F2 Flashcards
LONG-TERM FINANCE
What are the 4 equity sources of finance? Do not explain.
- Rights issue of shares
- New issue of shares
- Stock market
- Alternative Investment Market (AIM)
LONG-TERM FINANCE
What are the two types of shares and what are their differences?
- Ordinary Shares: also known as equity shares, allows you to claim dividends if offered. Shareholder will be a part owner of the company and therefore can vote/attend meetings. Paid last out of all investors (both for dividends and winding up).
- Preference Shares: paid dividend at a fixed rate based on the nominal value of the share. Can be accumulated dividends. Holders do not own any part of the company and cannot vote/attend meetings. Paid in preference to ordinary share holders.
LONG-TERM FINANCE
What are the 4 types of preference shares?
- Cumulative - dividends build up until paid.
- Non-Cumulative - dividends can be missed.
- Participating - fixed dividend and can get extra in good years
- Convertible - can be converted into ordinary shares based on certain conditions.
LONG-TERM FINANCE
What are some ‘other’ sources of long-term finance (i.e. not Debt/Equity)
- Using Retained Earnings
- Government Grants
- VCs/Angel Investors (although you would likely lose some control of the business)
LONG-TERM FINANCE
What are the primary and secondary functions of the stock market and what is a prerequisite for a company?
- Primary: allows companies to raise new finance by issuing shares or marketable debt.
- Secondary: enables subsequent trading of investments between investors
Companies MUST be a PLC (public limited company).
LONG-TERM FINANCE
What is a Rights Issue of Shares?
- New shares are issued to existing shareholders in proportion to their existing shareholdings. (Private companies can partake)
- Often at a discounted price - but if price is too low, too much earning per share dilution can happen.
- Rights issues are simple to arrange and do not alter control, but are not always suitable for raising large amounts of finance.
- Can be underwritten (underwriter buys any not sold shares).
LONG-TERM FINANCE
What does Cum rights price and TERP mean and what’s the formula?
- Cum rights price (CRP) = price of share immediately before rights issue
- Theoretical ex rights price (TERP) = theoretical price of share immediately after rights issue
TERP = (N x cum rights price) + issue price
- - - - - - - - - - - - - - - - - - - - - - - - - - -
(N + 1)
LONG-TERM FINANCE
What does AIM stand for and what does it mean?
Alternative Investment Market
- A stock exchange for smaller companies
- More straightforward admission requirements than the main stock exchange.
LONG-TERM FINANCE
What does it mean to issue shares on the stock market and what are the 5 advantages and disadvantages?
- A company may float on the stock market - this can make their shares more attractive.
- Shares offered to the general public. This is typically done using an IPO. The IPO price isnt necessarily the same as the nominal value
Advantages:
- Better company valuation
- Mechanism for trading shares in the future
- Company profile is raised
- Easier access for future capital finance
- Employee share scheme more accessible
Disadvantages
- Costly for a small entity
- Can lead to a loss of control for original owners
- Reporting reqs more onerous
- Stringent rules for obtaining a quotation
- Risk of failure (share price tanks)
LONG-TERM FINANCE
What is bank finance?
Bank Finance - for unlisted companies (and many listed ones too), a bank loan is the first option for debt finance.
LONG-TERM FINANCE
What is traded debt and what are the debt finance definitions?
Traded Debt (Debentures/Loan Stock/Bonds) - Listed companies can issue debt to investors, usually in $100 nominal value blocks (par value) - purchaser received interest (coupon rate).
Market value is the cash received from issuing the loan. Premium is the extra amount repayable at redemption date based on par value.
Can be redeemable/irredeemable.
Can have warrants i.e. investor can purchase shares in the company.
Can be convertible i.e. investor can swap debt for shares in the future.
LONG-TERM FINANCE
What is an RCF?
Revolving Credit Facility (RCF) - companies can borrow funds up to a pre-determined limit. Limit is changed based on how much is being used/been paid back.
LONG-TERM FINANCE
What are Commercial Papers?
Commercial Paper (unsecured loan) - no fixed (i.e. buildings) or floating (i.e. inventory) security.
Covenants can be in place which are rules/stipulations on how company is run/money managed.
COST OF CAPITAL
What is the WACC?
Weighted Average Cost of Capital is the average cost of the entity’s finance, weighted according to the proportion of each element in the overall pool of funds.
Market valued are used for the weightings.
The formula WILL be given during the exam.
COST OF CAPITAL
What does DVM stand for and what is the theory?
The Dividend Valuation Model theory is that the price of a share is the present value of the dividends, discounted at the shareholders’ required rate of return.
COST OF CAPITAL
What is the formula for the DVM - No Growth
Ke = d
- -
Po
Where:
Ke = Cost of Equity
d = Constant Dividend
Po = ex div market price of a share (ex div = after dividend is paid)
COST OF CAPITAL
What is the formula for the DVM - With Growth?
