Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFAI Flashcards > Financial Reporting & Analysis > Flashcards

Financial Reporting & Analysis Flashcards

1
Q

Investment in financial assets

A

Ownership interest of less than 20% is usually considered a passive investment - i.e. investor cannot significantly influence or control the investee

Reported on financial statement has either Amortized cost, FV through OCI or FV through profit or loss (income statement)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Investment in associates

A

Ownership interest between 20-50% and typically non controlling investment. Investor can usually significantly influence the investee’s business operations

Using equity method of accounting for financial statement reporting

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Business combinations

A

An ownership interest of more than 50% is usually a controlling investment.

The acquisition method of account is used for reporting financial statements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Joint ventures

A

An entity whereby control is shared by two or more investors. Both IFRS and US GAAP require the equity method for joint ventures.

In rare occurrence, proportionate consolidation method may be allowed. Investor only reports the proportionate shares of assets, liabilities, revenues and expenses. No minority owner’s interest is reported.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Amortized cost (debt securities only)

A

An IFRS 9 classification

Debt security that meet below two criteria use this method for financial reporting on balance sheet

  1. Debt securities are being held to collect contractual cash flows
  2. Contractual cash flows are either principal or interest on principal, only

Interest income from holding debt is recognized in the income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Fair Value Through Profit or Loss

A

Debt securities can be classified as such if held for trading

Equity securities held for trading are required to be classified as such

Changes in fair value, realized or unrealized, are recognized in the income statement along with any dividend or interest income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Fair Value through OCI (Debt and Equity Securities)

A

Securities classified as fair value through OCI are carried on the balance sheet @ fair value

Unrealized gain or loss in OCI

Realized gain or loss, dividends, and interest income are reported in the income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Reclassification of Debt Securities (IFRS 9)

A

Amortized cost to FVPL

Unrecognized gains/loss on debt securities recognized on the income statement

FVPL to Amortized Cost
Debt securities reclassified are transferred at fair value on the transfer date and will become the carrying amount - i.e. if at time of transfer FV > purchase price, treat as amortized premium vice versa

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Equity Method of Accounting

A

Referred to as one-line consolidation, one line in parent company’s balance sheet and one line in parent company’s income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Fair Value Option (US GAAP vs IFRS) - Equity Method

A

Under US GAAP, equity method of account for investments are allowed to be recorded at fair value.

Under IFRS, fair value option is only available to venture capital firms, mutual funds, and similar entities.

Reporting as fair value is irrevocable and changes in value are recorded in the income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Equity Method Impact to B/S and I/S

A
  1. Record initial amount of investment on B/S
  2. Add proportionate share of income received to initial amount of investment
  3. Reduce investment account by proportionate share of dividend received
  4. Record proportionate share of income received on I/S
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Partial goodwill calculation (Equity Method)

A

IFRS Only

```
Purchase Price
Pro-rata BV Net Assets
=Excess Purchase Price
(Pro-rata FV - BV)
=Goodwill
~~~

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Analytical Issues for Investment in Associates

A
  1. When investee is profitable and dividend payout ratio is less than 100%, equity method results in higher earnings
  2. B/S and I/S reporting in one line ignores the investee’s debt and therefore, lower leverage. In addition, margin ratios are high since investee’s revenue is ignored.
  3. Investee’s earnings through dividends may not always be cash flow and can be permanently treated as a reinvestment.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Merger

A

Acquiring firm absorbs all the assets and liabilities of the acquired firm, which ceases to exist. The acquiring firm is the surviving entity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Acquisition

A

Both entities continue to exist in a parent-subsidiary relationship.

When <100% of the subsidiary is owned by the parent, the parent prepares consolidated financial statement but reports (minority or non controlling) interest on its financial statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Consolidation

A

A new entity is formed that absorbs both of the combining companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Calculate minority interest (Acquisition Method)

A

(SE x %minority interest)
+ (NI x %minority interest)
- (Dividends x %minority interest)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Defined contribution plan

A

retirement plan whereby the firm contributes a certain sum each period to the employee’s retirement account

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Defined benefit plan

A

the firm promises to make periodic payments to the employee after retirement

based on employee’s years of service and compensation near retirement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

funded status of the plan

A

FV of plan assets - PV of DBO

Underfunded = net pension liability on B/S
Overfunded = net pension asset on B/S

Net pension asset is subject to ceiling, aka PV of future economic benefits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Proportionate consolidation vs. Equity Method Impact on B/S and I/S

