MCS Key things to remember Flashcards
Business Model
Defining Value
Creating Value
Delivering Value
Capturing Residual Value
Intangible assets: capitalise when…
Probably future economic benefits
cost can be measured reliably
Development costs, PIRATE criteria:
P - probably future economic benefits
I - intention to complete
R - resources to complete
A - ability to use or sell
T - technically feasible
E - expenditure reliably measured
4 Types of Business Risk
Product Risk - factors that can negatively affect products success in the market
Product reputation risk
Contractual inadequacy risk
Operational risk - business operations inefficient/processes fail
Goodwill on acquisition is….
The difference between amount paid as consideration at acquisition and the fair value of the subsidiaries net assets
Consideration to be valued at (for calculating GW):
deferred cash
Shares
deferred cash - discount to PV
Shares (incl. deferred) - market value @ acq
Difficulties in determining fair value of subs net assets (for calculating GW)
Property
Equipment
Licenses
Trade receivables
Liabilities (incl. contingent liabilities)
Property - check values, compare to others, professional valuation
Equipment - check for damage or if technically obsolete. If intent to sell PPE recognise at realisable value
Licenses - transferable? reliably measurable since no 2nd hand market for licenses?
Trade receivables - recognise recoverable amount
Liabilities (incl. contingent liabilities) - recognise at fair value
Fair value adjustments to subsidiaries net assets
- if subs net assets fair value higher than carrying amount
- if contingent liabilities
If subs net assets fair value higher than carrying amount:
1. Add fair value uplift to the carrying amount of subs net assets
2. this reduces the difference between consideration and fair value of subs net assets which reduces goodwill
3. additional depreciation will reduce profits
Contingent liablities:
1. deduct fair value of contingent liabilities from subs net assets
2. this increases the diff between consideration and fair value of subs net assets which increases goodwill
Integrated Reporting - 6 capitals
- Financial capital (financial resources)
- Manufactured capital (physical assets e.g. PBSAs)
- Intellectual capital (technical know-how/expertise)
- Human capital (staff skills/competencies)
- Social & relationship capital (reputation & relationships)
- Natural capital (environmental resources e.g. green spaces / energy sources / materials used)
Characteristics of DEBT (5)
- cheaper (since lenders are protected by rights that come into force if interest repayments of principal not made)
- Plenty of property to secure against
- Loan interest is an expense for tax purposes - further reduces Kd
- Ranks ahead of equity for repayment, so repayment more likely
- more flexible & quicker to organise
Characteristics of EQUITY (5)
- Permanent finance source, suitable for long term investments
- more expensive, lenders exposed to risk associated with FH (more risk = more retun)
- Quoted company - reasonably practical to raise large sum but expensive due to professional fees
- share price will decrease if returns are not delivered
- right issue is the simplest way to raise additional equity
KEY RATIOS
OP% =
GP% =
ROCE =
Gearing =
Interest Cover =
Dividend Cover =
OP% = PBIT / revenue
GP% = Gross profit / revenue
ROCE = PBIT / capital employed
Gearing = Debt / Equity
Interest Cover = PBIT / finance costs
Dividend Cover = Profit / Divis paid
Subsidiaries are entity controlled by another entity….criteria for control:
- voting rights or right to appoint key management/decision making
- Rights to variable returns (dividends)
- Ability to use power to affect investor returns
Consolidation of foreign subs
(P/L, A & L, Exchange G/L)
- P/L translated at average rate for the year
- Assets & liabilities translated at closing rate
- exchange differences taken to foreign currency exchange reserve (doesn’t affect reported earnings but will impact equity - consider ratios)
Currency effects on financial statements
SOFP - NET ASSETS
SOPL
SOFP - NET ASSETS
1. net assets of each foreign sub (incl. GW) must be retranslated at each year end using the closing rate
- Gains/losses taken to currency reserve
- currency G/L are not recognised in consolidated P/L so do not affect reported profit.
- Currency loss would reduce equity, so would increase ROCE and vice versa
- impact is decreased if investments spread across different countries
SOPL
Any expenses in P/L translated at the average rate for the year - less likely to be affected by large swings in FX rates
Transfer Pricing
Needed for….
