CFA Level 2 FRA
projected benefit obligation (PBO)/present value of defined benefit obligation (PVDBO)
Actuarial present value (at an assumed discount rate) of all future pension benefits earned to date, based on expected future salary increases.
underwriting loss ratio
(Claim paid + loss reserve) / net premium earned
Net Interest Expense/Income
(PBObegin - PAbegin ) * r = Net Interest expense/income
Temporal Method and Current Rate 调平
* Net income is remeasured at a "mixed rate" (i.e., a mix of the average rate and the historical rate) under the temporal method ** Under the current rate method, total assets and liabilities are translated at the current rate. The total equity (equity taken as a whole) would then have to be translated at the current rate for the balance sheet to balance.
Pension Expense IFRS
+ Service Cost +/- Net Interest Expense/ (Income)* +/- Past Service Cost Re measurements (Actuarial gains/loss) are reflected in OCI and not amortized *Net interest expense/(income) = beg funded status * Discount rate
Financial Assets
- <20% ownership -IFRS classifies investments in financial assets at HTM, AFS, or Fair Value through profit or loss
Mechanisms to Misstate Profitability (Biased Accounting)
- Aggressive rev recognition, bill and hold sales, fake sales - Lessor use of financial lease classification - Classifying non-op rev/income as operating, and operating expenses as non-operating -Channeling gains through net income and losses through OCI
Temporal Method (Remeasurement)
- Also known as monetary/nonmonetary method - Overseas operations considered as an extension of the parent companies activities - If functional currency and parents presentation are the same we REMEASURE - Assets and liabilities translated at rates that preserve the measurement bases after translation: 1. Current Value 2. Historic Cost (fluctuating rates do not have an impact) Remember: Inventory is a nonmonetary asset Exchange rate gain/loss go through I/S. Retained earnings is figure that makes accounting equation balance: A - L - Common Stock = Retained earnings
Uses of Fixed Asset Disclosures
- An analyst can use financial statement disclosures to estimate the avg age of fixed assets and the average depreciable life of fixed assets in order to: * Identifiy firms with older, inefficent assets * Identify when major capital investments are required * Idnetify firms with inflated earnings
Earning Sources and ROE
- Assess the firm's performance drivers and breaks down into 5 specific areas - Goal is to determine whether the firm's earnings are generated internally (from operations), from acquisitions, or from investment income from associates (equity method) - We must adjust by removing equity method income and investment in asset from equation Don't adjust for stockholders equity because we dont know how it was financed. Leave equity alone, leave assets alone then too.
Analyst Issues - Equity Method
- B/S : Netting assets against liabilities may obscure liabilities and understate leverage (we are doing one line; %A, %L, GW). Distorts equity. -I/S: We only see share of NI, not rev, costs, etc.
Capital Structure
- Cap structure must support management's strategic objectives and allow firm to honor its future obligations - Pay attention to long term debt to total cap -Some liabilities are less onerous (costs to fufill are higher than economic benefit recieved) than others and may not require an outflow of cash: employee benefit obligations, deferred tax, restructuring provisions (future expense) - more onerous if more likely of cash outflow
Mechanisms to misstate assets/liabilities (Biased Accounting)
- Choosing inappropriate models and/or model inputs that affect estimated values of financial statement elements - Reclassification from current to non-current Over- or understating allowances and reserves -Understating identifiable assets (and overstating goodwill) in acquisition method accounting for business combinations
Capital Allocation Decisions
- Consolidation can hide the individual characteristics of dissimilar subsidiaries - Firms must disaggregate financial info into segments to assist users - Segment disclosures are valuable in identifying which divisions generate greatest rev/profit, relationship between capex and returns, and getting rid of segments that suck
Currency Effects on Profits
- Currency value fluctuations affect a company's reported results due to: Transaction exposures (gains/losses from imports and exports), translation effects (exchange rate gains/losses into I/S, not genuine economic Gain/Loss) - Disclosures may help analysts in determining - IFRS & U.S. GAAP Disclosures: -Exchange rate difference in I/S - CTA and reconciliation of opening and closing amounts
HTM (Financial Asset)