A

Balance Sheet:

Proportionate consolidation (aka acquisition) reports higher assets and liabilities than Equity method but reports the same Shareholder Equity (i.e. net assets)

Income Statement:

Proportionate consolidation (aka acquisition) reports higher revenues and expenses than Equity method but reports the same net income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

How to Calculate Unearned Profit on Downstream Sale for Equity Income on I/S

A
  1. Calculate Investors net profit from downstream sale
  2. Determine % unsold (if partial sales)
  3. Determine total unrealized profit ( %unsold x net profit from downstream sale)
  4. Reduce pro-rata share of investee’s net income by unrealized profit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Upstream Sale

A

Transaction between two affiliates. The associate sells to the investor.

Profit of the inter company transaction is recorded on the associate’s income statement.

Investor’s share of unrealized profit is included in equity income on the investor’s income statement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Downstream Sale

A

Transaction between two affiliates; the investor sells to the associate.

The profit is recorded on the investor’s income statement. Both IFRS and US GAAP require unearned profits be eliminated to the extent of investor’s equity interest in associate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Full Goodwill

A

Used by IFRS and US GAAP

FV of Entity
FV of identifiable assets
=goodwill

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Recognition and Measurement when Acquisition Price is Less than Fair Value

A

IFRS AND US GAAP require the difference between fair value of the acquired net assets and the purchase price to be recognized immediately as a gain in profit or loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Non-controlling Asset Valuation (Acquisition/Consolidation method)

A

Under acquisition method (IFRS and US GAAP), as long as the parent has control over subsidiary, it would control 100% of the subsidiary’s assets and liabilities at fair value

Goodwill = FV of the subsidiary - FV of the subsidiary’s net identifiable assets

Non-controlling interest = non-controlling interest% x fair value of the subsidiary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Impact of goodwill method on B/S ratios

A

Return on assets and return on equity under partial goodwill method is higher than full goodwill due to impact from non-controlling interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Impairment loss (IFRS)

A

Reported on consolidated income statement

Recoverable amount minus the carrying (book) value

Impairment loss is first applied to the good will of the cash generating unit of a company. Once reduced to zero, remaining loss is then allocated to all of the other non-cash assets in the unit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Impairment loss - US GAAP

A

Reported on consolidated income statement

  1. Check for impairment: Carrying value > FV?
  2. Measure impairment loss: FV of goodwill (implied) - carrying value of goodwill

Loss applied only to the reporting unit to which the goodwill has been allocated to.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Contingent Assets & Liabilities: IFRS vs. US GAAP

A

Not recognized under IFRS.

Under US GAAP, contractual contingent assets and liabilities are recognized and recorded at their fair values at the time of acquisition

32
Q

Vesting

A

Provision in pensions plans whereby an employee gains rights to future benefits only after meeting certain criteria (e.g. pre-specified numbers of years of service)

33
Q

Periodic Pension Cost (IFRS)

A

Change in the net pension liability or asset adjusted for the employer’s contributions.

3 components:

  1. Service Cost
  2. Net interest expense/income
  3. Remeasurement
34
Q

Service Cost

A

Component of periodic pension cost

Represents obligation of company for current and past services rendered by employee

Under IFRS, it is recognized on I/S for both past and current

Under US GAAP, current service cost recognized in I/S and past service cost recognized in OCI and amortized to I/S over the average service lives of employees in subsequent periods

35
Q

Net interest expense

A

Represents the financing cost of deferring payments related to the plan

Component of periodic pension cost

Calculated by multiplying net pension liability by discount rate used for calculating PV of pension liability

Under IFRS, reported on the I/S

36
Q

Net interest Income

A

Represents the financing income of prepaying amounts related to the plan

Component of periodic pension cost

Calculated by multiplying net pension asset by discount rate used for calculating PV of pension liability

Under IFRS, reported on the I/S
Under US GAAP, known as expected return on plan assets, also reported on I/S

37
Q

Remeasurement

A

3rd component of period pension cost

Remeasurement of net pension liability or asset, which includes:

  1. Changes in actuarial assumptions (i.e. actuarial gains and losses)

Differences between expected return and actual return on plan assets (US GAAP Only)

