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Accounting for Analysts > FI Leases and shizz > Flashcards

FI Leases and shizz Flashcards

1
Q

What is IAS 39/IFRS 9

A

Financial Instruments; recognition and measurement

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2
Q

what is IAS 32

A

Financial instruments; Presentation

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3
Q

what is IFRS 7

A

FI; DIsclosures

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4
Q

What are financial instruments

A
  • Any contract that gives rise a financial asset of one entity and a financial liability or equity instrument of another
  • Contract - unlike intangibles, their existence is clear
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5
Q

What are some common examples of financial instruments

A
  • Trade receivables/payables, loans, investment in shares, bank overdraft
  • Derivative, preference shares, convertible loan stock
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6
Q

What is a financial asset

A
  • Cash, equity instrument or another entity or contractual right to receive cash or other financial asset
  • NOT physical assets such as inventory
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7
Q

What is a financial liability

A
  • Contractual obligation to transfer cash/ financial asset or entity’s own equity instrument to another party
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8
Q

What is an equity instrument

A
  • Provides residual interest in an entity after deducting all of its liabilities
  • Liability = obligation to transfer an economic resource
  • Key point in distinguishing between equity and debt is that for equity there is no contractual obligation to pay cash
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9
Q

FA,FL,EQ?

A Ltd sells 5k of goods to B Ltd on credit

A

A Ltd has the right to receive cash and B Ltd has an obligation to pay
A FA
B FL

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10
Q

FA,FL,EQ?

C plc pays 30k in advance for 12 months fire insurance

A

C plc has the right to receive future fire insurance cover not cash or other FA, HENCE not a FA

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11
Q

FA,FL,EQ?

D plc issues 50,000 ordinary shares which E plc acquires

A

The shares are EQ in D plc and a FA for E plc

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12
Q

FA,FL,EQ?

F Ltd borrows 100k from G Plc

A

F Ltd has a FL, G plc has a FA

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13
Q

What are preference shares

A
  • have some similarities to debt
  • dividends often set at a specified rate
  • whether equity or debt depends mainly on whether the shares are cumulative or noncumulative
  • if cumulative, holder does not lose the right to the dividend if the company decides not to pay it in a given year
  • unpaid dividend roll up to the future
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14
Q

Where do cumulative preference shares go in the FS

A
  • NCL as a Finance expense
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15
Q

Where do non-cumulative preference shares go in the FS

A

Equity
and Changes in equity statement

UNLESS the holder has the right to demand that they are redeemed - in that case then NCL

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16
Q

Give and example and explain what a compound financial instrument is

A

Convertible Bond

  • Have the characteristics of both equity and debt
  • Obligation to pay annual interest and at some point repay the capital but gives the holders the option to convert bonds into shares in the future
  • IAS 32 requires the components be split between debt and equity
17
Q

Explain what IAS 32 wants

A

IAS 32 requires the components be split between debt and equity

  • Liability element = Present value of interest payments and eventual capital repayment
  • Discount rate = market rate applicable to a similar bond that is non convertible
  • Equity element = remainder of the proceeds on issue
18
Q

What are treasury shares, why and how are they treated

A
  • a companys own shares which it buys back
    ;Boost value of shares, reduce cash reserves, reduce future CF in dividends, Increase EPS signalling higher dividends
  • Cost of purchase shown as a negative reserve in equity
    DR Treasury Shares
    Cr Bank
19
Q

what are the four types of derivatives

A

Forward contract
Futures contract
Option
Swap

20
Q

What is a forward contract

A

agreement to buy something at a certain price at a certain date in the future

21
Q

what is a futures contract

A

similar to a forward contract but they are based on standardised contracts traded on securities exchange

22
Q

what are swaps

A

2 parties swap interest terms, fixed for variable, with financial institution acting as an intermediary

23
Q

what are options

A

give the holder the right but not the obligation to buy or sell an asset within a certain period at a set price

24
Q

what are the accounting problems of derivatives

A
  1. How should they be measured
    - what would be the effect if they were reported at historical cost
    - often with no initial outlay
    - nothing to record on signing the contract
    - gains/losses would not be reported until realisation
    - derivatives with NIL cost would never appear in the BS
    - IAS 3 requires companies to report their derivatives at fair value which is the price a buyer is willing to pay and is revalued annually
25
Q

what is a lease

A

a contract in which one party provides use of an asset to another party in return for regular payments but retains ownership

26
Q

What is an operating lease

A

IAS 17 where the risks and rewards of ownership remain with the lessor

ie they are like rental agreements

27
Q

what is a finance lease

A

IAS 17 transfers the risks and rewards of ownership to the lessee

ie treated as if the lessee bought it

28
Q

IAS 17 vs IFRS 16

A

IAS 17
FL are capitalised
OL are expensed
From 1.1.19 this distinction will be abolished by IFRS 16 and all leases to be treated as finance leases

in order to counteract creative accounting practices

29
Q

whats the analysts perspective of the new IFRS 16

A

The change will have a major impact on companies gearing ratios

30
Q

What do cashflow statements highlight?

A
  1. Relationship between profitability and liquidity

2. On cash implications of a companys activities such as investment strategies

31
Q

what are cashflow statements useful for

A

Assessing how able a company is to meet its short and long term obligations

  • maintain and expand the business operations through new investment
  • raise new finance
  • pay dividends to shareholders
32
Q

What is accrual accounting

A
  1. Revenue and expenses are included when they arise, not when they are paid
  2. Reported profits do not equal cash generated from ops
  3. Op profit based on sales and purchases of goods and services invoiced during the year not the amount of cash paid and received

ie profits take into account receivables and payables
4. COS is only charged with materials used up in production during the year not the amount purchased
ie COS is adj for opening and closing in which is not related to cash paid

33
Q

What can increases in working capital do to the cf

A

can obscure the decline in a companys liquidity ie current ratio vs operating cycle
Higher current ratio may seem beneficial because on the face of it the company has a higher proportion of ST net assets to convert into cash
BUT what if the increase is caused by overstocking or poor credit control

34
Q

Examples of non cash adjustments to operating profits

A

Depreciation
Amortisation
Losses/Profits on sale of NCA

35
Q

What are cash flow ratios

A
  1. Cash gen from ops
  2. Cash interest cover
  3. Cash dividend cover
36
Q

what is cashflow ratio

A

Cash generated from ops/ops profit

Measure of the quality of op profit ie how much of it is backed up by cash

37
Q

what is the cash interest cover ratio

A

Cash gen from ops+interest and dividends received/ interest paid

Similar to interest cover ratio but based on cash. cash based measure of risk defaulting on loan obligations

38
Q

What is the cash dividend cove

A

net cash from ope+ int and div received/ dividends paid

similar to dividend cover ratio. cash based measure of a companys investment policy

Accounting for Analysts (4 decks)

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