- Debt securities where company has intent AND ability to hold to maturity - Interest income reported on income statement - Interest = Coupon +Amort. Discount - Amort. Premium - Reported as carried on B/S at amortized cost (+ any discounts, - any premium; which is difference between interest and coupon rate*face value), carried at HISTORICAL -Cant sell before maturity, except for in unusual circumstance - Income statement sees the interest income, not the unrealized gain because we hold to maturity
Cash Flow Analysis
- Determine whether earnings are confirmed with CF *Adjust OCF by adding back cash interest and cash taxes if included *compare adjusted OCF to operating income - Calculate cash basis ratios: * CF ROA OCF / Average Total Assets * Operating earnings equality -Adjusted OCF/ EBIT (Adjusted OCF is cash version of EBIT) -CF to Reinvestment *Adjusted OCF / Cap Ex - CF interest Coverage *Adjusted OCF / Cash Interest - Cash flow to total debt *Adjusted OCF/ Total Debt
Stock Option (share base compensation)
- Fair value at grant date = estimated option premium - Service period equals time between grant date and vesting date (first date options can be exercised) - Option value is based on observable market price of an option with the same or similar terms and conditions, if one is available. -In absence of a market based instrument, fair value is determined by option valuation model: Black Shoels, binomial model, monte carlo simulation Option Model Assumptions: 1. Exercise price 2. Stock price at grant date 3. Implied vol 4. Rf rate 5. Expected term 6. Dividend yield
Sources of Information About Risk
- Financial Statements - Audit report - small sized firm relative to company being audited, and a lack of auditor independence are red flags. - Notes to financial statements - includes disclosure related to accounting principals, changes in accounting estimates, liability amounts and timing, contingent liabilities, and financial instruments's credit risks/liquidity risk/market risk/ pension assumptions) - MD&A includes principal risks unique to business. -SEC NT says firm is unable to file required 10q/k in timely manner - Look at financial press, but should conduct own due-diligence.
Other Adjustments
- Full pension expense is taken through Op expenses (SG&A) under GAAP - Only service is operating - Remove pension expense from operating expenses and include service cost - Add interest cost to interest expense - Add actual return on plan assets to non-operating income - Amortization ignored ***Total I/S effect = service + interest - actual return***
Business Combinations (Acquisition Method Accounting)
- In stock acquisition acquirer has incentive to pursue aggressive accounting so as to inflate their stock price prior to acquisition - Target company managers may also be motivated to inflate their stock price to get attractive valuation -Acquiring company managers may pursue acquisitions to hide pre-acquisition accounting irregularities by buying targets with dissimilar operations or with less publically available info -Acquirer will often underestimate value of identifiable net assets - thus overestimating goodwill on acquisition. -Fair value adjustments for identifiable assets typically result in excess depreciation which reduces profits for future reporting periods. Because goodwill isn't amortized, the effect of overestimating goodwill is to increase future reported profits. Inflated good will is eventually written down and be played down as a one-off, non-recurring event
Warning Signs of Misstated Assets/Liabilities
- Inconsistency in model inputs for valuation of assets vs liabilities -Typical current assets being classified as non-current -Allowances and reserves differ from those of peers and change over time -High goodwill relative to total assets -Use of SPE where doesn't make sense -Large changes in deferred assets/liabilities (DTA up, Tax Exp down) (DTL down, Tax exp up) -Large off B/S liabilities
Multinational Operations & Tax
- Issue is transfer pricing, items could be sold below true commercial value. Can use this to shift profits from high tax rate to low tax rate at countries via intercompany transactions - Countries have laws to prevent aggressive transfer pricing -Payment of domestic tax on overseas income varies globally -Tax treaties prevent double taxation - credit granted for overseas tax (U.S.) Statutory tax rate = rate of tax in domestic country (reporting currency/presenting tax rate)
Special Purpose Entity
- Legal structure created to isolate certain assets and obligations of sponsor - Does specific purpose: buy assets, fund R&D, lease assets, enhance B/S - Purpose if for low-cost financing Typical Uses: - Synthetic lease - sell to SPE and leaseback - Secularized Loans -loans or mortgages sold to SPE which issues MBS -Sale of Receivables - company sells AR to SPE, which uses AR as collateral to borrow R&D Cost - established to fund R&D, avoids recognition of R&D expense or liabilities so if R&D makes losses, doesn't impact company.
