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FRA Flashcards

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1
Q

Current Method
Temporal Method
Functional, Presentation, Local

A

Current F = L
Temporal F= P
Functional > 51% is the primary ccy used
Presentation currency of financial statements
Local country being referred to

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2
Q

Where are FX gains reported
Current method?
Temporal Method?

A 
Current = Cumulative Tax Adjustment on the balance sheet
Temporal = Consolidated Profit & Loss on Income statement
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3
Q

Temporal Method
Monetary assets
Non Monetary Assets
Revenue and Taxes

A

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

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4
Q 
Current rate
All income statement accounts
All Balance Sheet Items
What is at Historic cost?
What is at declared date rate?
A 
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
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5
Q

What is the current fx rate?

What is the historic fx rate?

A 
Current = day on which accounts were prepared
Historic = Day inventory was purchased
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6
Q

IFRS Hyperinflation treatment

Rate Adjuster

After inflation price

Which assets are not adjusted for inflation?

A

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.

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7
Q

Purchasing power loss equation

A

(CPI Year end / CPI Start ) x cash value

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8
Q

Income statement
Monetary

Non Monetary

A

Monetary (Revenue) = CPI End / CPI Average

Non Monetary ( Common stock, PP&E) = CPI End / CPI Beginning

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9
Q

US Gaap Hyperinflation

IFRS Hyperinflation

A

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%

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10
Q

Effective Tax Rate

A

Tax Expense / EBT

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11
Q

share of unsold downstream profits

A

% acquired company x (Inventory sold downstream - cost of inventory sold) x 1 - % sold

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12
Q

Downstream Income statement

A

% NI

  • % Depreciation(FV PPE/No Years)
  • share of unsold downstream profits
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13
Q

Upstream Balance Sheet

A 
Cost
\+ NI
- % Dividends received
- % Upsteam sale
= Holding value
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14
Q

Equity method fair value option
US Gaap
IFRSE

A

US Gaap - Any entity can take a fair value option

IFRSE - Only VC and mutual funds can take the fair value option

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15
Q

Adjusted EBIT

A

EBIT + Pension expense - service cost

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16
Q

Interest coverage ratio

A

Adjusted EBIT / Interest expense + costs

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17
Q

Balance sheet figure for PV of available future funds

A

The lower of:
FV plan assets - benefit obligation

or

PV of future economic benefit

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18
Q

How are actuarial gains/losses recorded under US GAAP?

Past service costs?

A

Either recognised fully or amortised.

If amortised us the corridor method.

Past service costs are amortised over the life of an employee.

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19
Q

How are acuarial gains/losses recorded under IFRS?

Past service costs?

A

Reflected in Equity under ‘ Other comprehensive income’

Past service costs are recognised in full in the year end plan amendment.

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20
Q

PVDBO =

Interest cost =

Service cost =

A

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

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21
Q

Funded status =

IFRS Interest expense =

A

Funded status = FV plan assets - Projected Benefit Obligation (PBO)

IFRS Interest Expense = Funded status x discount rate

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22
Q

Non controlling interest (if you own 80%)

A

0.2 x Fair Market Value

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23
Q

FV Year end Plan assets =

A 
FV At the beginning of the year
\+ Contributions
\+ Actual return
- Benefit paid
= FV at the end of the year
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24
Q

Projected Benefit Obligation (PBO) =

Plan Assets > PBO =

A 
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

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25
Q

Past (Prior) service cost =

A

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

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26
Q

Total Periodic pension cost

Ending or beginning funded status =

A

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

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27
Q

What is the corridor approach?

What happens to the excess?

A

Beginning Actuarial gain/loss > Greater of Beginning PBO or Beginning plan assets

Excess is amortised in P&L

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28
Q

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% +

A

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

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29
Q

How are derivatives held under IFRS 9?

IFRS Allows debt or equity to be reclassigied?

A

Derivatives NOT held for hedging are measured on FVPL

Debt - Only if the objective has changed in a way which affects operations

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30
Q

Year end Carrying Value for Equity method

A

Investment cost
+ % acquired x Net Income
- % acquired x dividends
= Year end Carry Value

31
Q

IN process R&D is recognized how under IFRS and US GAAP?

A

They are both recognised at Fair Value as a separate intangible asset. They are amortised if successful or impaired if not.

32
Q

Which tests must be passed for debt to be classified at amortised cost?

A
  1. Business Model Test

2. Cashflow characteristics test

33
Q

What is the business model test?

What is the Cashflow Characteristics test?

A

Financial assets are held to collect contractual cash flows

The only contractual cash flows are principal and interest payments

34
Q

Acquisition vs Equity method:
Net profit margin
ROE
ROA

Retained earnings

A

Acquisition method - All are lower
Equity method - All are higher

Retained earnings = the same

35
Q

Non controlling interest allocation:
Partial goodwill
Full goodwill

A

Partial - Does not allocate goodwill to NCI

Full - Does allocate goodwill to NCI

36
Q

what is the impairment test?

If yes: Impairment loss =

A

Does carrying value exceed recoverable amount?

Impairment loss = Goodwill - (Recoverable amount - Identifiable assets)

37
Q

Partial Goodwill equation =

Full Goodwill equation

Partial Non Controlling Interest (NCI) =

Full Non Controlling Interest (NCI) =

A

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%)

38
Q

Full Goodwill approach can be used by:

Partial Goodwill approach can be used by:

A

Full = IFRS and US GAAP

Partial = IFRS Only

39
Q

Impairment loss is permanent for US GAPP or IFRS?

