FRA Flashcards
Current Method
Temporal Method
Functional, Presentation, Local
Current F = L
Temporal F= P
Functional > 51% is the primary ccy used
Presentation currency of financial statements
Local country being referred to
Where are FX gains reported
Current method?
Temporal Method?
Current = Cumulative Tax Adjustment on the balance sheet Temporal = Consolidated Profit & Loss on Income statement
Temporal Method
Monetary assets
Non Monetary Assets
Revenue and Taxes
Monetary assets = debt, liabilities, receivables - current fx rate
Non Monetary Assets = depreciation, common stock, inventory, PP&E, intangibles, dividends, COGS - Historic rate
Revenue, purchases and Taxes = Average rate
Note - temporal method brings gians and losses onto the income statement
Current rate All income statement accounts All Balance Sheet Items What is at Historic cost? What is at declared date rate?
All income statement accounts - average rate except net income Net income and tax = average rate All Balance Sheet Items - current rate What is at Historic cost - Common stock, What is at declared date rate? Dividends
What is the current fx rate?
What is the historic fx rate?
Current = day on which accounts were prepared Historic = Day inventory was purchased
IFRS Hyperinflation treatment
Rate Adjuster
After inflation price
Which assets are not adjusted for inflation?
Year end CPI / Year beginning CPI = rate adjuster
Rate adjuster x PP&E = After Inflation price
After Inflation price x current rate = translated balance sheet price
Monetary assets such as cash, liabilities and short term debt.
Purchasing power loss equation
(CPI Year end / CPI Start ) x cash value
Income statement
Monetary
Non Monetary
Monetary (Revenue) = CPI End / CPI Average
Non Monetary ( Common stock, PP&E) = CPI End / CPI Beginning
US Gaap Hyperinflation
IFRS Hyperinflation
Temporal Method > 100% over 3 years
Current FX rate and use of the ‘Rate Adjuster’
(1.25 x 1.26 x 1.27) - 1 = > 100%
Effective Tax Rate
Tax Expense / EBT
share of unsold downstream profits
% acquired company x (Inventory sold downstream - cost of inventory sold) x 1 - % sold
Downstream Income statement
% NI
- % Depreciation(FV PPE/No Years)
- share of unsold downstream profits
Upstream Balance Sheet
Cost \+ NI - % Dividends received - % Upsteam sale = Holding value
Equity method fair value option
US Gaap
IFRSE
US Gaap - Any entity can take a fair value option
IFRSE - Only VC and mutual funds can take the fair value option
Adjusted EBIT
EBIT + Pension expense - service cost
Interest coverage ratio
Adjusted EBIT / Interest expense + costs
Balance sheet figure for PV of available future funds
The lower of:
FV plan assets - benefit obligation
or
PV of future economic benefit
How are actuarial gains/losses recorded under US GAAP?
Past service costs?
Either recognised fully or amortised.
If amortised us the corridor method.
Past service costs are amortised over the life of an employee.
How are acuarial gains/losses recorded under IFRS?
Past service costs?
Reflected in Equity under ‘ Other comprehensive income’
Past service costs are recognised in full in the year end plan amendment.
PVDBO =
Interest cost =
Service cost =
PVDBO = Opening PVDBO + Interest cost + service cost
Interest cost = Opening PVDBO x Discount rate
Service cost = PV of annual unit of credit eg £250k/1.04^24
Funded status =
IFRS Interest expense =
Funded status = FV plan assets - Projected Benefit Obligation (PBO)
IFRS Interest Expense = Funded status x discount rate
Non controlling interest (if you own 80%)
0.2 x Fair Market Value
FV Year end Plan assets =
FV At the beginning of the year \+ Contributions \+ Actual return - Benefit paid = FV at the end of the year
Projected Benefit Obligation (PBO) =
Plan Assets > PBO =
PBO At the beginning of the year \+ service cost \+ Interest cost \+ Past service cost \+/- actuarial gains/losses during year - Benefit paid = PBO at the end of the year
Plan Assets > PBO = overfunded
Past (Prior) service cost =
Benefit awarded to an employee when a plan is initiated or amended.
