Financial Reporting & Analysis Flashcards
How are dividends from a subsidiary accounted for?
The dividend will be taken off the investment in assets, but will flow in through cash flow from investing.
Which financial reporting method should be used for Joint Ventures?
The Equity Method.
When there are no amortisations, what is the formula for Periodic Pension Cost?
PPC = Service Cost + Interest Cost - Expected Return
If the contributions in a period are greater than TPPC, how should the difference be treated, and why?
It should be treated as an excess principal repayment, and subtracted from CFF and added to CFO. This is because principal repayments are a financing cash flow.
How would you calculate after-tax excess contribution?
Contributions - TPPC (1-T)
Under the temporal method, what rate are monetary assets translated at?
The current rate.
If a parent company is has variable interest exposure on convertible debt issued by a subsidiary, what financial reporting method should be used?
The consolidation method.
What does an M-Score of greater than -1.68 indicate?
Potential earnings manipulation.
What is a stronger determinant of accounting method to use, % ownership in the subsidiary or degree of influence over the subsidiary?
Degree of influence.
Can trading securities be written up past previous value on the balance sheet?
Yes.
What are the levels of influence and accounting methods at <20%, 20-50%, and >50%?
<20% - No significant influence (FV, HTM)
20-50% - Significant Influence (Equity Method)
>50% - Control (Consolidation Method)
If company A uses the equity method to account for its investment in Company B, is net income affected if it is proportionally consolidated with Company B, and why?
No, as Company B’s net income would already have been included as a single line in Company A’s income state under the equity method.
What is the test for goodwill impairment?
If carrying value is greater than fair value.
If goodwill is impaired, what is the outcome?
A loss is recognised for Book Value Goodwill - Implied Goodwill.
Under the acquisition method, how is Company B’s income statement accounted for?
Each line of Company B’s income statement is proportionally consolidated with Company A’s income statement.
What is the formula for Periodic Pension Cost?
PPC = Service Cost + Interest Cost - Expected Return
How is interest cost calculated?
Interest Cost = Beginning PBO x Discount Rate
What are the two formulas for Total Period Pension Cost?
TPPC = Service Cost + Interest Cost - Actual Return
TPPC = Contributions - Change in FundedStatus
What parts of PBO/ FV of Plan Assets are affected by the discount rate?
Service cost is the PV of future cash flows using the discount rate.
Interest cost is Beginning PBO x Discount Rate
FV of plan assets is not affected by the discount rate.
Under IFRS, how is net interest income calculated (for pension purposes)
Net Interest Income = Funded Status x Discount Rate
What is adjusted CFO?
Adjusted CFO is CFO after excess principal repayments have been moved from CFF or vice versa.
What is the formula for adjusted CFO for excess contributions?
Adjusted CFO = CFO + (1-T)(Excess Contributions)
What are the inputs to share-based compensation option pricing models?
Volatility, Share Price, Risk-Free Rate, Dividend Yield
How is the expense recognised for share-based compensation?
The expense is recognised based on fair value on grant date, and allocated over employee service period.
Under the temporal method, what rate are monetary assets translated at?
The current method.
Under the temporal method, what rate are non-monetary assets translated at?
The historical rate.
Under the temporal method, what rate are dividends and common stock translated at?
The historical rate.
Under the temporal method, what rate are the income statement items translated at?
COGS, depreciation and amortisation are translated at the historical rate.
The remainder of income statement items are translated at the average rate.
Under the current rate method, what rate are monetary assets translated at?
The current rate.
Under the current rate method, what rate are non-monetary assets translated at?
The current rate.
Under the current rate method, what rate are dividends and common stock translated at?
The historical rate.
Under the current rate method, what rate are income statement items translated at?
The average rate.
If the local currency is depreciating, do you want a net liability or net asset position under the current rate?
A net liability position.
If the local currency is depreciating, do you want a net monetary liability or net non-monetary liability position?
A net monetary liability position, as this will be translated at the current rate, whereas a net non-monetary position will be translated at the higher historical rate.
How do you calculate Cumulative Translation Adjustment (CTA)
- Translate Assets, Liabilities and Equity using the relevant rates.
- Find out the asset or liability plug that will make the accounting equation Assets = Liabilities + Equity balance.
Divide the following into monetary and non-monetary assets:
- Cash
- Accounts Receivable
- Accounts Payable
- Debt
- Deferred revenue
- Fixed Assets
- Intangible Assets
Monetary:
- Cash
- Accounts Receivable
- Accounts Payable
- Debt
Non-Moneatary
- Deferred revenue
- Fixed Assets
- Intangible Assets
Will the return beta in an AR model be affected by whether earnings are cash or accruals?
Yes. Cash-based earnings will be more persistent and thus be assigned a higher beta coefficient.
If a subsidiary is classed as a VIE, will the interest income be recognised on the consolidated income statement?
No, as the VIE’s whole income statement will be consolidated with the parent company’s.
