IFRS, corporate governance, financial analysis and accounting for
financial instruments.

A French version of the book has been developed with the cooperation of the following
colleagues. Corinne Bessieux–Ollier, Professor of Accounting at Montpellier Business School
(France). Roger Dinasquet, Professor of Accounting at the ESSEC Business School. Bernard
Esnault, Professor of Accounting at the ESSEC Business School. Jean-Luc Rossignol, Senior
Lecturer at the University of Franche-Comté (France) and Peter Walton, Professor at the
ESSEC Business School and the Open University (UK).
 INTRODUCTION
The European Commission now requires companies in the European Union (EU) which use
public savings to present their accounts according to the standards of the IASB (Interna­
tional Accounting Standards Board). This has implications for a majority of them. Until 2004,
companies listed in the EU could use national accounting standards. For example, in France,
consolidated financial statements had been prepared in accordance with rule CRC 99-02. This
rule now applies only to the consolidated accounts of non-listed groups. The introduction of the
standards of the IASB, i.e. IFRS (International Financial Reporting Standards), has imposed
a major change in the presentation of accounts. The accounting and finance departments of
listed companies, as well as all users of financial statements, should be able to understand the
principles of the IFRS. This book therefore refers to international rather than national account­
ing standards. For the various actors of the economy, harmonization of rules of measurement
and presentation of financial statements will facilitate comparison of the financial situation
and performance of firms across different countries. However, before presenting the principles
of preparation and presentation of accounting information, one should understand the role of
that information and the objectives of the IASB.

1. USERS OF FINANCIAL AND ACCOUNTING INFORMATION

The financial statements meet the information needs of many users, who are:
� Current and potential investors (shareholders). Early users of financial informa­
tion, they are concerned by the risk inherent in their investment and its profitability.
They seek information to determine if they should buy, hold or sell shares in a par­
ticular company. Shareholders also want to estimate the company’s ability to pay
dividends.
� Creditors. The information they seek is to enable them to determine whether their loans
and interest related thereto will be paid at maturity dates.
� Suppliers. The information they seek is to enable them to determine if the amounts that
are due will be paid at maturity.
� Customers. They seek information on business continuity, especially when they have
long-term relationships with the firm (i.e. the supplier).
� Employees and their representatives. They seek information on the stability and conti­
nuity of the operations of the company that employs them. They are also concerned by
the profitability of the company, reflecting its ability to pay employees, provide benefits
on retirement and employment opportunities.
� States and their agencies. They care about including the allocation of resources gener­
ated by businesses. They thus determine the appropriate tax policies based on national
income statistics (for example). It is therefore necessary to impose disclosure require­
ments.
� The public. They are interested in the firm’s activities, because it contributes substan­
tially to the local economy, including employing a large staff or using local suppliers.
The financial statements can inform them of trends and recent changes to the company’s
prosperity and the extent of its activities.
x Financial Reporting under IFRS

2. THE ROLE OF ACCOUNTING INFORMATION

The many users of financial statements have specific information needs. The financial state­
ments serve two main functions – not mutually exclusive – and thus meet the needs of most
users:
� An informational role. Numerous users need to estimate the value of a company. Thus,
when evaluating, potential investors (insurance companies, investment companies, pen­
sion funds, etc.), financial analysts and other market participants are concerned both
with the results of the company and its future performance. Accounting earnings are
one of the variables used by investors. Similarly, the estimated cost of credit depends
in part on the financial health of the company. Thus, incurring excessive debt and poor
earnings may affect the granting of new loans. From the simple evaluation of the fi­
nancial position of a firm wishing to borrow from a bank to the complex system of
assessment of rating agencies (e.g. Standard & Poor’s, Moody’s), performance, lever­
age and solvency ratios are at the heart of the assessment process of capital suppliers.
They are based on accounting data published by the company.
� A contractual role. Accounting data can also help to control the proper execution of
contracts between the firm and its business partners. Special contracts govern the rela­
tionship between the firm and its stakeholders (e.g. creditors, suppliers, staff, company
management, etc.). The contracts of the firm based on accounting data are contingent on
the peculiarities of each company. For example, the employment contracts of executives
link some of their compensation to performance indicators (return on equity, return on
assets, etc.) to encourage them to maximize the value of the firm. Loan agreements
may include specific covenants to protect the interest of creditors. For example, the
contract may limit the level of debt (measured with accounting data) and may restrict
the payment of dividends.

The financial statements do not meet all information needs of users. However, these latter have
common needs. Investors are providers of risk capital to the entity, and the IASB considers
that when the financial statements satisfy the needs of investors, they also satisfy most users.

3. OBJECTIVES OF THE IASB

To meet the needs of shareholders and investors regarding financial and accounting informa­
tion, the IASB has three objectives of standardization, in its preface to the IFRS:
� To develop, in the public interest, a single set of global standards, understandable and
applicable, that must provide information of high quality, transparent and comparable
with regards to financial statements and other accounting data. This helps users of
information, including those involved in capital markets, to make economic decisions.
� To promote the use and rigorous application of these standards.
� To work actively with the standard setters in different countries to bring about con­
vergence of accounting standards in different countries with IFRS, in order to obtain
high-quality solutions.

The Framework for the Preparation and the Presentation of Financial Statements of the IASB
presents in greater detail the objectives of financial statements, their qualitative characteristics
and their components. In theory, when decisions on standards are taken, the IASB should
Introduction xi

ensure compliance with the framework, which states that the objective of financial statements
is to provide information on the financial position, performance and change in the financial
position of an entity that is useful to a wide range of users in making economic decisions.