B/S Asset/Liability of Defined Benefit Obligation
- Net of PBO and fair value of plan assets - Asset/liability = funded status - If net asset > PBO - overfunded and we create asset - If net asset < PBO - underfunded and we create liability
Translated (Current Rate) Vs. Local Currency Ratio
- No change from translation using current rate method for pure income statement and b/s ratios - Mixed ratios are distorted (1 b/s item, 1 i/s item (which will be an average)) - FX rate changes affect consolidated ratio, even when no "real" change occurs
PBO (Projected Benefit Obligation)
- PV of all future pension pmts earned to date (current) based on expected salary increase over time. - Assume work until retirement - Estimate of liability on a going concern basis -PVDBO is what IFRS calls PBO
Indicators of Cash Flow Quality
- Positive OCF from sustainable sources - Large enough to cover cap ex, dividends, and debt repayment - Lower volatility than peers - Significant difference between OCF and earnings can be an indicator of earnings manipulation - Management can affect CFs through strategic decisions (slowing payments to suppliers, selling receivables) - Management may try to shift CFI/CFF into operating CFs
Available for Sale (Financial Asset)
- Reported on B/S at fair value (Amortized Cost & Unrealized Gain), CARRIED AT MARKET VALUE - Realized gains/losses/dividends/interest income reported on I/S - Unrealized gains/losses net of tax are reported in OCI, NOT I/S. When sold, these transfer to I/S. -Unrealized gain is difference between Fair Value and amortized cost [PV - amort. disc + amort. premium] Foreign Exchange gains/losses recognized in I/S for IFRS, equity for GAAP.
Warning Signs of Misstated Profitability (Biased Accounting)
- Rev growth higher than peers -Receivables growth higher than rev growth - High rate of customer returns -Unexplained operating margin boost -Operating CFs (OCF) lower than operating income
Impairment of Goodwill
- Tested for impairment annually, can't be amortized. - Impaired when carrying value (BV) > fair value -Impairment gain is reported on I/S as separate line -Cannot reverse impairments IFRS impairment is allocated across cash generating units that will benefit from acquisition. One Step: - If recoverable of cash generating unit < carrying value, difference is impairment Note: If impairment is greater than goodwill, remainder is allocated to other assets in the unit. GAAP impairment is allocated across reporting units; operating segment or component Two Step (Have to recalc goodwill): -If fair value of reporting unit < carrying value, impaired. - Amount of impairment in unit's reported goodwill - current fair value of unit's goodwill Note: If loss is greater than remaining goodwill, remainder is thrown away.
STOCK GRANTS (share base compensation)
- comp expense equals market value at grant date - allocated over period benefited by empolees service - restricted stock: ownership returned to firm if conditions are not met - performance shares: granted on meeting performance goals, not based on how long you've worked there
Joint Venture
- control shared by 2 or more investors - requires equity method
Associates
-20-50% ownership -Significant influence can be evidence by: BoD representation, involvement in policy making, material intercompany transactions, interchange of managerial personnel, dependence on tech. -Equity Method is used - Influence in financing, operating, and amount and timing of dividends.
Units of Production Depreciation
-Based on units rather than time - (Cost - Est. Salvage Value) / # Units - Take this number and multiply by units produced each year for the depreciation
Fair Value Option - Equity Method
-Election to treat equity method investments at Fair Value (HFT) - GAAP allows all entities - IFRS allows venture capital, mutual funds, unit trusts only - Cant change back to equity accounting from Fair value -Unrealized g/l on I/S
Intercorporate Investment Classifications
-Financial Assets: <20% ownership, no significant control over operations of investee firm. Passive. -Associates: 20% to 50% ownership,investing firm has significant influence over operations, but not control. Influence. -Business combinations: >50% ownership with control. Classifications depends on whether they are passive, influence, or control. Percentage ownership is irrelevant
IFRS vs GAAP
-GAAP expected return and discount rate may differ, IFRS expected return = discount rate - GAAP interest and $ expected return shown separately. IFRS netted. - IFRS remasurements taken OCI. GAAP actuarial gains and losses either recognized in the I/S or taken into OCI. - GAAP open OCI balances subject to potential amortization (corridor approach). IFRS no amortization. - IFRS past service costs taken to I/S - GAAP past service costs taken to OCI and amortized over remaining service life - GAAP uses 10% corridor approach for amortizing actuarial gains and losses - IFRS discount rate = yield on high quality corporate debt with similar duration to plan liabilities - GAAP discount rate = rate at which pension benefits can be settled.