4 types
Needed for: goal congruence & prevention of dysfunctional behaviour
- Marginal cost - when there is spare capacity
- Market based - when there is no spare capacity
If cannot agree…
3. Dual pricing - record different prices, adjustment for fictious profits needed
4. Two-part tarrif - marginal cost transfer plus periodic lump sum to contribute to fixed costs
Provision =
3 criteria
Contingent liability =
Provision = PROBABLE liability of uncertain timing
3 criteria:
1. present obligation due to past event
2. Probable future transfer of economic benefit
3. measured reliably
Contingent liability = POSSIBLE obligation arising from a past event which will be confirmed by a future uncertain event outside the company’s control
-> disclose in notes to the financial statements
NOTE: if only a remote possibility then do not recognise
ASSOCIATES - How can significant influence be determined?
- power to participate in decision making (but not control)
- Implied by equity holding >20% of voting rights (ordinary shares). If less, more detailed analysis needed…
- right to nominate board directors (since can represent on board and give opinions on policy)
- sole customer/supplier
Accounting for associates:
Inter company balances
unrealised profits
Share of P/L
Distributed profits
If significant influence lost
Inter company balances - NOT cancelled out
unrealised profits - adj for unrealised profit on inventory - reduce the sellers profits by the parents share only.
(if A seller - reduce share of associates profit in P/L
if P seller - increase parents COS)
Share of P/L - parent to recognize share of P/L in consolidated P/L
Distributed profits - show in investment in associate
If significant influence lost - if significant influence is lost, mist reclassify associate as an investment as equity method no longer appropriate
Revenue Recognition - 5 steps
- identify the contract
- Identify performance obligations - must be distinct and separately identifiable
- determine contract price
- allocate transaction price to performance obligations
- recognise revenue as/when performance obligations are met
- evenly throughout contract?
- may need to defer/accrue income
Fixed Rate Bonds
Predictable fixed return (coupon) rate paid
interest paid is tax deductible
secured against NCAs
Rights Issue
shareholders can increase their holding or sell their rights
issued at less than current market value to encourage uptake
no dilution of control
higher divi payments if more shares in issue
more shares = lower eps
significant professional fees to issue but reasonably practical since quoted company
Activity Based Management
Uses info from ABC to analyse relationships between costs & activities
focus on activity costs, not departmental
Revolved around value added: cost reduction, quality, process improvements, innovation
useful to ensure all overheads are allocated to activities for assessment
Negotiation 4 stages
Prepare - state what negotiations, gather all info needed to make informed opening offer
Open - must set opening bid at the right level (high enough to keep engaged, low enough for movement)
Bargain - contingencies, assurances, seat on the board, deferred cash/shares
Close - ratify & sign agreement quickly to prevent counter offers
Also consider: face to face negotiations to build relationships & explain issues more effectively. Senior decision makers to be present to ensure agreements can be upheld
Project management: key phases
5 process areas
Key phases:
1. need - determine goals/scope, feasibility study, project initiation doc (scope, deliverables, budgets)
- solution - project plan, select appropriate solutions, investment appraisal calcs
- implementation - solution put into place, PM necessary to keep on track, flexibility & adaptations needed, contingencies in budget/time plan?
- completion - confirmation that goals achieved. post completion audit for lessons learnt
5 process areas:
1. initiation
2. planning
3/4. controlling/executing
5. closing
Effective Teams
Important for….
To encourage effective teamwork….
Important for….
- good service to students & institutions, quality
- trust, cooperation, engagement in achieving shared objectives
To encourage effective teamwork….
- managers should encourage staff to share opinions to feel valued and motivated
- regular team meetings to give designated forum for opinion sharing rather than just disagreeing unconstructively
- specific targets and shared objectives & rewards e.g. student satisfaction = bonus for whole team
- lack of familiarity/ability to relate to one another can be an issue in achieving effective teamwork - consider social events for interaction & rapport building
Benchmarking 4 types
internal - one internal unit to another
operational - one operation to that in a different industry
competitive - compare to most successful competitor
customer - against what customers expect
limitations:
- doesnt give reasons
- can encourage continuation in wrong direction if original benchmarking strategy flawed
- external factors could have caused improvements
Responsibility centres
give managers well defined area of responsibility for which they have control & can influence - only assessed on this - motivating
cost centre - buildings generate own costs but consider who organises insurance etc.
revenue centre - usually filled to capacity, do managers have much influence? customer service team responsible for marketing material on social media & web which is where bookings are made
profit centre - remember cannot increase prices - can managers have much influence
investment centres
