F2 Flash Cards
Cost of Equity formula (no growth)
Ke = dividend / Ex. div share market price
Primary & secondary functions of capital markets
primary: to enable companies to raise new finance through issuing shares / marketable debt
Secondary: to enable trade of shares
Cost of Equity formula (with growth)
Ke =
(current Divi (1+ g) / ex. div share market price) + g
Calculating growth if not given
if given divi now and divi x years ago
(nth root of D0/Dn) -1
If based on retention of profits
G = % return required X proportion of funds retained
Cost of Debt formula (bank borrowings)
Kd = annual % int rate (1 - corporate tax rate)
Cost of Debt formula (Irrdeemable, undated, long dated or redeemable traded at par)
Kd = coupon rate (1-tax rate)
———————————–
after int. paid market price of debt
IRR formula (redeemable debt)
R1 + (R2- R1) x NPV1 / (NPV1 - NPV2)
Yield to maturity (irredeemable debt)
Annual int. received / market value
Yield to maturity (redeemable debt)
IRR
Financial Liabilities - Initial recognition
Fair value LESS transaction costs
Financial Liabilities - Subsequent Treatment
FVPL , reval to fair value, gain/loss to P&L
OR
Amortised cost
(net proceeds + int. - repayment = closing bal)
Convertible Loan (split liability & equity parts)
- cash from loan
- PV of cash flows = liability
- difference = equity
Financial Assets - Initial Recognition
Fair value PLUS transaction costs
OR
FVPL - transaction costs go to P&L
Financial Assets - Subsequent Treatment IF EQUITY
if shares held for trading: FVPL, reval to fair value, gain/loss to P&L
If shares NOT held for trading: FVOCI, reval to fair value, gain/loss to OCI
Financial Assets - Subsequent Treatment IF DEBT
If intend to hold to maturity:
Amortised cost
If intend to hold & then sell
FVOCI
If intend to sell
FVPL
Liability provisions 3 criteria:
- present obligation from past event
- outflow of resources probable
- reliable estimate can be made
(DO NOT provide for: training, future losses)
(provide for: lower of cost of fulfilling contract or cost of breaching contract, future costs of restoration capitalized with asset, redundancies)
Contingent liabilities & assets (disclosed in dates to the accounts if…)
contingent liability - disclose of possible
contingent asset - disclose of probable
Intangible asset definition…
identifiable, non monetary asset without physical substance
(must be seperable, or arise from legal/contractual rights)
Research & development costs
Research costs - write off to P&L
Development costs - capitalise & amortise IF meet PIRATE criteria
Probable future economic benefit
Intention to complete
Resources to complete
Ability to use/sell product
Technically feasible
Expenditure measured reliably
Internally generation ITAs
Internally generated e.g. brand names -> not recognised
ITA purchased separately e.g. aquire a licence -> capitalised at cost
ITA purchased with business acquisition -> capitalise at fair value if ITA can be measured
Earnings per share (EPS)
Earnings (PAT - NCI share of profits - irredeemable pref share divis)
______________________________________________________
WAV shares
FOR WAV SCALE UP SHARE ISSUES BEFORE BONUS/RIGHTS ISSUES
Bonus issue - bonus fraction =
shares after / shares before
Rights issue - bonus fraction =
Cum rights price / TERP
DEPS
Convertible loans:
earnings - save interest, pay more tax
WAV - no. shares increase by max. conversion
Share options:
earnings - no impact
WAV - no. shares increase by bonus element…..
bonus element = diff between no. options in existence and no. full price shares can be purchased with cash from options
Indicators of a finance lease
- legal title transferred
- option to purchase
- lease term majority of economic life
- PV of lease payments = FV of asset
- highly specialised asset
- lessee bears losses from cancelling lease
Finance leases, lessor initial recognition:
- derecognise asset
- record a receivable (PV of unreceived payments)
- difference is gain/loss on disposal
Finance leases, lessor subsequent treatment:
In arrears:
Opening bal, +int., - lease receipt, closing bal
In adavnce:
Opening bal, - lease receipt, sub total, +int., closing bal
Operating leases, lessor accounting:
lease income recognised in P&L over the lease term
Dr cash
CR P&L
Cr/Dr deferred income/accrued income
Construction contracts recognising revenue….IF LOSS MAKING
revenue X
Cost of sales (X) (B)
_________________________
Gross loss ( X )
Construction contracts recognising revenue if progress unknown
Revenue = recoverable costs if progress unknown, no profit can be recognised
Related parties
key management & close family
entities in same group (parent, subsidiaries, joint ventures)
( not related: common director, joint venturers, finance providers, customers/suppliers)
Integrated reporting primary purpose
Explain to providers of financial capital how an entity created value over time in a way that’s beneficial to all stakeholders
Integrated reporting objectives (4)
- improve quality of info
- cohesive & efficient approach to corporate reporting
- enhance accountability & stewardship for the capitals