Warning signs of overstated Operating CFs (OCF)
-Increase in payables combined with decrease in inventory & receivables -Capitalized expenditures -Sales and leaseback of assets -Increases in bank overdraft
Mechanisms to overstate operating CFs
-Managing activities to affect CF from operations (stretching payables) -Misclassifying investing CFs as OCF
Defined Benefit Accounting
-Non-pay-related Plans: Pension benefits are unrelated to employee's salary level - Pay-related plans: Pension benefits are based on future comp - Employer needs to estimate future benefit payments to determine contribution, making accounting hard.
Effect of SPE Consolidation
-Receivables added back to sponsor B/S - Debt added to sponsor's liabilities - Leverage increases, receivables increase, recieveable turnover decreases, ROA decreases - No longer off balance sheet financing
GAAP Accounting but not Economic REality
-Sometimes an accounting treatment may conform to reporting standards but result in reporting that is not faithful of economic reality (SPEs) -Impairment or restructuring provisions may be strategically timed to shift future exp into current period: Example: impairment losses on long-lived assets recognized in the current period will reduce future depreciation expense. Similarly, restructuring provisions allow managers to effectively set aside profits in thew current period to be used in the future. - Remember, provisions are non-cash exp charged in current period; future expenses from such provisions bypass the I/S. Can reverse provisions from past in future dates, boosting income.
IFRS Remeasurement (periodic pension cost)
1, + Actuarial G/L 2, + Difference: Net return on plan assets = actual Return - (beginning plan assets x discount rate)
Variable Interest Entities VIE
1, At-risk equity that is insufficient to finance the entity's activities without additional financial support. 2, Equity investors that lack any one of the following: Decision making rights. The obligation to absorb expected losses. The right to receive expected residual returns. stockholders' equity is not truly equity
Periodic Pension Cost Reported in P&L (IFRS)
1, Current service cost.: Current service cost is the increase in the PBO that is the result of the employees working one more period. immediately recognized 2, Net Interest Expense Beginning: (PBO - PA) * discount rate (used to estimated plan liabilities) 3, Actual return on plan asset 4, Past Service cost
Determine the appropriate translation method
1, Functional currency = parent's presentation currency differ current rate method 2, Functional currency = parent's presentation currency temporal method 3, local currency, the functional currency, and the presentation currency all differ temporal method and the current rate method 4, Subsidiary is operating in a hyperinflationary environment, FC = PC GAAP: temporal method IFRS: the subsidiary's financial statements are restated for inflation and then translated using the current exchange rate.
Analyst Adjustments for pensions
1, Gross vs. net pension assets/liabilities 2, Differences in assumptions used high discount rates, low PBO, high net income 3, Differences between IFRS and U.S. GAAP in recognizing total periodic pension cost (in income statement vs. OCI) 4, Differences due to classification in the income statement GAAP: periodic pension cost in P&L (including interest) -- operating expense IFRS: multiple line
Adjust GAAP-reported income to IFRS
1, adding back the periodic pension cost in P&L 2, subtracting only service cost in determining operating income. 3, Interest cost should be added to the firm's interest expense, 4, the actual return on plan assets should be added to nonoperating income(other income). this adjustment excludes (ignores) any amortizations.
Pension Plan Assumptions
1, discount rate the interest rate used to compute the present value of the benefit obligation and the current service cost component of periodic pension cost. 2, rate of compensation growth average annual rate by which employee compensation is expected to increase over time. The rate of compensation growth affects both the PBO and periodic pension cost. 3, expected return on plan assets the assumed long-term rate of return on the plan's investments. GAAP: expected return is assumed. IFRS: expected return = discount rate
Actuarial gains and losses
1, gain (loss) due to decrease (increase) in PBO occurring on account of changes in actuarial assumptions. 2, second component is the difference between actual and expected return on plan assets. other comprehensive income (OCI) IFRS: not amortized GAAP: amortized corridor approach.