The economic decisions taken by users of financial statements require evaluation of a com­
pany’s capabilities to generate cash and cash equivalent, and their maturity or the assurance of
their realization. The financial position of a company is affected by the economic resources it
controls, its financial structure, liquidity and solvency and its ability to adapt to environmental
changes.

Structure Plan

The financial statements are crucial in decision making and should reflect the resources that
the company controls. Components of financial statements are explained in terms of assets and
liabilities. The balance sheet shows the assets and liabilities of the company, and the difference
represents the residual interest of the shareholders.

Chapter 1 (“Financial Statements and Accounting Mechanisms”) presents the structure and
mechanisms of preparation of financial statements. Chapter 2 (“Income from Ordinary Activi­
ties”) addresses the company’s performance, measured by the difference between the revenues
and expenses of the company for a given period. Revenues and expenses are in a financial
statement: the income statement (Profit or Loss account). Revenues come from an increase in
assets or a decrease in liabilities. As for expenses, they come from a decrease in assets or an
increase in liabilities. Any designer of accounting rules has to decide whether to start from the
income statement when making measurements (i.e. by looking at the commercial transactions)
and then consider the balance sheet as a remainder, or to start from the balance sheet (i.e. what
wealth the company has generated and what are its obligations) with changes in the balance
sheet items expressed within the income statement.

Chapters 3 (“Current Assets”) and 5 (“Non-current Assets”) handle the assets used for business
operations. They generate a number of obligations towards suppliers when goods or raw
materials are purchased on credit and towards the employees in terms of compensation, but
also pension contributions (Chapter 4, “Non-financial Liabilities”).

Chapter 6 (“Financing”) presents the main financial obligations, for example vis-à-vis credit
institutions. Chapter 7 (“Taxation”) deals purely with fiscal obligations. The presentation of
financial statements of a group of companies requires specific accounting treatments, presented
in Chapter 8 (“Group Accounts”).

Chapter 9 (“Financial Analysis and Communication”) analyzes all of the information provided
both from the perspective of credit risk and profitability for shareholders.

Finally, Chapter 10 (“The IASB and Development of the IFRS”) reviews the history of the
IASB and the continuous process of developing future international standards.
 ACKNOWLEDGEMENTS
We wish to thank the companies that have allowed this book to be richly illustrated and thus
promote the understanding of the complex topic that is the IFRS. These are Accor, Arcelor
Mittal, AstraZeneca, Bic, BP France, British Airways, Cap Gémini, Club Med, Danone,
Deutsche Telekom, Fiat, Lafarge, L’Or´eal, LVMH, PSA Peugeot-Citro¨en, Publicis, Renault,
Rolls Royce, Schneider Electric, Suez Environnement, Total, TUI, Unibail Rodamco, Unilever,
Vinci, Vodafone and Volkswagen.

We also wish to thank Thomas Dumoulin, Vincent Ferry, Thomas Gaimard, Rachel Gorney,
Stefan Jensen and Kanchan Rabadia for their help in copy editing the chapters, J´er´emy Borot
for his valuable contribution in drafting the exercises, and Guillaume Pech and Fanny Sergent
for managing relationships with the quoted companies.

This book has received the financial support of the ESSEC Research Center, the ESSEC-KPMG
Chair in Financial Reporting, and the EMLyon CERA Chair in Growth firm.
1 FINANCIAL STATEMENTS AND
ACCOUNTING MECHANISMS
Financial disclosure has become a critical function for businesses. Today, firms are under
pressure from various stakeholders (financial markets, the State, clients, employees, etc.) and
are therefore engaged in information policies, in order to meet changing requirements. Thus,
we can see that annual reports are providing a growing supply of information. It covers not
only the needs of corporate governance, through the establishment of a management report
and description of the principal organs of corporate control (for example, the structure of the
Board and capital, the firm’s Audit committee, the salaries, etc.), but also those related to
the firm’s environmental responsibility. Other documents and summary tables – the financial
statements – also provide various business partners with a wide range of information about
the nature and performance of the firm’s activity. They perform various functions. On the
one hand, they can serve as evidence or control tools for monitoring the performance of
contracts between the firm and its partners. On the other hand, they provide investors and
other users with relevant information for economic decision making. Financial statements are
therefore supposed to better reflect the economic situation of the company so that investors
can properly evaluate the performance (section 1.1). In order to produce useful and relevant
information, the preparation of financial statements is based on a number of principles, uses
its own mechanisms of information processing (section 1.2) and allows a rigorous synthesis.

1.1 FINANCIAL STATEMENTS

The objective of financial statements is to inform all stakeholders about the business situation
at a given date. We can identify several groups of regular users of financial statements. The
current or potential owners of the company (shareholders for limited liability companies) are
the first to be concerned by the financial statements. They are interested in the performance of
the company in order to measure the profitability of their investment. On a long-term basis, it
is also useful to know the evolution of business investments in order to evaluate if the company
will be able to generate profits in the future, and therefore to distribute dividends. For similar
reasons, the management team is also concerned by the information contained in the financial
statements. Indeed, shareholders have delegated the management of their capital invested to
them. Financial statements therefore provide a means for controlling the financial performance
of the management team, by informing the owners of the quality of their decisions. In that
matter, financial analysts are an important group of users. Their objective is to assess the
company as a whole and to make recommendations on whether to invest in it or not. Many
banks and other current and potential investors use the recommendations of these experts for
decision-making purposes. Thus, the company must necessarily “supply” them with the most
complete information possible. Although analysts do not exclusively base their decision on
the financial statements, the latter represent a fundamental element of their analysis.

