Revision Deck Flashcards
How do you account for hedging instruments within your financial statements?
What are the two types of joint arrangements under IAS 11?
What is the difference between the two and how you account for them?
Joint arrangement is when two parties have control. The two types are: 1) Joint operation; 2) Joint venture
Joint ventures are separate entities and hence are accounted for under the equity method of accounting (recog at cost and adjust for post acq changes in reserves).
Joint operations are accounted for by recognising in relation to its interest in a joint operation: [IFRS 11:20]
- its assets, including its share of any assets held jointly;
- its liabilities, including its share of any liabilities incurred jointly;
- its revenue from the sale of its share of the output of the joint operation;
- its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly.
Joint operations may represent a foreign operation and if so must be converted to presentation currency if the functional currency is different
Sales volume variance calculation
(Budgeted volume - actual volume) x budgeted contribution
Contribution = sales price - direct and variable costs per unit
Sales price variance calculation
(Budgeted selling price per unit - actual selling price per unit) x actual sales volume I.e. number of units sold
How to answer question which states:
“Prepare a forecast of the overall cash flows for Business Strategy 2 (ignore tax and interest payments0 for each of the five years from 1 January 20X8. On the basis of this forecast, determine the total amount of new finance needed and state when the maximum financing need will arise.”
[TO INSERT WHEN RECEIVE ANSWER]
What is customer relationship management?
Management process that seeks to attract, maintain and enhance customer relationships by focussing on the whole satisfaction experienced by the customer when dealing with the firm
Relationship marketing can look at targeting existing customers and new customers as well as increasing communication with customers.
The communication can help enhance trust and make customer seek out their services.
What is a zero cost collar and how does it work?
An arrangement where you sell/buy a put option and buy/sell a call option to hedge against risk movements moving in both an upwards and downwards direction. You effectively create a floor and ceiling.
You buy a call and sell put when you need to buy an item in item in the future.
You sell a call and buy a put when you need to sell the item in the future.
Beneficial as the cost of acquiring the call option is offset against the proceeds from selling the put option. You will still be exposed to fluctuations to a certain extent and must rely on the holder of the put option exercising the option when the floor price/rate is breached.
What are the advantages and disadvantages of a central treasury team?
Advantages:
- High degree of expertise and a centre of excellence
- Get better economics when dealing with banks or negotiating debt
- Takes a group wide perspective as opposed to isolated views
Disadvantages:
- Local needs may be ignored
- Could take longer to respond to local needs
What are the methods which may be used to value a brand?
(Zeta question)
- Research based methods - research in to consumer behaviour and attitudes (i.e. consumer perception) - These do not put any financial value on the brand however
- Cost-based approaches - value is the aggregation of a the historical costs incurred to bring the brand to its current state (i.e. development costs, advertising costs etc)
- Premium price - NPV of the premium price that a branded asset could command over an unbranded asset. Difficult to find an unbranded product to compare it to.
- Economic use approach - Combination of financial principles (i.e. brands future earnings are identified and discounted to NPV using a discount rate) and marketing principles (i.e. brands generate customer demand which translates to revenue and retention in the long term by way of loyalty.
What is brand equity?
What does a strong brand give a company?
Brand equity is the asset the marketer builds to ensure continuity of the satisfaction for the customer and revenue for the supplier. The asset consists of consumer attitudes, distribution and so on. It is thus the public embodiment of the organisations strategic capability.
A strong brand should help to generate future cash inflows and higher profits for the company. Brands can build market share, and support higher prices
What is the financial reporting treatment of acquiring a brand
This depends on whether you acquire the brand only, or you acquire the equity of the brand (i.e. the company)
If the brand only: brand is an intangible asset under IAS 36 and must be recorded at FV, under the requirements of IFRS 13. IFRS 13 requires fair value to be determined on the basis of tits highest and best use from a market participants perspective.
If the business is acquired - It should be accounted for under IFRS 3 as a business combination.
What is Multi lateral netting off and how should you complete this?
What are the advantages and disadvantages of this
MLNO is the process where in the group wide payables and receivables are converted to one currency (e.g. sterling) at the current spot rates in order to determine the net receivable and payable amounts by each division. The amounts can then be paid to central treasury who can then transfer the money to those divisions with net receivables.
Advantages:
- Saving on transaction costs
- Optimisation of cash flows across the group
Disadvantages:
- Not popular in certain countries
- Local receivable balances may take longer to settle during this process (may lead to local borrowing)
How do you account for finance secured by way of: £5.4m of 8% redeemable preference shares, redeemable after 5 years
This means that the shares can be bought back (i.e. redeemed) after 5 years time. They are therefore presented as a liability.
The 8% represents the year dividend that should be payable on the preference share. There would also be a finance cost charged on this amount if the shares were issued at a discount (use the effective interest rate).
Given the shares a re a financial liability the dividend payment would be an expense in the profit or loss statement.
In practical terms preference shares are only treated as part of equity when:
• they will never be redeemed;
• the redemption is solely at the option of the issuer and the terms are such that it is very unlikely at the time of issue that the issuer will ever decide on redemption; and
• the payment of dividends is discretionary.
Formula to calculate weighted average cost of capital?
WACC = (MVe x Ke) + (MVd x Kd) / (MVe + MVd)
MVe = market value of equity
Ke = cost of equity
Points to consider when assessing different finance alternatives? (I.e. bonds, shares, loans)
- Cost - Ke or Kd
- Covenants - are you restricted by these?
- Currency - Is there a FX risk?
- Control - is this impacted by any share issuance?
- Cash flows - Are they suitable? Strong CF needed for debt
- Security - Is there enough security for the loan - i.e. assets
- Signalling - If raising debt, the market thinks there is strong CF. What is the signal sent to the market?
- Gearing - effect on current gearing and likely effect in future?
- Green? - Finance available for environmental projects. Green loan determined by the bank - these co’s using are seen as better organised and more responsible, which leads to better credit rating and lower costs. Green bond assessed by a third party - tax incentives given for these to bond holders, and cost to issuing company is lower as the bond holders demanded yield is low.
- Duration - what’s the duration that it needs to be paid back over? Is the repayment due before cash flows are going to be generated? Always prefer longer period for liquidity perspective
- Availability - Amount and timing. Is there a loan available at the correct amount, and at the correct time.