IFRS 9 New Standards
1. Amortized Cost (HTM debt securities) Conditions: - Business model (How business model is managed- do you htm?) - Cash flow characteristic test( are the payments soley interest and principal) Accounting treatment same as HTM; store purchase price, then amortize disc/premium till asset converges to face value at maturity 2. Fair value through profit or loss (debt & eequity) Same accounting treatment as HFT 3. Fair value through OCI (ONLY equity securities/ AFS)
Cash Flow Quality Analysis
1. Check for unusual items 2. Check for rev quality (outflows due to AR, outflows due to inventory increases when fake sales are reversed) 3. Check for provisions - cash inflow when created, outflow when ordinary op expenses are channeled through such reserves
Current Rate Steps
1. Convert the I/S - all rev and expenses are translated at average rate 2. Derive closing RE, but no plug figures involved ( Begin RE + NI - Dividend = End RE ) 3. Convert the B/S - all A&L are translated at the current rate 4. B/S will not balance. The difference is the translation gain/(loss). Difference is the CTA to make balance. 5. Force the B/S to balance by including the adjustment in the shareholders' equity (cumulative translation adjustment) NOTE: the exchange rate gain or loss for the period is the change in the CTA CTA makes accounting equation balance = A - L - Common - Retained earnings = CTA
Exchange Rate Definitions
1. Current rate = Foreign Exchange (FX) rate as of balance sheet date (i.e., closing rate) 2. Average rate = Average FX rate over reporting period 3. Historical rate = FX rate that existed when a particular transaction occurred
Market Value Decompisition
1. Determine the implied value of the parent excluding the value of the associates Market cap of parent - parent's share of associates market cap = implied value of parent Note: May be necessary to convert the associates market cap to the parent's reporting currency at the CURRENT exchange rate. 2. Determine the implied P/E of the parent by eliminating the associates income from the parent (see image) Note: May be necessary to convert the associates earnings to the parent's reporting currency using the AVERAGE exchange rate, and convert associates Market cap by CURRENT rate.
Framework for Analysis
1. Establish the objectives (input and output) - Input: Analysts perspectives, needs communicated by client or supervisor, institutional guidelines - Output: Purpose statement and specific questions to answer, nature and content of final report, timetable and budget 2.Data collection - Input: Financial statements, communication with management, suppliers, customers, and competitors - Output: Organized financial information 3. Process data from Step 2 - Output: adjusted financial statements, common-size statements, ratios, forecasts 4. Analyze data from step 2&3 - Output: Results of analysis 5. Develop and communicate conclusions -Input: Results from analysis using report guidelines -Output: Recommendations 6. Follow up - Input: Periodically update information - Output: Update analysis and recommendations
Problems affecting quality of financial reports
1. Measurement and timing issues: Affects multiple financial statement elements. Includes aggressive rev recognition that increase reported revs, profit, equity and assets (expensed vs capitalized) 2. Classification Issues: affects one element. Refers to how financial statement element is categorized (operating vs non-operating)
Restating for Inflation (IAS)
1. Nonmonetary assets and liabilities - restate using a price index from acquisition date to balance sheet date. Revalued assets indexed from date of revaluation. 2. Monetary assets and liabilities are not restated 3. Equity is restated by multiplying the change in the index from the beginning of the period, or date of contribution if later, to the balance sheet. 4. Revenues and expenses are restated by multiplying the change in the index from the transaction date to the balance sheet date 5. A purchasing power gain or loss is recognized in the I/S based on the net monetary asset or liability exposure (applies to both GAAP AND IFRS) - Net monetary asset exposure = loss, because purchasing power of money amounts has been eroded by decline in exchange rate. - Net monetary liability exposure = gain
Earnings Sustainability
1. Organic growth in sales (growth excluding the effects of acquisitions/divestitures and currency effects) are usually more sustainable 2. Currency effects on reported revenues distort sustainable growth estimates 3. Management can affect volume and price but have no control over exchange rates 4. Currency effects can mean revert 5. Analysts should remove currency effects for forecasting future revenues
Temporal Method Steps
1. Produce top of balance sheet (total asset) 2. Produce SE and liabilities (Retained earnings = plug figure to ensure B/S balances) 3. Derive NI from reconciliation of retained earnings ( Begin RE + NI - Dividend = End RE) 4. Produce the income statement. Net Income (NI) in the income statement will be different from NI in retained earnings 5. Force the NI in I/S to agree to the NI in retained earnings by adding a gain or loss.