Ke = Do (1 + g)
- - - - - - - - - + g
Po
Where: Ke = Cost of Equity Do = Constant Dividend Po = ex div market price of a share (ex div = after dividend is paid) g = dividend growth.
COST OF CAPITAL
What are the two ways to calculate growth for the DVM?
Based on retention of profits: g = r x b = return on reinvested funds x proportion of funds retained
or
Based on averaging method: g = n√(Do/Dn) - 1
- Do = Current Div
- Dn = Dividend n years ago (oldest)
COST OF CAPITAL
What is Gordons Growth Model?
g = b * Re
Where:
b = earning retention rate (% of profits retained i.e. not given as a div)
Re = accounting rate of return (% returns on projects)
COST OF CAPITAL
What is cum div and ex div and how do you calculate the change?
Cum Div means that a div is just about to be paid, Ex Div means its just been paid.
To calculate a Cum Div –> Ex Div: Share Price - Divident payout
COST OF CAPITAL
What are the repayments equal to for the cost of equity and the cost of debt?
The cost of equity is equal to the required return to the ordinary shareholders.
The cost of debt is not equal to the required return of the debt holders, because the company gets tax relief on debt interest.
COST OF CAPITAL
What is the formula for Irredeemable debt?
Kd = I ( 1 - T )
- - - - - - -
Po
Where:
Po = ex interest market price of the debt
I = annual interest rate
T = tax rate
COST OF CAPITAL
What is the formula for a Bank Loan?
Kd = I ( 1 - T)
Where:
I = interest rate
T = tax rate
COST OF CAPITAL
What is the formula for the cost of preference shares?
Kp = annual dividend/ex-dividend share price
COST OF CAPITAL
Verbally summarise how you would calculate the cost of Redeemable Debt and Convertible Debt.
Redeemable Debt - Using the discounted cashflow method and the IRR formula in the formula sheet.
Convertible Debt - As above but must work out if redemption value is more than share value, use the highest value to work out IRR.
COST OF CAPITAL
What 3 things need to be in place for WACC to be suitable for use?
- Constant capital structure
- New investment carries the same business risk profile of the entity
- New investment is marginal to the entity
COST OF CAPITAL
What are the two calculations for Yield to Maturity and how do they differ to the cost of debt calculations?
- YTM - - - - - - - - - - - - - - - - - - - - - - -
. / \
. / \
. Irredeemable Debt Redeemable Debt
. | |
. Annual Interest Received IRR Calculation
. - - - - - - - - - - - - - - - - - - - - - x100
. Market Value
- YTM - - - - - - - - - - - - - - - - - - - - - - -
YTM is always GROSS of tax, whereas the cost of debt is always NET of tax (this is because of the tax deduction)
COST OF CAPITAL
What is the IRR Formaula?
IRR = ( NL )
L + (H - L)(—————)
( NL - Nh )
Where:
L & H = Lower and Higher discounted rate used
NL & NH = NPV at the lower and higher rate
FINANCIAL INSTRUMENTS
What is a financial instrument?
A contract that creates a financial asset for one party, and a financial liability for another.
FINANCIAL INSTRUMENTS
When looking at the type of transactions, an Asset is any of:
- Cash
- An equity instrument of another company
- The right to receive cash from another party
- Contractual rights to exchange financial instruments under favourable terms (IAS 32)
FINANCIAL INSTRUMENTS
When looking at the type of transactions, a Liability is any of:
- An obligation to pay cash or deliver another financial asset to another entity
- An exchange of financial instruments under unfavourable terms (IAS 32)
FINANCIAL INSTRUMENTS
When looking at the type of transactions, an Equity is:
- Any contract where there is residual interest in the assets of an entity after deducting all of its liabilities (ordinary shares)
FINANCIAL INSTRUMENTS
Classify the following financial Instruments
Instrument Classification
-> Ordinary Shares | ->
-> Loans | ->
-> Debentures/Loan Stock | ->
/Loan Notes/Bonds |
-> Preference Shares | ->
-> Convertible Loans | ->
Instrument Classification
-> Ordinary Shares -> Equity
- > Loans -> Liability
- > Debentures/Loan Stock/Loan Notes/Bonds -> Liability
- > Preference Shares -> Depends. If obligation to deliver cash = Liability BUT If no obligation = equity
- > Convertible Loans -> Both. A hybrid instrument.
FINANCIAL INSTRUMENTS
What is the split accounting required for the INITIAL RECOGNITION of Convertible Loan notes?
Step 1 - Dr Cash actually received
Step 2 - Cr Liability (PV of cash flows)
Step 3 - Cr Equity (bal fig)
FINANCIAL INSTRUMENTS
What is the classification for Financial Liabilities and what is their initial recognition and subsequent treatment?