- support integrated thinking & creation of value
The 6 capitals
Financial
Manufactured
Intellectual
Human
Social/relationship
Natural
4 pros & 3 cons of integrated reporting
Pros
+ forward looking info
+ more info disclosed
+ increased transparency = improved reputation
+ improved efficiencies
Cons
- reports not audited - bias
- disclosure of info could = loss of competitive adv
- too much info for users to digest
Foreign currency transactions: initial & subsequent measurement
initial measurement = record at historic rate
Subsequent measurement =
If settled - translate at settlement date
If not settled - translate at closing rate
UNLESS non -monetary asset (e.g. machinery), then keep at historic rate
3 steps to account for deferred tax
- calc the temporary difference
CA > TB = DT liability
CA < TB = DT asset - calc DT balances at year end
Temp difference x tax rate = year end DT liab/asset - Post the MOVEMENT in the DT balance
NOTE: DT assets can only recorded up to the amount you expect to be able to use
NOTE2: DT entry should match treatment of transactions that caused it e.g. cap allowances to P/L, revaluations to OCI
W3 Goodwill calc
Cost of investment
NCI @ acquisition
LESS S NAs @ acquisition
W4 NCI calc
NCI @ acqusition
NCI% S post acq NA movement
LESS impairment (only NCI % if fair value used for NCI @ acq)
W5 Retained earnings calc
100% P
P% S post acq movement
LESS impairment (full impairment if proportionate method used and only P% if fair value method used for NCI @ acq)
PUP adjustments
Cr inventory, Dr retained earnings (increase COS)
If P sold to S -> all P adj in W5 RE
If S sold to P -> split P% in W5 RE calc and NCI% in W4 NCI calc
intra-group outstanding balances: if balances AGREE
cancel out immediately
Dr payables
Cr receivables
intra-group outstanding balances: if balances DO NOT AGREE
due to cash in transit:
Treat cash as received at YE
Dr cash, Cr receivables
cancel out intra group balances
Dr payables, Cr receivables
due to inventory in transit:
treat inventory as received at YE
Dr inventory Cr receivables
cancel out intra group balances
Dr payables, Cr receivables
consideration for cost of investment. Fair values for:
cash
deferred cash
shares
deferred shares
contingent consideration
cash = cash paid
deferred cash = PV
shares = market value @ acq
deferred shares = market value @ acq
contingent consideration = fair value
Indications of significant influence (2)
- appoint board members
- lots of trading between parent & associate
Investment in Associate =
Cost of investment
P% A post acq movement
Less: impairment
Less: PUP
Share of associates profit =
P% of A total profit after tac
Less: Impairment
Less: PUP
Consolidated Reserves at Reporting Date =
100% P
P% S post acq
p% A post acq
LESS: Goodwill impairment
LESS: impairment of A investment
LESS: PUP adj
Joint ventures are
2 companies create new company
rights to net assets
(use equity accounting the same as for associates)
Joint operations are
Jointly controlled projects (no separate entity exists)
rights to assets & obligations
Associate accounting rules
parent has significant influence, not control (<50% shares/voting rights)
No control = no addition of assets & liab or income & expenses
DO NOT eliminate trading between assoc & group companies
DO remove dividends received from associate
Dividends paid to NCI =
NCI bal b/f
NCI share of profit/OCI
Dividend paid BALANCING FIGURE
____________________________________
NCI bal c/f
Dividends received from associates =
Inv in assoc b/f
Assoc share profit/OCI
Dividend received BALANCING FIGURE
_________________________________________
Inv in assoc bal c/f
Calculating FX difference on translation of goodwill
Goodwill @ Acq @ HR
LESS Impairment @ AR
Exch difference BALANCING FIGURE —> if FV split P&NCI, if prop all P
____________________________________
Goodwill @ reporting date @ CR
Exchange difference on Subs net assets
Closing NAs @ CR
LESS opening NAs @ OR
LESS comp income @ AR
___________________________________
FX diff on S net assets ——> split P & NCI
Gross profit margin =
Movements caused by….
Gross profit (rev - cos)
____________________________
revenue
movements caused by:
sales & cost price changes
sales mix changes
inv valuation policy changes
Operating profit margin =
Movement caused by….
Operating profit (PBIT)
__________________________
Revenue
Movements caused by:
same as GP% if inline
changes to admin & distribution exps
exceptional PPE write off
ROCE=
Movements caused by…..
Operating profit (PBIT)
_________________________
capital employed
Movements caused by:
OP% or asset turnover (ROCE = OP% x asset turnover)
Revaluations
PPE inv at YE with no time to generate profit
changes in leases
Current ratio & Quick Ratio/Acid Test
Current = current assets / current liabilities
Quick = current assets - inventory / current liabilities
Inventory days
Inventory / COS X365
Receivable dats
Receivables / Revenue X365
Payable days
Payables / COS X365
Gearing =
Ratio= Debt / equity
% = debt / debt +equity
Interest cover =
Operating profit (PBIT) / finance cost
Dividend cover =
EPS / Dividend per share
OR
profit for year / dividend paid