Contributors to Earning Manipulation
1. Revenue recognition issues 2. Expense recognition issues
High Quality Earnings
1. Sustanable: persist overtime 2. Adequate: earnings cover cost of capital focus on discretionary accruals : 越少越好 Remember: Low quality earnings comes from (1) earnings that are below cost of capital and/or (2) earnings that are not sustainable and/or (3) poor related to reported quality
Evaluating equality of financial reports
1. Understand company, industr, accounting principals, and appropriateness 2. Understand the management, remuneration packages, insider trades, and related party transactions 3. Identify material accounting areas open to subjectivity and estimation 4. Make cross sectional and time series comps of statements and ratios 5. Check for warning signs 6. Conglomerates: check segment disclosures for shifting of profits (transfer pricing) 7. Use quant tools to evaluate likelihood of earnings management
Revenue Recognition Steps
1. Understand the rev recognition practices - shipping/credit terms, returns policy, multiple deliverable, practices of peer group companies 2. Evaluate ageing of receivables - time series, cross sectional (peer group) comparisons 3. Cash vs accruals - cash vs accruals-based earnings evaluation 4. Compare financials with physical data provided by the company: Capacity utilization levels, order books 5. Compare revenue trends to peers: use segment analysis 6. Check for related party transactions: transactions with associates, transfer pricing
Hyperinflation
3 year cumulative compound rate > 100% (GAAP) High inflation rates witness rapid deflationary exchange rates, high inflation, high export prices, less demand, sliding exchange rate. In hyperinflation, using Current Rate (we use closing rate and this falls in hyper inflation) method results in lower assets and lower liability value. Non monetary assets and liabilities are not as affected by hyperinflation (disappearing plant - things at historical rates will appear to get small when you convert because you apply exchange rate that is falling. But in reality value has increased because of hyperinflation). GAAP - temporal method is required IAS - says you can can still use current rate method, but to get around disappearing plant, and nonmonetary asset/liability but be inflated up then translated at exchange rate
Current service cost
= PV of the annual unit credit only Operation expense other are all non-operating expense.
Special purpose entity (SPE)
A legal structure created to isolate certain assets and liabilities of the sponsor. reduce risk and thereby lower the cost of financing IFRS 10, Consolidated Financial Statements, the sponsoring entity must consolidate if it controls the SPE.
Cash Flow Adjustments
Adjust CFO and CFF for the after-tax difference in economic pension expense and cash contributions. contribution excess TPPC -- excess*(1-T) 计入CFF outflow 其余计入CFO contribution < TPPC difference*(1-T) - CFF inflow 借钱finance CFO outflow
Stock appreciation rights (cash bonuses linked to stock performance)
Advantages: - avoid dilution - less risk aversion Disadvantages: - cash outflows -expense - valued at fair value and spread over service life.
Share-Based Compensation
Advantages: 1. No cash outlays - no cash leaving the firm 2. Aligns management and shareholders interest (reduces agency cost) Disadvantage: 1. Employees have limited influence over stock price 2. Increases stock ownership, more risk aversion 3. Option award may increase risk taking 4. Existing shareholders diluted Disclosures required: must disclose nature and extent of share-based comp arrangements, how fair value determined, and impact on income for the period. Accounting: Allocate fair value over service period.
Acquisition method
All asset, liabilities, revenues and expense of subsidiary combined with parent equity 子公司NI not combined in parent NI only 子公司dividend% combined in parent. Except Equity Parent B/S: no investment in subsidiaries. Minority Interest is recognized in B/S and I/S Transaction between parent and subsidiary are eliminated.
Actuarial Pension Plan Assumptions
All plans must disclose at least these 3 assumptions: 1. Discount Rate 2. Rate of compensation increase 3. Expected return on plan assets ( GAAP Only) These assumptions can affect: - Balance Sheet (through effect on PBO) - Incomes Statement (pension cost) Pension accounting can be manipulated when change actuarial assumptions.