Other users of financial statements are the bankers, suppliers and other creditors who wish to
know whether the company is – and will be – able to meet its financial commitments. This is
related to both the reimbursement of debts and the payment of interest on loans. Moreover,
2 Financial Reporting under IFRS

the State, local authorities and social organizations refer to the accounting records to calculate
the contributions and corporate taxes payable by the company. Finally, employees and their
representatives also need information on the situation of the firm. It allows them to determine
the outlooks on job security and define their social demands.

All these groups of users need information, in near real time, on the financial situation,
performance and the status of the company’s cash account.

The financial situation consists in identifying the assets used by the company (lands, buildings,
machinery, vehicles, inventory, receivables, and cash) and the financial resources, evaluating them
and analyzing the evolution of their value over time.

The financial situation consists, at first, in identifying the assets used by the company (for
example, lands, buildings, machinery, vehicles, inventory, receivables and cash), evaluating
them and analyzing the evolution of their value over time. Meanwhile, the evolution of the
financial resources, which enabled the acquisition of those assets, must also be carefully
monitored. For instance, the more the company gets into debt, the more difficult it will be to
reimburse its debts. Even a slight increase in debt can have significant consequences on the
business, when a bank decides that it has crossed a particular risk threshold and, accordingly,
increases the interest rate for all future loans.

The performance or the net income shows whether the activity of the firm as a whole is profitable,
which is normally the main objective of the management team.

The performance or the net income shows whether the activity of the firm as a whole is
profitable, which is normally the main objective of the management team. Here, “profitability”
means that the money invested by the owners can make profits and thus increase their wealth.
Entrusted by the owners to achieve this objective at any cost, the management of the company
has to follow the change in income, using the financial statements, to ensure that the decisions
are in accordance with the target fixed by the owners. If this is not the case, the regular
monitoring of income enables corrective measures to be taken, before the situation of the
company deteriorates.

The cash account includes cash, bank deposits and a number of other monetary elements which the
company could liquidate within a very short span of time, usually in less than 3 months.

The cash account includes cash, bank deposits and a number of other monetary elements
which the company could liquidate within a very short span of time, usually in less than
3 months. The objective here is different from the profit, that is to say it is not to maximize
it.1 However, it is important to have enough cash at all times, to meet financial deadlines, i.e.

1
For example, too much liquidity in bank accounts which generates little or no interest, could mean that
the management of the company has borrowed too much from banks or asked too much capital from its
 Chapter 1 / Financial Statements and Accounting Mechanisms 3

reimburse loans, pay the invoices of suppliers, salaries and taxes, etc. Failure to meet financial
deadlines and the inability of the company to meet its commitments may result in insolvency,
or even the outright liquidation of the company shortly afterwords. The analysis of the status
and evolution of cash flow is therefore of high importance for the survival of the company.

Under the international accounting standards (IAS/IFRS), it is compulsory to publish at least

one table dedicated to the analysis of each of these elements. Sections 1.1.1 to 1.1.3 explain
the content and format of these tables, as well as the relationships between them.

1.1.1 Balance Sheet

Content

The balance sheet is the basic summary table, which presents the financial situation of a company
at a given date.

The balance sheet is the basic summary table. It presents the financial situation of a company
at a given date. It is measured by the difference between all assets of the company and all
its liabilities (obligations to do, to pay) and represents the net value of what belongs to the
owners, the “shareholders’ equity”. The balance sheet therefore presents three main elements:
assets, liabilities (or obligations) of the company and its shareholders’ equity.

An asset is an item, a resource controlled by the firm from which future economic benefits are
expected. It has a positive value for the company.

An asset is a resource (controlled by the firm) from which the company expects future economic
benefits and has a positive value for it.2 The future economic benefit is the potential of the
asset to contribute directly or indirectly to cash flows for the benefit of the company. The assets
of the balance sheet are primarily the “properties” of the company, i.e. what the company is
at a given date in purely “physical” terms. It included lands, buildings, industrial equipment,
furniture, inventory and cash. There are also intangible assets: either rights (patents or licenses,
for example), or financial assets (equity investments, receivables, short-term investments or
bank deposits).

A liability is an obligation to do or to pay. It has a negative value for the company.

Liabilities are obligations to do or to pay. They have a negative value for the company, since,
at maturity, the company will have to reimburse them to third parties. It includes mainly bank

owners, and does not know what to do with this excess cash. This can be the sign of mismanagement.
However, this analysis would be different if this was done in preparation for the takeover of a
competitor.
2
Under certain conditions, some items are also included in the assets of the company, even if they do
not belong to it (see Chapter 6).
4 Financial Reporting under IFRS

loans and overdrafts, accounts payables and tax liabilities. We can add other liabilities whose
exact timings or amounts are not known, but their existence is sure and certain, such as pension
obligations, long-term product warranties or provisions for legal risks.

The shareholders’ equity is the difference between assets and liabilities. It represents the net value
of the firm.