- Depending on the type - if amortised:
Initial Recognition
- Cash received less costs incurred
Subsequent Treatment
Year || Bal B/F || Effective Interest Rate || (Coupon Rate) || Bal C/F
Year 1. ||
Year 2…||
- If classified as FVPL:
N.B - Liabilities held for trading (including derivatives) can be designated as FVPL
Initial Recognition
- Cash revived at FV
- Issue costs would be expensed
Subsequent Treatment
- Measured at FV each year with movement going to P&L
FINANCIAL INSTRUMENTS
When classifying an investment in shares, when would the equity be held as FVPL and what would its initial recognition/subsequent treatment be?
Held as Fair Value Through Profit & Loss when the equity is held for trading.
Initial Recognition
- At FV (cost)
- Issue costs expensed to P&L
Subsequent Treatment
- Revalue to FV
- Gain or Losses to P&L
FINANCIAL INSTRUMENTS
When classifying an investment in shares, when would the equity be held as FVOCI and what would its initial recognition/subsequent treatment be?
Held as Fair Value Through Through Other Comprehensive Income when the equity is not held for trading AND it is irrevocably designed.
Initial Recognition
- At FV (cost)
- Tx costs added
Subsequent Treatment
- Revalue to FV
- Gain or Losses to Other Comprehensive Income (and reserves on SFP)
N.b. the gain/loss in OCI is NEVER reclassified to P&L in the future.
FINANCIAL INSTRUMENTS
When classifying Debt financial assets, outline the Contractual Cashflow, Initial Recognition and Subsequent Treatment for holding until redemption?
FVPL
Contractual Cashflow
- Passed
Initial Recognition
- At FV (cost)
- Tx cost added
Subsequent Treatment
- At amortised cost
FINANCIAL INSTRUMENTS
When classifying Debt financial assets, outline the Contractual Cashflow, Initial Recognition and Subsequent Treatment for holding to redemption AND selling before redemption?
FVOCI
Contractual Cashflow
- Passed
Initial Recognition
- At FV (cost)
- Tx cost added
Subsequent Treatment
- Revalue to FV
- Gain or loss to OCI (and reserves on SFP)
N.b. The gain or loss in OCI IS reclassified to P&L in the future
FINANCIAL INSTRUMENTS
When classifying Debt financial assets, outline the Business Model, Contractual Cashflow, Initial Recognition and Subsequent Treatment when the model does not fit FVPL or FVOCI?
Contractual Cashflow
- Does not pass the tests for Amortised Cost/FVOCI
Initial Recognition
- At FV (cost)
- Tx cost expensed to P&L
Subsequent Treatment
- Revalue to FV
- Gain or losses to P&L
FINANCIAL INSTRUMENTS
What are the 3 characteristics of a Derivative and how are they classified?
- Little of no initial value
- Value changes in response to a change in underlying factor
- Settled in the future
Always classified as FVPL
EARNINGS PER SHARE
What are the formulas for Basic EPS and Diluted EPS?
- Basic EPS
Profits attributable to ordinary share holders - Weighted average number of ordinary shares
- Diluted EPS
Basic Earnings + Potential Extra Profits - Weighted avrg no. of shares + potential extra shares
EARNINGS PER SHARE
When calculating EPS, how do you calculate profits and the weighted avrg no. shares?
Profits
- > = Profits after tax - and NCI - (%*Non-Redeem Pref Shares)
- > Deduct cumulative preference div in the year they accrue, even if not paid
Weighted avrg. no. shares
Date || Actual No. of Shares || N/12 || Bonus Fraction || Weighted Avrg.
EARNINGS PER SHARE
What is a bonus issue of shares and how are they accounted for?
Bonus shares are those issued for free based on how many the holder has, i.e. 1 for 4.
Accounted for by increasing the issue in proportion. Use the regular weighted average table layout to calculate. Break out pre and post bonus issue in the table.
EARNINGS PER SHARE
How do you compare an earnings per share that has a bonus issue?
For the years prior EPS, multiply it by the inverse of the bonus fraction - will ALWAYS be lower.
i. e bonus issue of 1 to 9 = 10/9 bonus fraction, inverse is 9/10
14. 4 cents -> 13.0 cents
EARNINGS PER SHARE
What are some reasons to issue bonus shares?
Some argue its effectively paying a dividend when the co. doesnt want to pay cash.
The real reason is to lower the SP to make it more attractive.
EARNINGS PER SHARE
What is the RIBF and how is it calculated?
+ how does it lead to a comparitive?
RIBF = Right Issue Bonus Fraction
RIBF = Cum Rights Price/TERP
where TERP = (No. shares before x MV) + (Extra shares x exercise price)
Price After/TERP = Bonus figure for table -> Inverted = comparitive
EARNINGS PER SHARE
What does Diluted Earnings per Share mean and what are the two instruments involved?