A

Only under US GAAP are impairment losses permanent.

40
Q

How to do you account for Income under each method?
FVPL
Equity Method
Consolidation / Acquisition Method

A

FVPL = % Dividends only
Equity Method = % Net income and balance sheet approach but IGNORE dividends
Consolidation = FULL Net income - minority interest and IGNORE Dividends

41
Q

Equity method treatment of Balance sheet
20% - 50%

Income statement treatment

A 
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.
42
Q

Merger

Acquisition

Consolidation

A

Merger = Acquirer absorbs all assets and liabilities

Acquisition = Both entities continue to exist

Consolidation = A new entity is formed

43
Q

Contingent assets and liabilities treatment

IFRS:

US GAAP:

A

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.

44
Q

Basel III Banks minimum capital requirement

Basel III minimum stable funding

Basel III Liquidity

A

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.

45
Q

RWA decrease =

Capital Decrease =

A

RWA decrease = Improved financial position (these include unsecured loans so by reducing they are improving financial positions)

Capital Decrease = Deteriorated capital position

46
Q

Dividend to policy holders ratio =

Combined ratio after dividends =
what does it show?

A

Dividend to shareholders / Net premiums earned

combined ratio + Dividends to policyholders ratio

Shows a total efficiency measure

47
Q

Insurers

Soft Pricing =

Hard Pricing =

A

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.

48
Q

Characteristics of:

Property & Casualty insurers:

Life & Health insurers:

A

Property & Casualty insurers: Short term and claims are variable

Life & Health insurers: Long term, more predictable claims. More duration risk from assets.

49
Q

Loss Adjustment Expense ratio =

Underwriting expense ratio =

Combined ratio =

A

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.

50
Q

CAMELS =

A

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.

51
Q

CAMELS Earnings
Level 1
Level 2
Level 3

A

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.

52
Q

CAMELS - Liquidity

Liquidity Coverage ratio =

Net Stable Funding Ratio =

Basel II Minimum liquidty standards

A

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.

53
Q

Accruals vs cash - Which is more persistent and which reverts to normal levels quicker?

A

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

54
Q

What is a high Beneish model M-Score suggestive of?

Declining receivables turnover

Increasing receivables turnover

A

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.

55
Q

Earnings (Net income) =

Accruals ratio B/S approach

Accruals ratio CF approach

A

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

56
Q

Capital lease effect on assets

JVs effect on assets

A

Increases assets will reduce ROA.

JVs are off balance sheet reducing assets and increasing ROA.

57
Q

Days of Sales Outstanding

Receivables turnover

A

DSO = 365/ Receivables Turnover

RT = Turnover / Avg Receivables

58
Q

Effect of take or pay contracts

A

Take or pay contracts increase inventory, Increase liabilities and increase assets.

59
Q

6 steps of the financial statements analysis framework?

A
  1. Define purpose and context
  2. Collect input data
  3. Process input data
  4. Analyze/interpret
  5. Develop conclusions
  6. Follow up
60
Q

Change in Net Income given LIFO reserve

Net Income from Retained Earnings

FIFO Inventory

A

NI = LIFO Reserve x (1-t)

NI = (closing RE - Opening RE) + Dividends paid

FIFO Inventory = LIFO Inventory + LIFO Reserve

61
Q

Expensing vs Capitalising - Net Income and ROA

What happens to interest when you capitalise it?

A

Expensing NI & ROA = Higher

Capitialising NI & ROA = Lower

Interest moves from CFI to CFO when you capitalise it.

62
Q

COGs Treatment for LIFO/FIFO

Current method

Temporal Method

A

Current - COGS = Average FX rate

Temporal - COGS = Historic FX rate

63
Q

cash flow aggregate accruals ratio

Average NOA

Cash flow based Accruals ratio

Net Operating Assets NOA =

Accruals =

A

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

64
Q

ROE

3 stage

5 stage

A

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

65
Q

current ratio =

A

Asset / Liabilities
Assets = inventory, receivables and cash
Liabilities = Payables and short term debt

66
Q

Balance sheet bond value given price

A

Compute YTM with I/Y.

Value on balance sheet = MV of bond + (YTM - Coupon)

67
Q

net monetary assets =

A

Check assets and liabilities on balance sheet to find each figure.

net monetary assets = (Cash + receivables) - (Payables + income tax)

68
Q

Days of Sales Outstanind DSO =

Receivables turnover =

A

Days of Sales Outstanind DSO = Account receivables / (Revenue/365)

Receivables turnover = Total revenue / Avg receivables

69
Q

What is bill and hold stock?

A

A potential earnings manipulation where invoices are issued at a time where goods are still on the sellers premises.

70
Q

Cash flow treatments:

Trading securities

Non-trading securities

A

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

71
Q

IFRS vs US GAAP treatment of:

Interest received
Interest paid
Dividend received
Dividend paid

A 
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
72
Q

Inventory Turnover =

Days of Inventory on Hand =

Receivables Turnover =

Days of Sales Outstanding =

A

Inventory Turnover = COGS / Avg Inventory

Days of Inventory on Hand = 365 / Inventory Turnover

Receivables Turnover = Net Sales / Avg Receivables

DSO = 365 / Receivables Turnover

73
Q

Adjusted EBIT =

Adjusted Interest =

A

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.

74
Q

Provision for loan losses to net loan charge offs

Allowance for loan losses to non-performing loans =

A

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)

CFA 2 (10 decks)

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