The difference between assets and liabilities results in the shareholders’ equity. It is the net
value of a firm: it represents the value of what owners possess at the time of the establishment
of the balance sheet. In normal circumstances, this value must at least include the subscribed
capital. It is the initial input of owners, i.e. the capital invested at the creation of the company
and the contributions made during each capital increase. Inasmuch as the profits over time
are not fully paid as dividends, we should also find the part not distributed under “equity
reserves”.

The net income is the balance between creation and consumption of wealth over a period
(revenues – expenses).

The shareholders’ equity is also affected by each consumption (expense) or creation of wealth
(revenue) in the company. The balance between creation and consumption of wealth over a
period is the net income (Revenues – Expenses = net Income). If it is positive, the net creation
of wealth returns to the owners and the value of their investment increases: this is known as
a profit. If negative, it is the opposite: the value of the investment declines and is known as a
loss. The net income is therefore the basic indicator of wealth creation for the company.

Format IAS 1 standard does not impose any compulsory detailed format of presentation. It
rather indicates some principles to follow:

� The separate presentation of assets, liabilities and shareholders’ equity.

� The distinction between current and non-current assets and current and long-term
liabilities. In practice, the threshold is usually of one year: elements with a residual
maturity in the company of less than one year are considered to be current items, others
as non-current.
� The distinction, among others, between:

– lands, buildings and equipments

– intangible assets, such as licenses, patents, software
– financial assets
– inventory
– receivables
– cash and equivalents
– accounts payables
– provisions for contingencies, i.e. those obligations whose exact timings and amounts
are not yet known
Other documents randomly have
different content
"Then he must have escaped with Francois! Put my horse in the
carriage at once."
Ten minutes later M. Bourdon was on his way to the cottage of
Francois.
Fifteen minutes before he arrived Francois had aroused our young
hero.
"It is time to get up, little monsieur," he said. "In half an hour the
cars will start."
Refreshed by his sound sleep, Ben sprang up at once—he did not
need to dress—and was ready for the adventures of the day.
"Where is the station, Francois?" he said.
"I will go with monsieur."
"No; if the doctor should come, delay him so that he cannot
overtake me."
"Perhaps it is best."
Ben followed the directions of his humble friend, and soon brought
up at the station. He purchased a third-class ticket for a place fifty
miles away, and waited till it was time for the train to start.
Meanwhile M. Bourdon had driven up to the cottage of Francois.
The door was opened to him by Francois himself.
"Where is that boy? Did he come away with you?" he asked,
abruptly.
"What boy?" asked Francois, vacantly.
"The one who came a few days since. You know who I mean."
Francois shrugged his shoulders.
"Is he gone?" he asked.
"Of course he is, fool."
Just then the wife of Francois came to the door. Unfortunately her
husband had not warned her, nor did she know that Ben had been
an inmate of the asylum.
"Where is the boy who came here last night with your husband?"
asked M. Bourdon, abruptly.
"Gone to the station," answered the woman, unsuspiciously.
The doctor jumped into his carriage, and drove with speed to the
station.
 CHAPTER XXX.
M. Bourdon's Little Scheme.
Meanwhile Ben had entered a third-class carriage—it behooved him
to be economical now—and sat down. He was congratulating himself
on his fortunate escape, when M. Bourdon dashed up to the station.
He entered the building, and was about passing to the platform,
when he was stopped. "Your ticket, monsieur."
Just then came the signal for the train to start.
"Never mind the ticket!" shouted the doctor. "Don't stop me. One of
my patients is running away."
"I can't help it," said the guard, imperturbably. "Monsieur cannot
pass without a ticket."
"But I don't want to go anywhere," roared M. Bourdon. "I want to
see the passengers."
To the railway attendant this seemed a very curious request. He
began to think the doctor, with his excitable manner, was insane. At
any rate, he was obliged to obey the rules.
"Go back and buy a ticket, monsieur," he said, unmoved.
"But I don't want to go anywhere," protested M. Bourdon.
"Then go back!" And the official, placing his hand on the doctor's
sacred person, thrust him forcibly aside.
"Fool! Dolt!" screamed M. Bourdon, who could hear the train
starting.
"You must be crazy!" said the guard, shrugging his shoulders.
It was too late now. The train had actually gone, and M. Bourdon
turned back, foiled, humiliated and wrathful. He regretted bitterly
now that he had not let Francois off the evening before, as in that
case Ben would not have had a chance to escape. Now he must lose
the generous sum which Major Grafton had agreed to pay for his
ward. It was more than he received for any other of his patients, for
M. Bourdon, recognizing Ben's sanity, shrewdly surmised that the
guardian had some special design in having his ward locked up, and
took advantage of it to increase the weekly sum which he charged.
And now all this was lost.
But no! A happy thought struck the worthy doctor. Ben had escaped,
it is true, but why could not he go on charging for him just as
before? His escape was not known to Major Grafton, and probably
would not be discovered for a long time at least. The major was not
very likely to visit the asylum, as an interview between him and his
young victim would be rather embarrassing to him.
Yes, that was the course he would pursue. He would from time to
time send in a report of his patient, and regularly collect his board,
while he would be at no expense whatever for him. It was
necessary, however, to take Francois into his confidence, and he
drove back to the cottage of the humble attendant.
Francois was watching outside. He was afraid the doctor would
succeed in capturing the boy, in whom he had begun to feel a strong
interest. When he saw M. Bourdon drive up alone he smiled to
himself, though his features remained outwardly grave.
"Did you find him, sir?" he asked, respectfully.
"No," answered M. Bourdon, roughly. "The train had just started."
"And was he a passenger?"
"Doubtless."
"What will you do, Monsieur le Docteur?" Francois asked, curiously.
"Francois," said M. Bourdon, suddenly, "I am sorry for you."
"Why?" asked Francois, considerably surprised. "Is it because my
little Marie is sick?"
"Plague take your little Marie! It is because you have helped the boy
to escape."
"How could I help him, sir?"
"Some one must have unlocked the door of his room. Otherwise, he
could not have got out."
"I don't know, monsieur," said Francois, assuming ignorance.
"When did you first see him?"
"I had walked about a quarter of a mile," said Francois,
mendaciously, "when he ran up and overtook me. I told him to go
back, but he would not. He followed me, and came here."
"This story is by no means ingenious," said the doctor, shaking his
head. "When you stand up in a court of justice you will see how the
lawyers will make you eat your words. And very likely they will send
you to prison."
"Oh, no! Don't say that!" said poor Francois, much frightened. "What
would become of my poor wife and child?"
"You should have thought of them before this."
"Oh, Monsieur le Docteur, you will save me from prison!" exclaimed
poor, simple-minded Francois.
"On one condition."
"Name it, monsieur."
"Let no one know that the boy has escaped."
"I will not, if you desire it."
"You see, it will be bad for me as well as for you. It was very
important to keep him—very important, indeed—and his friends will
call me to account. But they need not know it, if you remain silent."
"No one shall hear me say a word, Monsieur le Docteur," said
Francois, promptly.
"That is well. In that case I will overlook your disobedience, and
allow you to return to your place."
"Oh, monsieur is too good!" said Francois, who did not by any
means anticipate such magnanimous forgiveness.
"When can you come back?"
"When monsieur will."
"Come, then, this evening. It will be in time. I will allow you to
spend the day with your family, since your child is sick."
The doctor turned his horse's head, and drove back to the asylum.
Three days after he wrote to Major Grafton:

"My Dear Sir: Your ward is rather sullen, but quiet. He was at
first disposed to make trouble, but the firm and effective
discipline of the institution has had the usual result. I allow him
to amuse himself with reading, as this seems to be the best way
of keeping him quiet and contented. His insanity is of a mild
kind, but it is often precisely such cases that are most difficult to
cure. You may rely, Monsieur Grafton, upon my taking the best
care of the young gentleman, and, as you desired, I will
especially guard against his obtaining writing materials, lest, by
a misrepresentation of his condition, he might excite his friends.
"I thank you for your promptness in forwarding my weekly
payments. Write me at any time when you desire a detailed
account of your ward's condition."

M. Bourdon signed this letter, after reading it over to himself, with a

complacent smile. He reflected that it did great credit to his
ingenuity.
"Some men would have revealed the truth," he said to himself, "and
lost a fine income. I am wiser."
In due time this letter reached Major Grafton.
"That is well," he said to himself. "I am rather sorry for the boy, but
he has brought it on himself. Why must he be a fool, and threaten to
blab? He was living in luxury, such as he has never been accustomed
to before, and he might rest content with that. In me surely he had
an indulgent master. I rarely gave him anything to do. He could live
on the fat of the land, see the world at no expense to himself, and
have all the advantages of a rich man's son. Well, he has made his
own bed, and now he must lie in it. On some accounts it is more
agreeable to me to travel alone, and have no one to bother me."
To avert suspicion, Major Grafton left the Hotel des Bergues and
took up his quarters at another hotel. At the end of two weeks he
left for Italy, having arranged matters satisfactorily by sending M.
Bourdon a month's payment in advance, an arrangement that suited
the worthy doctor remarkably well.
 CHAPTER XXXI.
A Wanderer in France.
A boy toiled painfully over a country road but a few miles from the
city of Lyons. His clothes bore the marks of the dusty road over
which he was travelling. It was clear by his appearance that he was
not a French boy. There is no need of keeping up a mystery which
my young readers will easily penetrate. This boy was our hero, Ben
Baker. He was now more than half way to Paris, and might have
reached that gay city days since but for his limited supply of money.
When he gave Francois a hundred francs he nearly exhausted his
limited capital, but there was no help for it.
He had travelled a hundred miles on the railway, far enough to be
beyond the danger of pursuit and the risk of a return to the asylum,
which he could not think of without a shudder. Now he would walk,
and so economize. He had walked another hundred miles, and had
reached this point in his journey. But his scanty funds were now
reduced to a piece of two sous, and he was between three and four
thousand miles from home. This very day he had walked fifteen
miles, and all he had eaten was a roll, which he had purchased in a
baker's shop in a country village through which he had passed in the
early morning.
Hopeful as Ben was by temperament, he looked sober enough as he
contemplated his position. How was he ever to return home, and
what prospect was there for him in Europe? If he had been in any
part of America he would have managed to find something to do,
but here he felt quite helpless.
He had walked fifteen miles on an almost empty stomach, and the
result was that he was not only tired but sleepy. He sat down by the
way-side, with his back against the trunk of a tree, and before he
was conscious of it he had fallen asleep.
How long he had been asleep he did not know, but he was roused
suddenly by a touch. Opening his eyes, he saw a man fumbling at
his watch-chain. The man, who was a stout and unprepossessing-
looking man of about thirty-five, wearing a blouse, jumped back with
a hasty, confused exclamation.
"What are you doing?" demanded Ben, suspiciously.
He spoke first in English, but, remembering himself, repeated the
question in French.
"Pardon, monsieur," said the man, looking uncomfortable.
Ben's glance fell on his chain and the watch, which had slipped from
his pocket, and he understood that the man had been trying to steal
his watch. In spite of his poverty and need of money he had not yet
parted with the watch, though he suspected the time would soon
come when he should be compelled to do so.
"You were trying to steal my watch," said Ben, severely.
"No, monsieur, you are wrong," answered the tramp, for that was
what he would be called in America.
"How came my watch out of the pocket, and why were you leaning
over me?" continued Ben.
"I wanted to see what time it was," answered the man, after a
minute's hesitation.
"I think it is fortunate I awoke when I did," said Ben.
His new acquaintance did not choose to notice the significance of
the words.
"Monsieur," he said, "I am a poor man. Will you help me with a few
sous?"
Ben could not help laughing. It seemed too ridiculous that any one
should ask money of him. He took the two-sous piece from his
pocket.
"Do you see that?" he asked.
"Yes, monsieur."
"It is all the money I have."
The man looked incredulous.
"And yet monsieur is well dressed, and has a gold watch."
"Still I am as poor as you, for I am more than three thousand miles
from home, and have not money enough to get there, even if I sell