Looks to see what would have happened if instruments had been converted in the year to shares i.e. convertible bonds + Options and warrants
EARNINGS PER SHARE
With DEPS, what are the effects on profits and avrg. no. shares for both types of instrument?
CONVERTIBLE BONDS
Profits
- Interest savings net of tax means earnings increase
Shares
- No. shares increase. If multiple conversion dates, assume worst case
OPTIONS AND WARRANTS
Profits
- No effect
Shares
- No. shares increase. Calculated by cash received vs would be FV today. Diff is the dilutive part.
LEASES
What is the difference between a finance lease and an operating lease?
A finance lease is where the risks and rewards of the underlying asset substantially transfer to the lessee. One or more of the following apply:
- Ownership transferred to lessee at the end of the lease
- Lessee has option to purchase asset < FV
- Lease term
- PV of payments ~ FV
- Specialised nature (tailored to them)
- Cancelled lease
- Gains/Losses to Residual value go to Lessee
- Can continue lease for secondary term at reduced cost
An operating lease is one that does not meet the above definition.
LEASES
What is considered in the initial recognition of a lease?
- Fixed and Variable payments
- Guaranteed and Unguaranteed residual values
- Purchase options reasonably exercised
- Termination penalties
LEASES
For a finance lease, what is the double entry for the initial recognition of the lease?
Dr Lease Receivable - PV of all CFs
Cr PPE - Asset Cost
Cr P&L - bal fig
LEASES
For a finance lease, what are the double entries for lease payments received and interest income?
Interest Income (Implicit rate of return x Opening lease value)
Dr Net Investment in Lease
Cr Interest Income
Lease Payments Received
Dr Cash
Cr Lease Receivable
LEASES
For an operating lease, what is the double entry and how are the values calculated?
Dr Cash - Money received in the year
Cr P&L - All incomes/lease term
Cr Deferred Income - bal fig
REVENUE RECOGNITION
What are the 5 steps that an entity applies when recognising revenue (IFRS 15)?
1) Identify the contract
2) Identify the separate performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations in the contract
5) Recognise the revenue when (or as) a performance obligation is satisfied
REVENUE RECOGNITION
What does revenue recognition at a point in time mean?
The performance obligation is satisfied at a point in time when a customer obtains control of a promised asset.
Control refers to the ability to direct the use of, and obtain substantially all of, the remaining benefits from the asset.
REVENUE RECOGNITION
What are some indicators that control has been transferred?
- The entity has a present right to payment for the asset.
- The entity has transferred physical possession of the asset.
- The customer has legal title to the asset.
- The customer bears the risks and rewards of ownership of the asset.
- The customer has accepted the asset.
REVENUE RECOGNITION
An entity should recognise revenue over time if it meets any one of the following three criteria, what are they?
- The customer simultaneously receives and consumes the benefits provided by the entity’s performance.
- The entity’s performance creates or enhances an asset that the customer controls.
- The entity’s performance does not create an asset with an alternative use and they have an enforceable right to payment for performance completed to date.
REVENUE RECOGNITION
When recognising revenue in construction projects, what are the four steps for the accounting of construction contracts
1) Determine if overall contract is PROFITABLE (looking out for loss making contracts)
2) Determine the STAGE OF COMPLETION of the contract
3) Calculate figures for the current period for the P&L
4) Calculate year-end figures for the SFP
REVENUE RECOGNITION
When recognising revenue in a construction contract, how do you determine the stage of completion of the contract using the input and output basis method?
Input Method
Costs incurred to date
- - - - - - - - - - - - - - - - - - -
Total costs
Output Method
Work certified to date
- - - - - - - - - - - - - - - - - - - - - - - -
Total revenue for the contract
REVENUE RECOGNITION
When recognising revenue in a construction contract, how do you calculate the figures for the current period statement of P&L for profitable, loss making and unknown contracts?
PROFITABLE CONTRACTS
Revenue X -> [Completion % x contract price] - previously recognised revenue
Cost of Sales X -> [Completion % x total costs] - previously recognised costs
- - -
Gross Profit X
LOSS MAKING CONTRACTS
Revenue X -> [Completion % x contract price] - previously recognised revenue
Cost of Sales X -> bal fig
- - -
Gross Profit X -> Total loss calculated recognised immediately
UNKNOWN CONTRACTS
Recognise Revenue received as the recoverable value of the CoS to date
N.b. when recognising previous revenue, years need their own % cost to completion x Rev/CoS
IAS 37 - PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITES
What is the difference between a provision and a contingent asset/liabilty?
A provision is a liability of uncertain timing and/or amount whereas a contingent asset/liability is a possible asset or liability arising from a past event where existence will be confirmed by future uncertain events from the control of the entity.
IAS 37 - PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITES
What are the 3 conditions for a provision to be made?
A provision can only be made if:
- There is a present obligation (legal or constructive) as a result of a past event
- It is probable that an outflow of economic benefits will be required to settle the obligation
- A reliable/best estimate can be made of the amount of obligation
IAS 37 - PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITES
Complete the table:
Likelihood of Occurrence Contingent Asset Contingent Liability Remote Possible Probable Virtually Certain
Likelihood - Contingent Asset - Contingent Liability
Remote - Nothing - Nothing
Possible - Nothing - Disclose
Probable - Disclose - Recognise
Virtually Certain - Recognise - Recognise
IAS 38 - INTANGIBLE ASSETS
What is the criteria for recognising an intangible asset from Development?
PIRATE - can only capitalise from the date that ALL criteria is met. Any costs prior are classed as research costs and therefore expensed.
Profit is expected to be made Intention to complete/sell Resources to complete Able to use/sell Technically feasible Expenses can be reliably measured
IAS 38 - INTANGIBLE ASSETS
How do you account for an intangible asset that has an indefinite useful life?
The asset should not be amortised but should undergo an impairment review per annum, or more often if there is an actual indication of a possible impairment.
IAS 38 - INTANGIBLE ASSETS
Outline how to cost the 5 main types of intangible assets.
PURCHASED
- Part of a business combination - Record at FV
- Other - Recognise at cost
INTERNALLY GENERATED
- Goodwill - Do not recognise
RESEARCH AND DEVELOPMENT
- Research - Expense to P&L
- Development - Capitalise if Pirate criteria are met.
N.B. If they are not intangible assets, likely to expense it to P&L
IAS 12 - INCOME TAX
What is Deferred Tax and why does it arise?
Deferred Tax recognises the tax impact arising beyond the next accounting period.
Deferred Tax arises due to temporary differences, i.e. differences in tax depreciation and depreciation on capital items.
IAS 12 - INCOME TAX
What is the table proforma to calculate the temporary difference in tax?
Accounting carrying amount x
Tax Base (x)
- - -
Temporary Difference x
N.B. Total deferred tax balance to the SFP, tax expense to the P&L
N.B.2 When posting difference in deferred tax, movement = bal c/f - bal b/f
IAS 12 - INCOME TAX
How do you set up and subsequently decrease a deferred tax liability?
SET UP
DR Income Tax Expense - P&L
CR Deferred Tax Liability - SFP
DECREASE
Dr Deferred Tax Liability - SFP
Cr Income Tax Expense - P&L
N.B MATCH THE ACCOUNTING TREATEMENT OF THE DEFERRRED TAX TO THE ACCOUNTING TREATMENT OF THE TX CAUSING DEFERRED TAX I.E. TEMPORTANT DIFF DUE TO CAPITAL ALLOWANCES SHOULD GO TO P&L WHEREAS DIFFERENCES DUE TO REVALUATION OF PPE SHOULD GO TO REVAL RESERVES
IAS 12 - INCOME TAX
How do you set up and subsequently decrease a deferred tax liability?
SET UP
DR Income Tax Expense - P&L
CR Deferred Tax Liability - SFP
DECREASE
Dr Deferred Tax Liability - SFP
Cr Income Tax Expense - P&L
N.B MATCH THE ACCOUNTING TREATEMENT OF THE DEFERRRED TAX TO THE ACCOUNTING TREATMENT OF THE TX CAUSING DEFERRED TAX I.E. TEMPORTANT DIFF DUE TO CAPITAL ALLOWANCES SHOULD GO TO P&L WHEREAS DIFFERENCES DUE TO REVALUATION OF PPE SHOULD GO TO REVAL RESERVES
IAS 12 - INCOME TAX
When are the two situations when you can have a deferred tax asset?
1 - Liabilities with nil tax base
2 - Losses
IAS 21 - FOREIGN CURRENCY TRANSACTIONS
What is the definition of a functional and presentation currency?
Functional Currency - Currency of the primary economic environment in which the entity operates
Presentation Currency - Currency in which the financial statements are presented (Co. can choose)
IAS 21 - FOREIGN CURRENCY TRANSACTIONS
Define and explain the treatment of the following: Settled, Unsettled, Monetary, Non-Monetary
SETTLED
- A settled transaction is paid or received before year end.
- When the receipt or payment is made, it is translated at spot at that date, and any exchange differences go to the P&L
UNSETTLED
- An unsettled transaction has NOT been paid or received before the year end and is therefore still outstanding.
MONETARY
- Items that are cash or readily convertible to cash i.e. payables, receivables, cash and cash eq.
- Translate at year end, diff to P&L
NON-MONETARY
- Items such as NCA and Inventory
- DO NOT translate at year end
GROUP ACCOUNTS - CONSOLIDATED SFP
What is the Profoma of Working 1?
(W1) Group Structure
Parent
| P%
| Date of Aquisition
Sub
GROUP ACCOUNTS - CONSOLIDATED SFP
What is the Profoma of Working 2?