IFRS = Expensed immediately on Income Statement
US GAAP = Amortized over average life of the employee on Other Comprehensive Income
Total Periodic pension cost
Ending or beginning funded status =
TPPC = Employer contributions - (Ending funded status - beginning funded status)
TPPC = Ending PBO - Beginning PBO + Benefits paid - actual return on plan assets
Ending or beginning funded status = FV plan assets - PBO
What is the corridor approach?
What happens to the excess?
Beginning Actuarial gain/loss > Greater of Beginning PBO or Beginning plan assets
Excess is amortised in P&L
If you own a company and shares fall/gain in value you account for the year end unrealised/realised gain or loss with a method:
0 - 20%
20 - 50%
50% +
0 - 20% = FVPL Realised and Unrealised gain go on Income Statement. Securities go on B/S.
FVOCI - Realised gain goes on Income Statement, Unrealised gain goes on Balance sheet
20 - 50% = Equity Method
50% + = Consolidation method
How are derivatives held under IFRS 9?
IFRS Allows debt or equity to be reclassigied?
Derivatives NOT held for hedging are measured on FVPL
Debt - Only if the objective has changed in a way which affects operations
Year end Carrying Value for Equity method
Investment cost
+ % acquired x Net Income
- % acquired x dividends
= Year end Carry Value
IN process R&D is recognized how under IFRS and US GAAP?
They are both recognised at Fair Value as a separate intangible asset. They are amortised if successful or impaired if not.
Which tests must be passed for debt to be classified at amortised cost?
- Business Model Test
2. Cashflow characteristics test
What is the business model test?
What is the Cashflow Characteristics test?
Financial assets are held to collect contractual cash flows
The only contractual cash flows are principal and interest payments
Acquisition vs Equity method:
Net profit margin
ROE
ROA
Retained earnings
Acquisition method - All are lower
Equity method - All are higher
Retained earnings = the same
Non controlling interest allocation:
Partial goodwill
Full goodwill
Partial - Does not allocate goodwill to NCI
Full - Does allocate goodwill to NCI
what is the impairment test?
If yes: Impairment loss =
Does carrying value exceed recoverable amount?
Impairment loss = Goodwill - (Recoverable amount - Identifiable assets)
Partial Goodwill equation =
Full Goodwill equation
Partial Non Controlling Interest (NCI) =
Full Non Controlling Interest (NCI) =
Partial Goodwill = Acquisition price - (Acquisition % x FV of subsidiaries Net Assets)
Note - any excess PP&E of acquiree is also deducted afterwards. Ie company has a plant which is undervalued by £300k deducts 25% of 300k from partial goodwill.
Net assets = assets + pp&e - liabilities
Full Goodwill = Full Acquisition price - FV of subsidiary Net Assets
Partial NCI = NCI% x Fair Value of Acquiree Net identifiable assets (assets + FV liabilities - payables - long term liabilities)
Full NCI = NCI% x Fair Value of full subsidiary
(grossed up ie 80% would be 270/0.8 and NCI% would be 20%)
Full Goodwill approach can be used by:
Partial Goodwill approach can be used by:
Full = IFRS and US GAAP
Partial = IFRS Only
Impairment loss is permanent for US GAPP or IFRS?
Only under US GAAP are impairment losses permanent.
How to do you account for Income under each method?
FVPL
Equity Method
Consolidation / Acquisition Method
FVPL = % Dividends only
Equity Method = % Net income and balance sheet approach but IGNORE dividends
Consolidation = FULL Net income - minority interest and IGNORE Dividends
Equity method treatment of Balance sheet
20% - 50%
Income statement treatment
Original investment at cost \+ % Investee EAT (for all years) - % share of dividend (for all years) - % share of extra depreciation - % share of de-recognised profits = Year end carrying value
+ % NI
- % share of extra depreciation
- % share of de-recognised profits.