my watch."
"Where does monsieur live?" asked the tramp, looking interested.
"In America."
"Will monsieur take my advice?"
"If it is good."
"There is a rich American gentleman at the Hotel de la Couronne, in
Lyons. He would, perhaps, help monsieur."
The idea struck Ben favorably. This gentleman could, at any rate,
give him advice, and he felt that he needed it.
"How far is Lyons away?"
"Scarcely a league."
"Straight ahead?"
"Yes, monsieur."
"Then I will go there."
"And I, too. I will guide monsieur."
"Thank you. I will reward you, if I have the means."
 CHAPTER XXXII.
A Strange Meeting.
The Hotel de la Couronne is situated in one of the finest parts of
Lyons. As Ben stood before it, he began to doubt whether he had
not better go away with his errand undone. After all, this American
gentleman, if there were one in the hotel, would be likely to feel
very little interest in a destitute boy claiming to be a fellow-
countryman. He might even look upon him as a designing rogue,
with a fictitious story of misfortune, practising upon his credulity.
Ben's cheek flushed at the mere thought that he might be so
regarded.
So he was on the point of going away; but he was nerved by his
very desperation to carry out his original plan.
He entered the hotel, and went up to the office.
"Will monsieur look at some apartments?" asked the landlord's son,
a man of thirty.
"No, monsieur—that is, not at present. Is there an American
gentleman at present staying in the hotel?"
"Yes. Is monsieur an American?"
Ben replied in the affirmative, and asked for the name of his
countryman.
"It is Monsieur Novarro," was the reply.
"Novarro!" repeated Ben to himself. "That sounds more like a
Spanish or an Italian name."
"Is that the gentleman monsieur desires to see?"
"From what part of America does Mr. Novarro come?"
The register was applied to, and the answer given was "Havana."
"Havana!" said Ben, disappointed. "Then he will take no interest in
me," he thought. "There is very little kindred between a Cuban and
an American."
"Would monsieur like to see M. Novarro?"
"I may as well see him," thought Ben, and he answered in the
affirmative.
"There is M. Novarro, now," said the landlord's son; and Ben,
turning, saw a tall, very dark-complexioned man, who had just
entered.
"M. Novarro, here is a young gentleman who wishes to see you—a
countryman of yours."
The Cuban regarded Ben attentively, and not without surprise.
"Have we met before?" he asked, courteously.
"No, sir," answered Ben, relieved to find that the Cuban spoke
English; "and I am afraid I am taking a liberty in asking for you."
"By no means! If I can be of any service to you, my friend, you may
command me."
"It is rather a long story, Mr. Novarro," Ben commenced.
"Then we will adjourn to my room, where we shall be more at our
ease."
Ben followed his new acquaintance to a handsome private parlor on
the second floor and seated himself in a comfortable arm-chair,
indicated by the Cuban.
"I will first mention my name," said Ben. "It is Benjamin Baker."
"Baker!" exclaimed the Cuban, in evident excitement. "Who was your
father?"
"My father was Dr. John Baker, and lived in Sunderland,
Connecticut."
"Is is possible!" ejaculated the Cuban; "you are his son?"
"Did you know my father?" asked Ben, in amazement.
"I never saw him, but I knew of him. I am prepared to be a friend to
his son. Now tell me your story."
 CHAPTER XXXIII.
An Astounding Discovery.
Ben told his story so far as it concerned his engagement by Major
Grafton and his visit to Europe. Of his mother and her circumstances
and of his uncle he had scarcely occasion to speak, considering that
his auditor would hardly feel interested in his own personal history.
The Cuban, who had a grave, kindly aspect, listened with close
attention to his narrative. When Ben ceased speaking he said:
"My young friend, there is one thing that puzzles me in this story of
yours."
"What is it, sir?" asked Ben, anxiously. He feared that the stranger
did not believe him.
"Why should you need to travel with Major Grafton, or any other
gentleman, as private secretary, unless, indeed, your mother did not
wish you to come to Europe alone?"
Ben stared at his interlocutor in amazement.
"How could I come to Europe alone?" he asked. "Where should I
find the money to pay my expenses?"
"Your mother might pay the expenses of your trip."
"My mother is very poor, Mr. Novarro."
"Very poor! Has she, then, lost the money that your father left her?"
"I think you must be under a great mistake, Mr. Novarro. My uncle
allows my mother a small income, and I help her all I can."
"There is certainly a great mistake somewhere," said the Cuban. "To
my certain knowledge your father possessed a hundred thousand
dollars in first-class securities. Didn't you know anything of this?"
continued Mr. Novarro, observing Ben's look of extreme amazement.
"I know nothing of it, Mr. Novarro."
"Then he must have been robbed of the securities which I myself
gave him on the 18th day of May, in the year 18—"
"That was the day of my father's death," said Ben.
"He died on that very day?" said the Cuban in excitement. "Tell me
the particulars of your father's death. Did he die a natural death?"
"Yes, sir; he died of heart disease."
"And where?"
"In the house of my Uncle Nicholas."
"Before he had time to go home? Before he had acquainted your
mother with his good fortune?"
"Neither my mother nor myself knew but that he died a poor man."
"But he had the securities with him. Did your uncle say nothing of
