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CFA level 2 > Financial Statement Analysis > Flashcards

Financial Statement Analysis Flashcards

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1
Q

What are the 4 different categories of intercorporate investments

A
  • Investment in financial assets
  • Investments in associate
  • Joint venture
  • Business combination
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2
Q

When is something categorized as Investment in financial assets

A

Less than 20% ownership in equity

No significant influence or control

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3
Q

When is something categorized as Investments in associate

A

20-50% of equity ownership

Significant influence but no control

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4
Q

When is something classified as Joint venture

A

When 2 or more entities share control of a company.

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5
Q

When is something classified as Business control

A

More than 50% equity ownership

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6
Q

How are investment in financial assets classified if they’re to be sold?

A

Fair value through profit or loss

Fair value through IOC

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7
Q

What is the equity method?

A

The equity method requires the investing company to record the investee’s profits or losses in proportion to the percentage of ownership.

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8
Q

How are investments initially recorded?

A

Initially recorded at cost of acquired shares.

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9
Q

Where should Increase in proportion of earnings be recording in the equity method

A

In income statement

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10
Q

Where should Increase in proportion of dividends be recording in the equity method

A

Only in balance sheet

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11
Q

What is fair value method?

A

The estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price.

Individuals and businesses may compare current market value, growth potential, and replacement cost to determine the fair value of an asset.

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12
Q

Who can use fair value method under IFRS and GAAP?

A

IFRS: Strictly Venture capital, Mutual funds, are restricted to only use FV

GAAP: All entities

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13
Q

Where is unrealized gains/loss reported in fair value method?

A

In net income

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14
Q

Where is interest/dividends reported in fair value method?

A

In net income

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15
Q

How is impairment tested in Fair value method

A

For both IFRS and GAAP

If impaired, write down to recoverable amount

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16
Q

When is acquisition method used?

A

In business combination

When we go from influence to control

Used for IFRS and GAAP

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17
Q

Formula for calculation of impairment of loss

A

Carrying value - Recoverable amount of units

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18
Q

How should equity investment be categorized on the financial statement?

A

Fair value through profit and loss

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19
Q

Formula for recognized goodwill

A

Fair Value of consideration (Shares issued x MV of shares) - (%ownership x FV of net assets of acquired company)

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20
Q

Test for impairment of GW under GAAP

A

CV of unit > FV of unit

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21
Q

Measurement of implied goodwill under GAAP

A

FV of unit - Net assets

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22
Q

Measurement of Impairment of loss under GAAP

A
  1. FV of unit - Net assets = Implied goodwill
  2. Current Goodwill - Implied goodwill = Impair loss
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23
Q

Test for impairment of GW under IFRS

A

CV > Recoverable amount

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24
Q

Measurement of Impairment of loss under IFRS

A

Recoverable amount - Carrying value

25
Q

Formula for excess purchase price

A

Purchase price - (% acquired x BV of net assets)

26
Q

If a parent company has purchased 80% of a subsidiary shares, how will it affect the BS of the parent company?

A

Under acquisition method, the parent company will absorb 100% of the subsidiary asset and liabilities measured under fair value method.

27
Q

How do we recognize contingent liabilities under IFRS

A

On the acquisition date, the acquirer must recognize any contingent liability in the acquisition if.

  1. It is a present obligation that arises from past events.
  2. It can be measured reliably
28
Q

How is Partial Goodwill measured?

A

Fair Value of acquisition minus acquirer share of FV of net assets

29
Q

Formula for Partial Goodwill

A

(Shares outstanding x share price) - (FV of net asset x % ownership)

30
Q

Formula for full goodwill

A

[ (Shares outstanding x share price) / % ownership ] - (FV of net asset x % ownership)

31
Q

Formula for Full Goodwill recognized under GAAP

A

FV of entity - Fv of net identifible assets

32
Q

Formula for excess purchase

A

Purcahse price - (% own x BV of assets)

33
Q

How does IFRS allocate goodwill and how many steps does it have?

A

IFRS allocates Goodwill to cash generating units that is expected to benefit from synergies.

1 step appraoch - Identification = Measurement

34
Q

How does GAAP allocate goodwill and how many steps does it have?

A

GAAP allocates Goodwill to all reporting segments

2 step approach: Identification then measurement

35
Q

How is the carrying amount of the investment recognized?

A

It is recognize the investors proportionate share of the investee’s earnings or losses, and these earnings or losses are reported on income statement.

Dividends or interests recived from the investee are trated as a return of capital, and thus reduces the carrying amount of the investment and are not reported on Profit or loss

36
Q

What causes acturial losses?

A
  • Wage inflation - (increase in wages)
  • lower discount rate
  • Longer tenure
37
Q

What are the key dates for recognizing employee compensation

A
  1. Grant: Compensation is offered and accepted
  2. Vesting: Employee becomes entitled to compensation
  3. Settlement: Compensation is given to employer
38
Q

When is share based compensation recorded?

A

At fair value at grant date

39
Q

Current Service Cost

A

It is the present value of benefits earned by the employees during the current period or it is the increase in the present value of defined benefit obligation as a result of employee service in the current period.

40
Q

Interest Cost

A

It is the increase in the obligation due to the passage of time. Interest cost increases every
year regardless of whether the employee works another year or not. Interest cost is immediately recognized as a component of pension expense.

Interest Cost = Beginning PBO x Discount Rate

41
Q

Net Interest Expense/Income

A

Net Interest Expense/Income = Beginning Funded Status x Discount Rate

A net interest expense represents the following cost of deferring payments related to the plan i.e. if underfunded - liability, then an expense is reported.

A net interest income represents the following income from prepaying amounts related to the plan i.e. if overfunded - asset, then an income is reported.

42
Q

What is Fair value

A

Fair value is the estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price

43
Q

What is “Planed assets”

A

Value of employees pension asset/fund

44
Q

What is exposure to Foreign Exchange Risk or Transaction Exposure?

A

the value of the foreign currency might change relative to the Local currency .

45
Q

If I have a net asset balance sheet exposure and the foreign currency strengthens

A

I have a positive adjustment

46
Q

If I have a net asset balance sheet exposure and the foreign currency weakens

A

I have a negative adjustment

47
Q

If I have a net liability balance sheet exposure and the foreign currency strengthens

A

I have a negative adjustment

48
Q

If I have a net liability balance sheet exposure and the foreign currency strengthens

A

I have a positive adjustment

49
Q

What kind of balance sheet exposure do we have if we use current rate?

A

Typically net asset balance sheet exposure

50
Q

If functional currency is same as parent which method do we use?

A

Temporal method

51
Q

If functional currency is different as parent which method do we use?

A

Current rate method

52
Q

Foreign currency = functional currency

A

Current rate method

53
Q

presentation currency = Functional currency

A

Temporal method

54
Q

What is the process of translation using current rate.

A
  1. identify the functional currency.
  2. Translate for currency on functional statement into functional currency.
  3. use current spot rate to translate for functional currency balance to parent presentation currency.
55
Q

By definition, for accounting purposes, a foreign currency is any currency other than a company’s …

A

Functional currency

56
Q

What is the liquidity coverage ratio

A

Cash / One month liquidity needs

LCR is expressed as the minimum % of a bank expected cash outflows that must be held in highly liquid assets

57
Q

CAMELS: Capital Adequacy

A

The ability of a bank to absorb losses without resulting in financial weakness or insolvency.

Portion of the banks asset funded with capital.

Capital Adequacy is based on RWA

58
Q

CAMELS: Asset quality

A

Amount of credit risk associated with the assets.

CFA level 2 (10 decks)

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