What are the components of the 5-stage DuPont model?
Tax Burden x Interest Burden x EBIT Margin x Asset Turnover x Financial Leverage
What is the formula for Tax Burden?
Tax Burden = Net Income/ EBT
What is the formula for Interest Burden?
Interest Burden = EBT/ EBIT
What is the formula for EBIT Margin?
EBIT/ Revenue
What are the effects on the balance sheet and income statement of capitalising an operating lease?
Balance Sheet: An asset and liability of equal amount are added.
Income Statement: The operating expense is credited and charges for depreciation and interest are debited.
How is unrealised and realised gain/loss of trading securities accounted for in the income statement under IFRS/ GAAP?
Unrealised and realised losses on trading securities are recognised on the income statement under IFRS and GAAP.
How do you calculate funding status at the end of a period?
Opening Funding Status - Costs \+/- any actuarial gains/losses \+ actual return \+ contributions
*Benefits paid is not included as it is recognised in both the FV of plan assets and PBO, so net off to 0.
What are the steps to adjust an income statement for operating and non-operating items?
- Add back PPC to op profit.
- Subtract service cost from op profit.
- Subtract interest cost from interest expense.
- Add actual return to other income.
For options that are fully vested on grant date, when is the expense recognised?
The full expense is recognised on the grant date.
When calculating value of debt immediately after an acquisition, do you use book value or fair value?
Fair value.
Under the equity method, how is a new investment accounted for if purchased with cash?
The initial investment is reported at cost in non-current assets and the cash amount is removed from current assets.
Under the equity method, do you report full goodwill or partial goodwill?
Partial goodwill.
Which accounting method is used for investment in associates?
The equity method.
Which accounting method is used for investment in subsidiaries?
The acquisition method.
Will revenue be higher or lower under the equity method as compared to the acquisition method?
Lower. Under the acquisition method revenue will be proportionately included in the parent’s revenue line, whereas under the equity method the associate’s revenue will be rolled up in the net income line.
Where are remeasurement gains/ losses recorded under the current rate method and temporal method.
Current Rate Method - Cumulative Translation Adjustment on the balance sheet.
Temporal Method - Remeasurement g/l in the income statement.
What is the formula for EBI?
EBI = EBIT(1-T)
Is capitalising R&D a sign of aggressive or conservative financial reporting?
Aggressive, because you are deferring the expense until later.
Is reducing expected return on pension assets a sign of aggressive or conservative financial reporting?
Conservative, because it increases the pension expense.
Are total assets higher under the acquisition method or the equity method?
The acquisition method, because the equity method only shows net assets of the affiliate.
What is the formula for interest coverage?
Interest Coverage = EBIT / Interest Expense
Is net income higher under the equity method, acquisition method, or proportion consolidation?
It is the same under any method.
Is equity higher under the equity method, acquisition method, or proportionate consolidation?
Equity is always highest under the acquisition method, as it includes minority interest.
What is bill and hold?
Recording revenue whilst inventory is still held.
How do you calculate return on equity from the financial statements?
AVERAGE Net Income / AVERAGE Equity
Is choosing LIFO inventory aggressive or conservative?
Conservative, because during inflationary periods COGS will be higher.
Under the acquisition method, what is the formula for Company A assets just after the acquisition?
Total Assets = Total Assets - Cash + Company B Assets
Does a self-contained subsidiary use the current method or the temporal method?
The current method.
Under GAAP, what is the effect of hyperinflation on accounting treatment of subsidiaries?
The subsidiary’s functional currency becomes the parent’s presentation currency.
Do IFRS/ GAAP permit partial goodwill?
IFRS permits partial or full goodwill.
GAAP requires full goodwill
Is the test for impairment different under IFRS and GAAP?
Yes.
Is debt a monetary or non-monetary liability?
Monetary.
How are a subsidiaries foreign payables/ receivables accounted for? i.e. What translation method and where are FX g/l recognised?
They are translated at the current and g/l go on the income statement.
What is the formula for period pension expense under US GAAP?
PPE = Service Cost + Int. Cost - Expected Return + Amortised Loss - Amortised Gain
When is amortisation required?
When actuarial losses are greater than 10% of opening PBO.
How are share options accounted for on the balance sheet/ income statement?
Net income is reduced but paid-in capital is increased (No change to total equity).
What is the formula for ending assets?
Ending Assets = Beginning Assets
+ Contributions
- Benefits Paid
+ Actual Return
Under IFRS, what is the effect of hyperinflation on accounting treatment of subsidiaries?
The parent can translate inflation-adjusted nonmonetary assets and liabilites at the current rate, removing most of the inflation effect.
What is the accounting treatment under the pooling of interests method?
The pooling of interests method acts as if neither firm acquired the other, but that their interests were joined equally.
- Book values are combined.
- Prior operating periods are restated.
- Fair value/ price paid is not recorded on financial statements.