Merger
Acquisition
Consolidation
Merger = Acquirer absorbs all assets and liabilities
Acquisition = Both entities continue to exist
Consolidation = A new entity is formed
Contingent assets and liabilities treatment
IFRS:
US GAAP:
IFRS: Liabilities recognised at Fair Value at the time of acquisiton. Assets are never recognised
US GAAP: Contractual liabilities and assets are recorded at Fair Value on acquisiton date.
Non contractual assets are recognised if they are more likely than not to meet the definition of an asset.
Liabilities are measured at lower of initial value and best estimate of future value.
Basel III Banks minimum capital requirement
Basel III minimum stable funding
Basel III Liquidity
Minimum % Risk Weighted Assets RWA that a bank must fund with equity.
Minimum stable funding relative to the banks liquidity needs over ONE year.
Must have high quality liquid assets enough to cover 30 days liquidity needs in a stress scenario.
RWA decrease =
Capital Decrease =
RWA decrease = Improved financial position (these include unsecured loans so by reducing they are improving financial positions)
Capital Decrease = Deteriorated capital position
Dividend to policy holders ratio =
Combined ratio after dividends =
what does it show?
Dividend to shareholders / Net premiums earned
combined ratio + Dividends to policyholders ratio
Shows a total efficiency measure
Insurers
Soft Pricing =
Hard Pricing =
Soft pricing shows heightened competition, price cutting to obtain new business results on slimmer margins. Insurers leave the industry.
Hard pricing shows less competition which leads to fatter margins. New entrants join the industry.
Characteristics of:
Property & Casualty insurers:
Life & Health insurers:
Property & Casualty insurers: Short term and claims are variable
Life & Health insurers: Long term, more predictable claims. More duration risk from assets.
Loss Adjustment Expense ratio =
Underwriting expense ratio =
Combined ratio =
Loss Adjustment Expense ratio = (loss expense + loss adjustment expense) / Net premiums earned
Ability to estimate risk, lower is better
Underwriting expense ratio = Underwriting Expense / Net Premium Written
Efficiency of money spent obtaining new premiums, lower is better
Combined ratio = loss adjustment expense ration + Underwriting expense ratio
Less than 100% is considered efficient. Lower is obviously therefor better.
CAMELS =
Capital Adequacy ratio - RWA
Asset Quality - Credit risk of assets
Management - Internal control and governance, independpant board
Earnings - Returns above cost of capital L1, L2 and L3.
Liquidity - Liquidity coverage and Net Stable Funding
Sensitivity Analysis- VaR, Interest rate risk.
CAMELS Earnings
Level 1
Level 2
Level 3
Level 1 = Quoted market prices
Level 2 = Quoted prices of similar assets, observable interest rate spreads and implied volatility
Level 3 = Non observable and hence subjective, values are derived from models and estimates.
CAMELS - Liquidity
Liquidity Coverage ratio =
Net Stable Funding Ratio =
Basel II Minimum liquidty standards
Liquidity Coverage ratio = Highly liquid assets / expected cash outflows
Net Stable Funding Ratio = Available stable funds / Required Stable Funding
Basel II recommend a minimum of 100% for both.
Accruals vs cash - Which is more persistent and which reverts to normal levels quicker?
Accruals are LESS persistent than cash however Accruals cause earnings to mean revert to normal levels more QUICKLY than cash.
Cash revert to normal levels more slowly.
Discretionary accruals = manipulation more than non discretionary
What is a high Beneish model M-Score suggestive of?
Declining receivables turnover
Increasing receivables turnover
A high M score is an indication of earnings manipulation which has STANDARD DEVIATION = 1.0 and is normally distributed.
Declining RT is Bad = High M Score
Increasing RT is Good = Low M Score
Decreasing Day Sales in Receivables = Good sign as it shows less accruals.
Earnings (Net income) =
Accruals ratio B/S approach
Accruals ratio CF approach
NI = Cash from Operations + Accruals earnings
Accruals ratio B/S approach = (NOAend - NOAbeg) / (NOAend + NOAbeg)/2
Accruals ratio CF approach = (NI - CFO - CFI) / (NOAend + NOAbeg)/2
Capital lease effect on assets
JVs effect on assets
Increases assets will reduce ROA.
JVs are off balance sheet reducing assets and increasing ROA.