(W2) Net Assets of Subsidiary
Acquistion Reporting Date Post-Acq Share Capital X X Reserves (RE, Other Equity) X X X Fair Value Adjustment (FVA) X X X PURP Adj (if S is seller) (X) (X)
- - - - - - - - - - - - - - - - - - - - - -
X (to W3) X X (to W4/W5)
GROUP ACCOUNTS - CONSOLIDATED SFP
What is the Profoma of Working 3?
(W3) Goodwill
Cost of Investment X
NCI (either valued at share of NA (W2) or FV) X
100% x FV of S’s Net Assets at Acquisition (X)
- - - - - -
GW at Acquisition X
Impairment (X)
- - - - - - -
GW at Reporting Date X
GROUP ACCOUNTS - CONSOLIDATED SFP
What is the Profoma of Working 4?
(W4) Non-Controlling Interest
NCI @ Acq (W3) X
NCI% x S’s Post-Acq Reserves (W2) X
NCI% x GW impairment (FV Method only) (X)
- - - - -
NCI @ Reporting Date X
GROUP ACCOUNTS - CONSOLIDATED SFP
What is the Profoma of Working 5?
(W5) Consolidated Reserves
Retained Earnings Other Components 100% x P's Reseres X X P's % of S's Post-Acq Res (W2) X X P's % of A's Post-Acq Res (W6) X X P's % of S Impairment (X) - A Impairment (X) - PUPR Adj (P>S) (X) - P% of PUPR Adj (P>A) (X) -
- - - - - - - - - - - - - - - - - Reserves @ Reporting Date X X
GROUP ACCOUNTS - CONSOLIDATED SFP
How do you account for Intra-group balances and Cash in Transit? And what are the exemptions?
Intra-Group Balances - Deduct the intra-group balance from i.e. both payables and receivables. This includes Loans, Dividends and Interest Income.
Cash in Transit = Deduct the relevant CiT from the payables, keep the receivable balance as is.
Exemptions - unrealised profit on inventory (P%), dividend received from assoc.
GROUP ACCOUNTS - CONSOLIDATED SFP
How do you calculate the PURP?
Provision for Unrealised Profits are when there is sales between the parent and sub. Work out the profit element retained by the group (not sold) and deduct it from the relevant working.
Mark-up: Divide by the 1 + mark up % i.e. 20% = 1.2
Margin: Multiple by margin i.e. 50% = 0.5
GROUP ACCOUNTS - CONSOLIDATED SFP
What is included within the definition of control in IFRS 10 Consolidated Financial Statements?
- The investor has power over the investee
- The investor has exposure, or rights, to variable returns from its involvement with the investee
- The investor has the ability to use its power over the investee to affect the amount of the investor’s returns.
GROUP ACCOUNTS - CONSOLIDATED P&L
How do you consolidate a P&L?
- Add together all costs into a consolidated column to get a Total Comprehensive Income
- Work out the NCI of the Subs profit
- Use a bal figure to work out the ‘Equity holders of the parent’
N.B. TIME APPORTION ANY OF THE SUBS FIGURES. MINUS INTRA FROM REV AND CoS, ADD PURP TO CoS
i.e. (this is how it looks - don’t need to remember)
. . . . . .
. . . . . .
Total Comprehensive Income Y
═══
Equity holders of the parent β
NCI Share of Subs Profit or (W1) X
- - - - -
Y
GROUP ACCOUNTS - CONSOLIDATED P&L
What is the working for NCI in the P&L Consol?
(W1) Non-Controlling Interest
Subs Total Comp Income (Pro-rate if needed) X
FV Depreciation (X)
PURP (S>P) (X)
Impairment (FV Method Only) (X)
- - - - -
NCI = X
Multiply NCI by % to move to main Consolidation.
GROUP ACCOUNTS - CONSOLIDATED P&L
What are the adjustments to the Consol P&L and how are they treated?
- Dividend income - remove parents share of dividend income.
- Loan Interest - Remove any loan interest between the two entities, pro-rate if needed.
- Impairment of GW - Generally against admin expenses. If FV Method, against Subs Expenses - If proportionate, against Parents Expenses.
- FV Depreciation - Depreciate the FV change. Pro-rate if needed.
- Intra-Group - Reduce Revenue and CoS for value. Be careful of dates of acquisition, ignore is prior to control.
- PURP - Add to CoS.
GROUP ACCOUNTS - ASSOCIATES AND JOINT ACCOUNTS
What is an associate and how are they accounted for?
An associate is typically described as a 20-50% shareholding + they must have significant influence.
- As the parent does not have control, DO NOT add in line by line or show a NCI
- The parent only has significant influence so will only bring their share of the associates assets
- Bring the parents share of associates post acq profit into W5 Group Reserves
GROUP ACCOUNTS - ASSOCIATES AND JOINT ACCOUNTS
What is the proforma for the (W6) Investment in Associate that goes into W5 Group Reserves?
