1. Financial Statement Analysis Flashcards
Which methods we can use to valuate Property, plant, and equipment valuation method?
IFRS: cost model or revaluation model
U.S. GAAP cost model only
which asset is not subject to depreciation?
Land is not subject to depreciation.
What is the premise behind the classification of PP&E or PPE?
The major premise behind the classification is that the company foresees that those assets will be used in operation and will generate economic benefits for the period beyond 1 year.
When the impairment occuors?
Impairment adjustment arises when the recoverable amount is lower than the carrying value of the PP&E asset on the balance sheet.
How the recoverable of an asset is defined?
he recoverable amount is defined as the amount that is the higher of:
1° the asset’s fair value less costs to sale
and;
2 ° The asset’s value in use (present value of the future cash flows to be generated by the asset).
In which system are reversals impairment are allowed?
Reversals to the impartirment charges are allowed under IFRS, but not under U.S GAAP
What is the Goodwill and when it happens?
Goodwill – arises during the corporate merger & acquisition processes when the price paid for the company acquired is higher than the net fair value of identifiable and measurable assets and liabilities
Why the Goodwill is necessary?
It is necessary, because there are components that build the value of the target company, but are not appropriately represented by the carrying values of assets and liabilities reported within the balance sheet. Usually, this value is built by a well-known brand, customer base, non-capitalized research and development costs, as well as the value coming from the expected synergies when acquiring and target companies are combined.
What are the types of Goodwill
1° Accounting goodwill, based on accounting standards.
2° Economic goodwill, based on the economic performance of the company which should be reflected (in theory) in the stock value.
Is the Goodwill subject to amortization?
No, it is not subject to amortization but nbeeds to be annually tested for impairment.
Which system requeire companies to capitalize Goodwill within the balance sheet?
Both IFRS and U.S. GAAP require companies to capitalize goodwill within the balance sheet.
What is the process to measure Goodwill when a company acquires another?
The process to measure goodwill when one company acquires another can be summarized in the following steps:
1° Purchase price paid by the acquirer is established.
2° Fair value of identifiable assets is netted by the fair value of identifiable liabilities (both regular and contingent liabilities are taken into consideration).
3° Goodwill is the difference between the purchase price and fair value of net assets calculated in step 2.
Why Goodwill can be subjective?
Because goodwill is not a separately identifiable asset and its valuation might be subjective, analysts and investors do have opposing views on whether such an asset should be recognized in the balance sheet.
What is bargain purchase?
There are situations, where the price paid to acquire another company is lower than the fair value of net assets – it is called bargain purchase. The profit from such a transaction is recognized in the income statement.
Can the Goodwill be exclude in the balance sheet?
No, it can not. However, because it subjective, the analyst sometimes adjust the balance sheet to exclude goodwill when valuing the firm or calculating financial ratios.
What the acronym “DTA” means?
It means Deferred tax asset (DTA)
When the Deferred Tax Asset happens?
It arises due to differences between tax calculated for the net income using tax regulation and accounting regulation.
When we should recognize DTA?
We recognize DTA in the situations when the actual tax paid to the governmental authorities exceeds the tax due calculated using the accounting methods.
What is the main drive in DTA?
The timing difference. Certain business activities are recorded as income/cost faster for accounting purposes than tax purposes, e.g., due to the application of the accrual accounting method
What the company needs to do in order to recognize the DTA in the balance sheet?
To recognize DTA in the balance sheet, the company needs to expect to generate a taxable income in the subsequent periods, which will allow the company to deduct the ‘overpaid’ taxes.
What is the Long-Term Financial Liabilities?
Long-term liabilities represent the amounts that the company is due to its lenders and finance providers beyond a period of 1 year. Usually, it consists of long-term loans provided by the banks and debt/bonds issued to finance investments and business growth.
What method is applied to measure the Long-Term Liabilities?
Typically, long-term liabilities are reported and measured using the amortized cost method (for details please see the financial instruments section above). However, we need to bear in mind that certain financial liabilities might be recorded using the fair value method. This includes derivatives (which represent liability) or debt held for trading.
Which Long-Term Liabilities should be recorded using the Fair Value Method?
Derivatives Because it represent liability or debt held for trading.
What the acronym “DTL” means?
It means Deferred Tax Liability (DTL)