  1. Any differences between the actual return on plan assets and the amount included in the net interest expense/income calculation

Under IFRS, recognized in OCI

38
Q

Corridor approach (US GAAP Only)

A

Process in which companies will compare net cumulative actuarial gains/loss w/ DBO and FV of plan assets at the beginning of the period

If cumulative amount exceeds 10% of greater of DBO or FV of plan assets at beginning of period, the amount in excess of 10% is amortized over the expected avg remaining working lives of employees

It will be included as a component of periodic pension cost on the I/S

39
Q

Periodic Pension Cost on I/S (US GAAP)

A

Current service cost
+ interest cost (PBO beginning of period x discount rate)
- expected return on assets

40
Q

Fair Market Value of Plan Assets Calculation (IFRS)

A

Periodic pension cost =

beginning PBO
-service cost
-interest cost
\+benefits paid
=End PBO

Plan assets =

Beginning plan assets
+actual return on plan assets
+benefits paid
= ending value of plan assets

41
Q

Total Periodic Pension Cost

A

Contributions - change in funded status

Change in fund status =

(End FV plan assets - Beg FV plan assets) - (end PBO - beg PBO)

OR

Current service cost + interest cost - actual investment return (instead of expected return); consider it as the final cost as opposed to estimated

42
Q

Pension contribution impact to cash flows

A

If contributions exceed total periodic pension cost, the difference should be treated similar to an excess principal payment on a loan

Since principal payments are reported as financing activities, increase operating cash flow and decrease financing cash flow

Note: adjustment to cash flow with excess contribution needs to be after-tax

43
Q

Reclassifying pension cost for analytical purposes

A

Treatment of periodic pension cost differ between IFRS and US GAAP.

Adjust operating income by adding back period pension cost and only subtracting current service cost

Interest cost should be added to interest expense

Actual return on plan assets added to non operating income

44
Q

SFAS No. 123(R) - Employee Stock options

A

Firms are required to use the fair value method of valuing stock option plans. In the absence of a market-based instrument, firms may select and use an option-pricing model such as the Black-Scholes, binomial, or Monte Carlo

Compensation expense is not affected when options are exercised.

Companies will be required to spread the compensation cost over the vesting period equally

45
Q

Temporal Method (aka Remeasurement)

A

The local currency is different from the functional currency. The functional currency is the same as the parent company reporting currency

Occurs when a subsidiary is well integrated with the parent. The parent makes the operating, investing, and financing decisions.

46
Q

Current Method (aka Translation)

A

The local currency and the functional currency are the same and requires converting to the parent company’s reporting currency

Usually occurs when subsidiary is independent and operating, investing, and financing activities are decentralized from parent

47
Q

US GAAP vs. IFRS treatment of translation of currencies on financial statement

A

Subsidiary needs to be operating in a hyper inflationary environment.

Under US GAAP, functional currency = reporting currency and use temporal method

Under IFRS, subsidiary’s financial statements are restated for inflation and then use current method.

48
Q

B/S and I/S Impact under Temporal Method

A

Monetary A + L -> Current Exch

E.g. cash, receivables, payables, short-term and long-term debt

Non monetary A+L -> Historical Exch

E.g., Inventory, FA, intangible assets, unearned revenue

Common stock, dividends, COGS, dep/amortized expense -> Historical Exch

Revenue/Other exp -> Avg Exch

Translation G/L - > reported on I/S

49
Q

B/S and I/S impact using Current Rate Method

A

All I/S -> Avg Exch rate

All B/S -> Current Exch rate

Common stock & Div -> Historical Exch rate

Translation G/L -> CTA in Shareholder Equity

50
Q

Method required under US GAAP in inflationary environment

A

Temporal method

51
Q

Common Equity Tier 1 ratio

A

Common equity tier 1 / risk weighted assets

52
Q

Most important source of capital for a bank

A

Common Equity Tier capital

Includes:

  1. Common stock
  2. Additional paid-in capital
  3. Retained earnings
  4. OCI
  5. Adjustments related to deduction for intangible assets & deferred tax assets
53
Q

Total % of risk-weighted assets under Basel III guidelines for Tier 1 capital

A

6% of risk-weighted assets

54
Q

Level 1 inputs (valuation of securities)

A

Quoted market prices of identical securities

55
Q

What does Net Stable Funding Ratio measure?

