EVA Flashcards
who launched EVA and when
stern stewart and co in 1989
Why do accounting standards apply conservative principles to uncertainty
as to not overstate the assets and earnings
what is an example of unconditional conservatism practices 1
research and development outlays
- accounting custom to expense and deduct from revenue an asset and amortise it gradually. the effect of expensing is to understate the companies true value
ie high tech companies and similar examples for advertising and marketing costs
What is an example of unconditional conservatism practices 2
Deferred tax provisions - arise from temporary differences between accounting and taxable profit
the accounting custom is to recognise future obligations as an expense and overstate the costs
whats the difference between accounting and taxable profit
Temporary differences - the period in which the revenues and expenses are recognised for accounting purposes is different from the period in which these revenues and expenses are treated as taxable income or allowable deduction for tax purposes
Permanent differences - one allows to recognise revenues or expenses but the other doesn’t
what are examples of conditional conservatism practices
Lower of cost and market - an asset is listed either at carrying amount of original cost or at market value whichever is lower
Doubtful debt - risk of non-payment
Charge increase provision to IS as expenditure and reduce value of receivables by full amount of provision
overstate the costs as it is not real
Impairment accounting
What is IFRS 16
Lessee accounting
Single lessee accounting model on all leases and are treated as the purchase of an asset on a financial basis
Why would you manipulate earnings
- Accounting-based debt covenants
- Management compensation
- Tax considerations
- Regulatory considerations
- Capital market considerations
- stakeholder considerations
- competitive considerations
what is big bath accounting
moving as many expenses as possible from future periods into the current period, so few expenses can be taken in this year
What is cookie jar reserves
stash accruals in cookie jars during the good times and reach into them when you need them in the bad times
What is the formula for EVA
EVA = NOPATt-TCC
What are two ways you can calculate total capital charge
TCC = sum (each capital*each cost of capital) TCC = Total capital * WACC
How do you calculate beginning amount EVA
EVAt=NOPATt-TCC^t-1
How do you calculate ending amount EVA
EVAt = NOPATt-TCCt
How do you calculate average amount EVA
EVAt= NOPATt - [(TCC^t-1+TCCt)/2]
how do you calculate the capital charge
Capital * cost of capital *(1-tax rate) + …. and so on
How do you calculate WACC capital charge
WACC = Capital/total capital * cost of capital * (1-tax rate) and so on
How would you calculate EVA considering both financial and accounting anomalies
EVAt = Adjusted NOPATt - Sum(C%*adjusted TC^t-1)
What is the ACCA for accounting adj - R&d, advertising and staff training
Expenditure on promotional activities, research and development and employee training should be capitalised. If they have been treated as an expense in the income statement, they should be added back to . profit, and added to capital employed in the year which the expenses were incurred
What is the ACCA adj for depreciation
the depreciation charge is added back to the profit, and instead of a charge for economic depreciation is made. economic depreciation reflects the true change in value of the assets during the period, unlike accounting depreciation. If no detail is given on economic depreciation then candidates should assume that accounting depreciation represents a reasonable approximation for it
what are the three factors to consider for depreciation
- Useful life
- Residual value
- Depreciation method
what is the ACCA accounting adjustment for allowances for doubtful debts, deferred tax
Items such as provisions, allowances for doubtful debts, deferred tax provisions and allowances for inventory should be added back to capital employed, since these represent over-prudence on the part of financial accountants, and this understates the true value of capital employed. Any expenses or income recognised in the income statement in respect of movements in such items should also be removed from NOPAT
holding other variables constant how would you increase EVA using ROCE
Increase it
holding other variables constant how would you increase EVA using WACC
Decrease it
holding other variables constant how would you increase EVA using investments
ROE-WACC > 0
holding other variables constant how would you increase EVA using divestment projects
ROE - WACC < 0
What are the limitations of EVA
- Adjustments can become cumbersome
- No GAAP to rule accounting adj, so its hard to compare other companies with EVA
- Although it makes a number of accounting adj to accounting data, it’s impossible to include the value of all assets or to judge how rapidly they depreciate
- Difficult to estimate C%
- It is an absolute measure, so hard to compare across firms with different size ie >ROCE
- BS does not show current market value of the firms assets