them?"
"Not a word."
A look of suspicion appeared on the face of Filippo Novarro.
"Tell me," he said, quickly—"did your uncle, shortly after your
father's death, enlarge his business?"
"Yes, sir; he moved from a small store in Grand street to a larger
store on Broadway—the one which he now occupies."
With the Cuban, suspicion was now changed to certainty.
He brought down his fist heavily upon the table at his side.
"I know all now," he said. "Your uncle deliberately robbed your dead
father of the securities which I had placed in his hands, and coolly
appropriating them to his own use, used the proceeds to build up
and extend his business, leaving your mother to live in poverty."
"I feel bewildered," said Ben. "I can hardly believe my uncle would
treat us so shamefully."
"By the way, when did your mother move to Minnesota?" asked the
Cuban.
"To Minnesota?"
"Yes. When I was in New York, not long since, I called upon your
uncle and signified my intention to call upon your mother. He told
me she had moved to Minnesota, and, of course, I was compelled to
give up my plan."
"My mother has never moved to Minnesota; she still lives in
Sunderland."
"Then your uncle intended to prevent our meeting. He feared,
doubtless, that if we met, his rascality would be discovered.
Providence has defeated his cunningly-devised scheme, and the
truth will soon be brought to light, to his confusion."
"I am afraid, sir, it will be difficult for my mother and myself to prove
that my father left money. We have no money, with which to hire
legal assistance."
"I propose to take the matter into my own hands. I am personally
interested as the agent whom my dead friend commissioned to pay
a debt of gratitude to the man who saved his life. Have you anything
to detain you in Europe?"
"No, sir, except an empty purse."
"Permit me to act as your banker."
Mr. Novarro drew from his pocket two hundred and fifty francs in
gold and paper and handed them to Ben.
To our hero it seemed like a fairy-tale, in which he was playing the
leading part. He half-feared that the gold would turn into brass and
the bank-notes into withered leaves; but, strange though it was, he
saw good reason to think that his good fortune was real.
"How can I thank you, sir, for your liberality?" he said, gratefully.
"You forget that this is your own money; I am only advancing it to
you, and shall be repaid speedily. Will you accept me as your
guardian to protect your interests and compel your uncle to disgorge
his ill-gotten gains?"
"Thankfully, sir, if you are willing to take the trouble."
"Then you will sail with me for New York by the next steamer. Have
you your luggage with you?"
"I have nothing, sir, except what I have on my back. I had to leave
the asylum without a change, and I have not been able to change
my clothes for a week or more."
"I had forgotten. This must be looked to at once. We will take lunch,
and then go out and purchase a new supply of under-clothing."
Once more Ben had fallen on his feet. At what appeared to be the
darkest moment light had suddenly fallen across his path, and he
had stumbled upon the one man who was able to bring him into the
sunshine. Before night his wardrobe had been quite replenished, and
he breathed a deep sigh of relief as he found himself in fresh and
clean attire.
He sought out the tramp who had escorted him to the hotel, and
liberally rewarded him.
"I shall telegraph for passage in the Havre line of steamships," said
Mr. Novarro. "A steamer is to sail on Saturday, so that we shall not
have long to wait."
"I fear, Mr. Novarro, you are interrupting your own plans in order to
befriend me," said Ben to his new patron.
"I have no plans. I am—perhaps unfortunately for myself—a rich
man, under no necessity of labor. Indeed, my chief aim has been to
pass my time as pleasantly as possible. Now I find something to do,
and I find myself happier for having some object in life. I am
rejoiced that we have met. It has brought to my life a new interest;
and even after I have redeemed your wrongs I shall hope to keep up
my acquaintance with you, and to make the acquaintance of your
mother."
"You may be sure, sir, that my mother will be only too glad to know
so true a friend."
The Cuban regarded Ben with a look of interest and affection. He
was beginning to be attracted to him for his own sake. He was a
man of energetic temperament, though a large inheritance had
hitherto prevented any display of energy. At length the occasion had
arisen, and he looked forward with eagerness to the struggle with
the New York merchant to secure the rights of his new friend.
On the next day Ben and his guardian left Lyons for Paris. They had
two days in this lovely city, and late on Friday evening they reached
Havre, the point where they were to embark for America.
"The first act is over, Ben," said the Cuban. "Our ocean trip is a long
wait between the first and second acts. When the curtain next rises
it will be in New York, and there will be other actors to take an
unwilling part in our drama, which is devoted to the detection and
punishment of guilt."
 CHAPTER XXXIV.
Rose Makes an Enemy.
Leaving Ben and his new guardian on their passage across the
Atlantic, we will precede them to New York, and inquire after the
welfare of some of our other characters.
The Beauforts seemed to have entered on a new and prosperous
career. Rose continued to give lessons in music, and to receive
liberal compensation. She was really an accomplished musician, and
had the happy knack of making herself agreeable to her young
pupils. Besides, she was backed by the influence of Miss Wilmot, and
that helped her not a little. Her sister Adeline, too, gave lessons in
art, and thus contributed to the family purse.
My readers will not have forgotten the young man who rescued Rose
from the disagreeable attentions of her elderly lover, Mr. Parkinson.
More than once Rose had thought of Clinton Randall, and, though
she scarcely admitted it to herself, cherished the hope that they
would some day meet again. The young man's frank, chivalrous
manners, and handsome face and figure, had impressed her most
favorably, and she suffered herself to think of him more than she
would have liked to admit. Had she known that Clinton Randall had
been equally attracted by her, and had made strenuous efforts to
find her ever since their first meeting, she would have been much
gratified.
Some weeks passed, however, before she saw him again. One
afternoon, as she was walking through Madison Square on her way
home from Mrs. Tilton's, where she had given her customary
lessons, she met the young man in the walk.
His face glowed with unmistakable joy as he hurried forward, with
hand extended.
"I am very glad to meet you again, Miss Beaufort," he said, eagerly.
"Where have you been? Not out of the city?"
"Oh, no!" answered Rose, successfully concealing her own pleasure
at the meeting. "You can't expect a poor music-teacher to break
away from her work at this season?"
"But I did not know you were a music-teacher."
"No, I suppose not," answered Rose, smiling.
"Do you give lessons on the piano?"
"Yes, it is my only instrument."
"I have for a long time thought of taking lessons on the piano," said
Randall, who had never thought of it before, "if I could only find a
teacher who would not be too strict. Do you—take gentlemen?"
"I am afraid I could not venture upon a pupil of your age, Mr.
Randall," said Rose, amused. "Suppose you proved refractory?"
"But I never would."
"I am afraid my time is fully occupied. I will promise, however, to
take you, if I agree to take any gentlemen."
"Thank you. I shall not forget your promise."
Clinton Randall, though he had been walking in a different direction,
turned and accompanied Rose, both chatting easily and familiarly. It
never occurred to Rose that she might meet any one who would
comment upon her and her escort. But at the corner of Eighteenth
street and Broadway she met a tall young lady, who made her the
slightest possible nod, while she fixed eyes of scorn and displeasure
upon the two. Clinton Randall raised his hat, and they parted.
"You know Miss Jayne, then, Miss Beaufort," said Randall.
"Yes, slightly, and you?"
"I have met her in society."
"She is a niece of Mrs. Tilton, to whose daughters I am giving music-
lessons."
"Indeed! I know Mrs. Tilton—I am to attend her party next week.
Shall you be there?"
"I believe so—not as a guest, however. She has invited me to play
on the piano for the entertainment of the guests. You will probably
dance to my music."
"I would rather dance with you to the music of another player, Miss
Beaufort."
"You forget, Mr. Randall, that I am a poor music-teacher."
"I don't think of it at all. It makes no difference in your claims to
consideration."
"The world does not agree with you, Mr. Randall."
"Then it ought. By the way, Miss Beaufort, has your elderly admirer
renewed his proposals?"
"Mr. Parkinson? No, I have not met him since."
"You are sure you won't relent, and make him a happy man?"
"I don't think it at all likely," said Rose, laughing.
Meanwhile Rose had made an enemy without being aware of it.
Miss Arethusa Jayne had long looked upon Clinton Randall with eyes
of partiality, not alone on account of his good looks, but because he
was wealthy, socially distinguished, and in all respects a desirable
parti. In her vanity she had thought that he was not indifferent to
her attractions. When, therefore, she saw him walking with her
aunt's music-teacher, she was not only angry but jealous. She
reluctantly admitted that Rose was pretty, though she considered
herself still more so. After this meeting she changed her plans, and
went straight to her aunt.
"Aunt," she said, "whom do you think I met on Broadway just now?"
"I am sure I can't tell, Arethusa. I suppose all the world and his wife
are out this fine day."
"Your music-teacher, Miss Beaufort, and Clinton Randall."
"You don't say so!" ejaculated Mrs. Tilton. "How should she know
him?"
"I have no idea they were ever introduced," said Arethusa, sneering.
"Probably she isn't particular how she makes acquaintance with
gentlemen. I always thought her forward."
"I can't say I ever did, Arethusa."
"Oh, she covers it up with you; but I ask you, Aunt Lucy, how could
she otherwise get acquainted with a gentleman of Mr. Randall's
position?"
"I don't know. Was she actually walking with him?"
"Certainly, and laughing and talking in a boisterous, unladylike way."
Of course this was untrue, but a jealous woman is not likely to
consider her words.
"I thought you ought to know it, aunt, so I came and told you."
"Do you think I ought to do anything, Arethusa?"
"I would not allow such a girl to teach my children."
"But she is an excellent teacher, and is recommended by Miss
Wilmot."
"Probably Miss Wilmot does not know how she conducts herself. No
doubt she carefully conceals her forwardness from that lady."
"But I can't discharge her without giving reasons."
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