A

NSFR is the ratio of available stable funding sources (nominator) to the required stable fund (denominator)

It measures liquidity of funding sources relative to liquidity needs of the assets

The standard sets a target minimum of greater than 100%

56
Q

Loss and loss adjustment expense ratio

A

Loss and loss adjustment expense / net premiums written

57
Q

Underwriting expense ratio

A

Indicator of the efficiency of a company’s operation in acquiring and managing underwriting business

Underwriting expense (incl. sales commissions and related employee expenses) / net premiums written

58
Q

Total Capital

A

Tier 1 capital + Tier 2 capital

Must be at least 8% of risk-weighted assets

59
Q

Level 2 inputs

A

Observable and include quoted prices for similar financial instruments in active markets, quoted prices for identical financial instruments in markets that are NOT active, other observable data such as rates, yield curves, credit spread, and implied volatility

60
Q

Level 3 inputs

A

NOT observable

Fair value for an instruments is based on a model

61
Q

Liquidity Coverage Ratio (LCR)

A

Expressed as the minimum % of bank’s expected cash outflows that must be held in highly liquid assets.

Expected cash outflows are bank’s anticipated one-month liquidity needs in a stress scenario

Standard is a target minimum of 100%

62
Q

Allowance for loan losses

A

Balance sheet account and a contra asset account to loans

Total loans - allowance for loan losses = expected value of the loans

**critical accounting estimate

63
Q

Provisions for loan losses

A

Income statement expense account that increases the amount of the allowance for loan losses

ACTUAL loan losses REDUCE the amount of the allowance for loan losses

64
Q

Soft vs hard pricing market for P&C insurance companies

A

Price cutting drives out profitability, which leads to insurers reaching depleted level of capital.

Once that occurs, competition lessens and underwriting standards tighten.

Once that occurs, premiums rise and insurers return to more reasonable levels of profitability.

This cycle continuous…

65
Q

Combined Ratio

A

(Loss and loss adjustment expense ratio + underwriting expense ratio)

A low combined ratio indicates a “hard insurance market”

A combined ratio higher than 100% for a single insurer indicates a underwriting loss

66
Q

Dividends to shareholders ratio

A

Dividends to policyholders / net premiums earned

67
Q

LIFO Liquidation

A

Slowing the purchase of inventory items so that older lower costs are used to calculate COGS.

Financial Statement Impact

Reduce COGS
Reduce Inventory
Artificially increase gross and net margins
Inventory turnover ratio likely increased (%decrease if inventory > %decrease in COGS)

68
Q

Classification of Debt Securities (IFRS 9)

A

Debt securities can be classified at amortized cost (if business model and cash flow characteristic test is met), FV OCI, or FV through P/L

69
Q

Reclassification of Equity Securities

A

NOT ALLOWED

Initial designation of FVPL or FVOCI is irrevocable

70
Q

When local currency, functional currency, and reporting currency are all different

A

Two step conversion:

  1. Convert local currency to functional currency using temporal method (Think 1 to 2)
  2. Convert functional currency to presentation currency using current method (think 2 to 1)
71
Q

Aggregate accruals using cash flow method

A

NI - CFO - CFI / (NOAend + NOAbeg)/2

72
Q

Accruals ratio using balance sheet approach

A
  1. Calculate beginning and ending Net Operating Assets (Net Operating Assets - Net Operating Liabilities)
  2. (NOAend - NOAbeg) / {(NOAend - NOAbeg)/2}
73
Q

If a company wished to pay off all of its debt while maintaining existing reinvestment, determine the number of years it would take to do so

A

Years to repay debt from operating cash flow =

Total debt / (CFO - reinvestment)

Reinvestment - All CapEx

74
Q

What business segment is the company’s management looking to grow?

A

Compare the segment CapEx as a % of total CapEx to the Segment assets as a % of total assets

Ratio = % of CapEx / % of total assets

If >1, it indicates that a segment is being allocated a greater proportion of CapEx than its proportion of assets and is therefore “growing”

75
Q

ROE (extended DuPont)

A

Tax Burden x Interest Burden x EBIT margin x Total Asset Turnover x Financial Leverage

= (NI / EBT) x (EBT / EBIT) x (EBIT / Revenue) x (Revenue / Avg Assets) x (Avg Assets / Avg Equity)

OR after cross multiplication:

NI / Avg Equity

CFAI Flashcards (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions