Financial Reporting & Analysis Flashcards
Earning Sources and ROE
Investments in other companies
Example of Equity Method problem
2016
I/S is prorate NI + Divs = $150
- $120 NI
- $30 Div
B/S End Investment = $1,090
- Beg Inv = $1,000
- RE $90 (120 NI - 30 Div)
Investments in other companies
Partial and Full Goodwill
- Define each
- How do they relate to each other (IRFS/GAAP, values, etc)?
Partial goodwill: IFRS only
GWpartial = $ - [%(owned) x FMVNA]
<span> </span> = [PurchasePrice] - [Prorata share(% owned) of FV Net Assets]
MI = %(not-owned) x FVNA
- Allocated to cash generatign units (if recoverable amount of unit is < carrying value, recognize difference as impairment
- Impairment:
- Loss recognized in I/S as line-item.
- = BV - Recoverable amount of cash generating unit
- 1-step
Full goodwill: considers total value of sub when calculated. Required by US GAAP. IFRS option.
GWFull = FVsub - FVNA
= [Purchase$ / % owned] - FVNA
MIFull = %(not-owned) x FVSUB
- Allocated to reporting units, i.e. operating segment or component.
- Think US GAAP for this
- Impairment: 2-steps
Investments in other companies
< 20% Ownership
< 20% ownership is a Financial Asset (passive investment, no-significant influence)
Accounting treatment is 3 Shoe Boxes (3SB)
- Held-to-Maturity (amortized cost) debt only
- B/S: = CV
- I/S: Interest(full), realized g/l
- Available for Sale (FV through OCI) D&E
- B/S: FV / OCI reflects cumulative U/R gain, _/_ OCI is u/r g/l for period
- Trading Securities (FV through profit/loss) D&E
- B/S: FV
- I/S: Interest + U/R g/l. (when sold, deduct u/r gain/loss from sale gain so not double taxed!)
Investments in other companies
Acquisition Method
(Application, B/S, I/S)
Application
• Influence > 50%
B/S (4-steps)
- Adjust Parent’s B/S to FMV per investment financing activity (cash, debt, stock?). No investment acct.
- Adjust Sub’s B/S to FMV and remove Equity (All! Common, RE, Paid-in-cap, etc!)
- Create MI minority interest for (non-purchased share of equity still owned by sub)
- Calculate GW goodwill [full-GAAP vs full-or-part IFRS]
- Combine A&L 100% of both firms (net of inter company transactions). Include all of Parent’s Equity.
I/S (3-steps)
- Adjust Sub’s I/S to FMV (if needed)
- Add Parent’s % share of Sub’s NI (post-acquisition) and/or Remove sub’s earnings from parent (dividends)
- Combine Rev & Exp 100% (net of inter company transactions)
Investments in other companies
Equity Method
(Applicable scenarios, B/S, I/S, Analyst issues)
Applicable w/ Significant Influence…generally >20% but ≥ 50% owned and includes joint ventures. Called 1-line item consolidation b/c only one entry each on B/S and I/S.
B/S
- 1-line: investment is Asset listed at-cost + prorata Earnings - prorata DIVs (Note - dividends shown separately as Cash on B/S)
- Analyst issues
- Nettings assets against liabilities may obscure liabilities and understate leverage
I/S
- 1-line: prorata earnings
- Analyst issues
- only share of NI shown
- earnings may not distribute dividends
Investments in other Corporations
Key Comparisons of Equity Method (EM) vs Acquisition Method (AM)
EM vs AM
< Equity (by amount of minority interest)
< Assets & Liabilities
< Sales & Expenses
= NI
> Net Profit Margin
> ROE
> ROA
Investments in other Corporations
Investment Ownership Types
Multinationals
Ratio and Statement Comparisons of
Original vs Translated
(3 key points, ratio table)
3 Key points to remember:
- Pure B/S and Pure I/S ratios will be the same. Mixed ratios (I/S num and B/S denom) present the challenges.
- LocalCurrency ↓ Depreciates ⇒ translated mixed ratios GREATER THAN > orginal (LC)
- LocalCurrency ↑ Appreciates ⇒ translated mixed Less than original (LC)
Multinationals
Current Rate Method Steps
Multinationals
Integrated vs Independent Subs
Integrated » $USD functional currency. High inflation locally makes integration more likely.
Independent sub » ¥ Local currency functional
Multinationals
Temporal Method and Current Rate Method
(Notable comparative categories and applicable differences)
B/S
Assets and Liabilities?
Nonmonetary assets/liabilities?
Common stock?
Equity (taken as a whole)?
I/S
Revenues and SG&A?
COGS?
Deprec and Amort?
NI?
Exposure?
Exchange rate gain or loss?
Multinationals
Temporal Method Steps
Pensions
Pension assumptions (3) and impact of changes to assumptions
- Discount rate
- Rate of Comp ↑
- Expected Return of pension assets
Pensions
Fair Value of Plan Assets
X BEG Fair value plan assets
+/- Actual return plan assets
+ ER contributions
- Benefits paid
ENDING FV plan assets
•
Pensions
Pension Accounting
IFRS vs US GAPP
Pensions
PBO & Components
- Define PBO
- How is it calculated?
- Define each component
Projected benefit obligation (PBO) is the actuarial present value (at the assumed discount rate) of all future pension benefits earned to date, based on expected future salary increases. It measures the value of the obligation assuming the firm is a going concern.
X Opening PBO
+ Service cost
+ Interest cost
+/- Actuarial (gains) or losses
+/- Past service cost
- Benefits paid
= Closing PBO [Reconciliation disclosed in footnotes]
Pensions
Remeasurements
Pensions
Summary slides:
- Funded Status of a pension plan (figure)
- Total Periodic Pension Cost (slide)
- Delayed Recognition of Pension Events (two main, +slides)
Pensions
Total Periodic Pension Cost (TPPC)
1) TPPC = Contributions - _/_ FS (Ending FS - Beg FS)
2) TPPC = I/S expense + OCI Expense
- reflects economic or true cost (it’s not pension exp)
- Same value in IFRS and GAPP (differs in terms of where pension cost is reflected…I/S vs OCI)
Topic summary
Major Differences (Level II Curriculum)
Between IFRS and U.S. GAAP Treatment