(W6) Invest in Associate
Cost of Inv X
P % of Post Acq Res X
Full Impairment (X)
P% PURP (P>A) (X)
- - - - - -
X
N.B. % of Post Acq Res and Impairment need to be included in Group Reserves
GROUP ACCOUNTS - ASSOCIATES AND JOINT ACCOUNTS
When would a parent equity account?
Parents will equity account when they have an associate (they must already have a subsidiary). Just means to consolidate the associate into their Consol Statements.
If they dont have a sub then they wont prepare consolidated accounts -> show the assoc just as an investment.
GROUP ACCOUNTS - ASSOCIATES AND JOINT ACCOUNTS
What adjustments do and do not need to be made with an associate?
- Intra-group trading/balances between the P and A - DO NOT adjust
- Dividend - DO adjust proportionally. (N.b. if working out OCI/P&L, ignore Div.)
- PURP - DO adjust proportionally
GROUP ACCOUNTS - ASSOCIATES AND JOINT ACCOUNTS
How do you add in Associates to the Consol P&L?
Add in an Income from Associate Column to the Consol P&L
P’s % of A’s Profit X
P% PURP (X)
- - - - - -
P% of subtotal X
Impairment (X)
- - - - - -
X
GROUP ACCOUNTS - ASSOCIATES AND JOINT ACCOUNTS
Explain Joint Control, the Two Types and how to account for them.
Joint Control is a contractual agreement/arrangement to share control.
JOINT OPERATIONS (Involves using the assets and resources) - Account for share of assets, liabilities, revenues and expenses.
JOINT VENTURE (Setting up a separate entity) - Equity account i.e. Assoc.
FOREIGN CURRENCY SUBSIDIARIES
What rates are used for converting Subs finances for consolidating?
- All ASSETS and LIABILITIES (including goodwill) translate at the CLOSING RATE
- All INCOME and EXPENSES translate at the AVERAGE RATE
- All FOREX DIFFERENCES go to EQUITY in the Group Reserves (OCI)
FOREIGN CURRENCY SUBSIDIARIES
How do you calculate Forex differences on Goodwill and Net Assets?
GOODWILL
GW at Closing Rate X
GW at Opening Rate (X)
Impairment X
- - - - -
Gain or Loss X
N.b. Impairment ADDED at average rate
NET ASSETS
Closing NA at Closing Rate X
Less Profit at Average Rate (X)
Less Opening NA at Opening Rate (X)
————–
Gain or Loss
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
What is the proforma layout for the CSOCIE table? (not the workings, the actual table)
. Parent NCI
Equity b/f X (W1) X (W2)
Comprehensive Income for Year X X
Dividends (X) (X)
- - - - - - - - - - - - - - - - - - - - - - -
Equity c/f X X
N.b. for Comp Income: Add both Comp Incomes and then remove portion of sub dividend and the NCI to calculate the Parent figure.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
What is (W1) to calculate the parent share of equity b/f?
(W1)
100% P Retained Earnings b/f X
P Share Ss PAR up to b/f date X
Impairment b/f (X)
- - - - - - -
Equity b/f X
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
What is (W2) to calculate the NCI share of equity b/f?
(W2)
NCI at acquisition X
NCI Share Ss PAR up to b/f date X
NCI Impairment b/f (fv method) (X)
- - - - - - -
NCI b/f X
CONSOLIDATED STATEMENT OF CASHFLOWS
What is the CSOCF Proforma?
CASH FLOW FROM OPERATING ACTIVITIES - Profit before Tax Adjusted for: - Depreciation/Amortisation - Provision Increase/(Decrease) - (Profit)/Loss on Disposal - (Interest Receivable/Investment Income) - (Share of Associates Profit) - Finance Costs
OPERATING PROFIT BEFORE WORKING CAPITAL CHANGES
- (Increase)/Decrease in Inventorires
- (Increase)/Decrease in Receivables
- Increase/(Decrease) in Payables
CASH GENERATED FROM OPERATIONS
- (Finance costs paid )
- (Tax Paid)
NET CASH FROM OPERATING ACTIVITES
CASHFLOWS FROM INVESTING ACTIVITIES
- (Purchase of PPE)
- (Purchase of intangibles)
- (Purchase of investments)
- Proceeds from sale of PPE
- Proceeds from sale of intangibles and investments
- (Acquisition of a sub net of subs cash)
- Dividends received from associates
- Investment income received
NET CASH FROM INVESTING ACTIVITIES
CASHFLOWS FROM FINANCING ACTIVITIES
- Proceeds from share issue
- Proceeds/(Redemption) from long term borrowing
- (Dividends paid to parent shareholders)
- (Dividends paid to NCI)
NET CASH FROM FINANCING ACTIVITIES
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD
CONSOLIDATED STATEMENT OF CASHFLOWS
What is the working for ‘Dividend Received from Associate’?