Days of Sales Outstanding
Receivables turnover
DSO = 365/ Receivables Turnover
RT = Turnover / Avg Receivables
Effect of take or pay contracts
Take or pay contracts increase inventory, Increase liabilities and increase assets.
6 steps of the financial statements analysis framework?
- Define purpose and context
- Collect input data
- Process input data
- Analyze/interpret
- Develop conclusions
- Follow up
Change in Net Income given LIFO reserve
Net Income from Retained Earnings
FIFO Inventory
NI = LIFO Reserve x (1-t)
NI = (closing RE - Opening RE) + Dividends paid
FIFO Inventory = LIFO Inventory + LIFO Reserve
Expensing vs Capitalising - Net Income and ROA
What happens to interest when you capitalise it?
Expensing NI & ROA = Higher
Capitialising NI & ROA = Lower
Interest moves from CFI to CFO when you capitalise it.
COGs Treatment for LIFO/FIFO
Current method
Temporal Method
Current - COGS = Average FX rate
Temporal - COGS = Historic FX rate
cash flow aggregate accruals ratio
Average NOA
Cash flow based Accruals ratio
Net Operating Assets NOA =
Accruals =
cash flow aggregate accruals ratio = Net Income - (CFO-CFI)
Average NOA = (Start NOA + End NOA) / 2
Cash flow based Accruals ratio = Cash flow aggregate accruals / Average NOA
Net Operating Assets NOA = (Total Assets excluding cash & short term investments) - (Total liabilities excluding debt)
Accruals = NOA Y1 - NOA Y2
ROE
3 stage
5 stage
NI/Sales x Sales/Assets x Assets/Equity
NI/EBT x EBT/EBIT x EBIT/Sales x Sales/Assets x Assets/Equity
Tax burden x interest burden x operating margin x asset turnover x financial leverage
current ratio =
Asset / Liabilities
Assets = inventory, receivables and cash
Liabilities = Payables and short term debt
Balance sheet bond value given price
Compute YTM with I/Y.
Value on balance sheet = MV of bond + (YTM - Coupon)
net monetary assets =
Check assets and liabilities on balance sheet to find each figure.
net monetary assets = (Cash + receivables) - (Payables + income tax)
Days of Sales Outstanind DSO =
Receivables turnover =
Days of Sales Outstanind DSO = Account receivables / (Revenue/365)
Receivables turnover = Total revenue / Avg receivables
What is bill and hold stock?
A potential earnings manipulation where invoices are issued at a time where goods are still on the sellers premises.
Cash flow treatments:
Trading securities
Non-trading securities
Cash flows from trading securities are usually classified as operating cash flows. CFO Trading
Cash flows from non-trading securities are usually classified as investing cash flows. CFI NONTrading
IFRS vs US GAAP treatment of:
Interest received
Interest paid
Dividend received
Dividend paid
US GAAP Interest received = CFO Interest paid = CFO Dividend received = CFO Dividend paid = CFF
IFRS Interest received = CFO or CFI Interest paid = CFO or CFF Dividend received = CFO or CFI Dividend paid = CFO or CFF
Inventory Turnover =
Days of Inventory on Hand =
Receivables Turnover =
Days of Sales Outstanding =
Inventory Turnover = COGS / Avg Inventory
Days of Inventory on Hand = 365 / Inventory Turnover
Receivables Turnover = Net Sales / Avg Receivables
DSO = 365 / Receivables Turnover
Adjusted EBIT =
Adjusted Interest =
Adjusted EBIT = EBIT + Lease expense - Depreciation
Lease expense = Annual payment
Depreciation = PV of Annual payment, no years and interest rate. divided by no of years.
Adjusted Interest = Interest expense + Interest on loan
Interest of loan = PV of annual payment, no years and interest rate divided by no of years. multiplied by interest rate.
Provision for loan losses to net loan charge offs
Allowance for loan losses to non-performing loans =
Allowance for loan losses to non-performing loans = Allowance for loan losses / non-accrual loans
Provision for loan losses to net loan charge offs
= Provision for loan losses / (Charge-offs - Recoveries)