LEFT Balance b/f = P Share of Associate Profit = P share of A OCI = Total =
RIGHT
Dividends received =
Bal c/f =
Total =
CONSOLIDATED STATEMENT OF CASHFLOWS
What is the working for ‘Dividend Paid to NCI?
LEFT
Dividends paid =
Bal c/f =
Total =
RIGHT Bal b/f = NCI % of S TCI = NCI % on Acq = Total =
IAS 24 - RELATED PARTY DISCLOSURES
What are not often seen as related parties (unless stated otherwise)?
- Two entities simply due to having a common director
- Two joint ventures
- Providers of finance
- Key customers, suppliers.
IAS 24 - RELATED PARTY DISCLOSURES
What is a related party transaction?
A transfer of services or resources between related parties, irrespective of whether a price is charged.
IAS 24 - RELATED PARTY DISCLOSURES
What disclosures are required for related party transactions?
- The nature of the related party (do not need to identify)
- The nature of the transaction
- The amount of the transaction
- The amount of any outstanding balances
INTEGREATED REPORTING
What are the 6 Capitals in Integrated Reporting and what do they mean?
The Capitals are resources and relationships used and affected by the organisation.
- Financial
- Manufactured
- Intellectual
- Human
- Social and Relationships
- Natural
INTEGREATED REPORTING
What is integrated reporting and what are its objectives?
Integrated reporting is a single document that will explain how an entity creates value over time using the principles outlines in the IR framework.
The objective of an integrated report it to explain to providers of financial capital how an entity creates value over time.
INTEGRATED REPORTING
What are the 3 limitations of financial statements?
- Historic - not forward looking
- Accruals - profits differs from cash
- Financial information fails to give the full picture
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What is the formula for Gross and Operating Profit Margin and what are their meanings?
GROSS PROFIT MARGIN = Gross Profit/Revenue
- Profitability of a company’s products. Higher is generally better
OPERATING PROFIT MARGIN = Profit from Operations (PBIT)/Revenue
- Profitability, but takes into account all costs of Ops.
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What is the formula for Asset Turnover and Return on Capital Employed and what are their meanings?
Asset Turnover (in no. of times) = Revenue/Capital Employed - Shows how efficient the assets are worked.
Return on Capital Employed (ROCE) = Profit from Ops (PBIT)/Capital Employed
- Shows how efficient a company is at generating profits from its resources available.
- Can be calculated by OP% x Asset Turnover
N.B. Capital Employed = Equity and Liabs
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What is the formula for the Current and Quick Ratios and what are their meanings?
Current Ratio = Current Assets/Current Liabilities
- Shows if there are enough assets to pay for liabilities
Quick Ratio/Acid Test = Current Assets-Inventory/Current Liabilities
- Measures a more immediate position
- Would expect this to be lower than the current ratio
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What is the formula for Inventory Days, Receivable Days and Payable Days and what are their meanings?
Inventory Days = (Inventory/Cost of Sales)*365
- Indicated how long a company holds stock for. Middle is good.
Receivable Days = (Receivables/Credit Sales)*365
- Indicates how long it takes customers to pay. Middle is good.
Payable Days = (Payables/Credit Purchases)*365
- Indicates how long it takes us to pay suppliers. Middle is good.
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What is the formula for Inventory and NCA Turnover what are their meanings?
Inventory Turnover = Cost of Sales/Inventory
- Shows us how many times a business is selling inventory A YEAR (value in mo i.e. 12 = 1 a month)
Non-Current Asset Turnover = Revenue/Non-Current Assets
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What are the two different formulas for Gearing and what do they meanings?
Gearing = Interest Bearing Borrowings/Capital Employed OR Interest Bearing Borrowing/Equity
- Shows the amount of debt the company is reliant on and therefore how risky it is.
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What are the formulas for Interest and Dividend Cover and what do they mean?
Interest Cover = Profit before Finance Costs/Finance Costs
- Shows how many times interest can be paid
Dividend Cover = Profits available to ordinary shareholders/Dividend
- Shows how comfortably a company can meet the current level of dividends.
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What are the three main type of limitations with Financial Statement Analysis?
- Limitations of financial reporting information
- Limitations of comparing different entities
- Limitations of ratio analysis
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
How do you calculate EBITDA?
EBITDA = Profit for Year + Interest (Finance Costs) + Depreciation + Amortisation
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
What is Gartners Data Analytics Maturity Model?
The Gartner Data Analytics Maturity Model groups data analytics into 4 separate stages:
- Descriptive: What happened?
- Diagnostic: Why it happened?
- Predictive: What is going to happen?
- Prescriptive: How can we make it happen/prevent it happening?
ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION
How do you calculate the Working Capital/Cashflow Cycle?
Inventory Days + Receivable Days - Payable Days