Acquistion Method (Business Method)
Balance Sheet: 1. Eliminate investment account (purchase price) of parent and equity accounts of subsidiary 2. Create minority interest (share of equity not owned and net assets they own) 3. Calc goodwill 4. Combine 100% of assets and liabilities of both firm, not the percent of company owned. Income Statement: 4. Eliminate subsidiary earnings from parent (dividends) 5. Subtract minority share of earnings (share of earnings not owned) 6. Combine rev & exp. of both firms ( net of intercompany transactions and only include post acquisition results)
Presentation IFRS/GAAP
GAAP, all components of periodic pension cost that are reported in the income statement are aggregated and presented as a single line item. IFRS, components may be presented separately. Both U.S. GAAP and IFRS require disclosure of total periodic pension cost in the notes to financial statements.
Currency Exposures
Gains/Losses hit income statement Analysis issue of: No guidance on WHERE on I/S to place, making comparability between companies difficult
Periodic Pension Cost Reported in P&L (GAAP)
CSC + interest expense - expected return on PA + amortization 1, Current service cost.: Current service cost is the increase in the PBO that is the result of the employees working one more period. immediately recognized 2, Interest expense Begin PBO * discount rate 3, Expected return Begin PA * expected return rate 4, Actuarial gain/loss amortization 4, Past Service cost amortization PSC is in OCI
Capitalizing Expenses
Can boost performance by under-reporting an operating expense by capitalizing it. Steps in analysis of expense recognition practices: 1. Review cost capitalization disclosures, depreciation disclosures, and compare to peers 2. Evaluate changes in noncurrent assets, margins, depre expense/rate, and capex on a time series and cross sectional basis 3. Check for related part transactions - shifting assets to associates, propping up earnings.
mixed ratio
Combines inputs from both the income statement and balance sheet. when the foreign currency is depreciating because the average rate (which is used in the numerator of the ratio) is greater than the ending rate (which is used in the denominator of the ratio). translated ratio is larger than the original ratio
Stock Options compensation
Compensation expense is based on the fair value of the options on the grant date based on the number of options that are expected to vest. vesting date: first date the employee can actually exercise the options compensation expense allocated grant date and the vesting date decrease net income and retained earnings paid-in capital is increased =no change in equity
Straight Line Depreciaiton
Cost - Salvage Value / Depreciable Life
Functional Currency
Currency of the PRIMARY economic environment in which the subsidiary operates. This is the currency in which the firm generates and spends cash (some subjectively) -Currency that influences sales price & cost of production -Currency of country whose competitive forces and regulations determine sales price -Currency in which funds from financing activities are generated - Currency in which receipts from operating activities are retained - Subsidiary's autonomy - Financing from parent (reliance) to service debt
local currency
Currency of the country being referred to
Mean Reverting Earnings
Earnings at extreme levels tend to revert back to normal levels overtime. Analysts should not expect extreme earnings (high or low) to continue indefinitely. When earnings are mainly made up of accruals, mean reversion happens sooner
Earnings Quality
Earnings can be disaggregated into CF and accruals using Balance sheet approach and cash flow statement approach. We should look at ratio of accruals to average net operating assets - lower ratio, higher quality
Measuring Earnings Quality
Earnings have a CF component and an accrual component. Aggregate accruals can be measured by Balance sheet approach and cash flow statement approach. Inverse relationship between accruals and earnings quality.
Earnings Quality Vs Reporting Quality
Earnings quality refers to level of earnings, sustainability of earnings, and economic performance. If biased, then earnings quality is weak. Reporting quality refers to accuracy and relevancy. CANNOT have low quality reporting but high quality earnings. We want to ask: Are the underlying financial reports GAAP compliant AND decision useful? Are the earnings high quality?
Sustainable/Persistent EArnings
Earnings we expect to recur in the future. Can overstate persistent earnings by mis-classifying normal op expenses and expenses from discontinued operations Can gauge earnings by using a regression model for current earnings relative to last years earnings. Higher Beta indicates higher persistence of earnings
Fair Value of Plan Assets
Employer contribution - amount they will put into plan ROA - actual capital gains/dividends/interest. Will fluctuate with market Benefits paid - payments made from the fund to existing retirees
Investments in Associates
Equity Investment = cost + NI% - dividend % - Amortization of excess amount paid for PPE excess of PPE : fair value PPE - book value PPE
Asset Base
Examine composition of asset base over time -Common size analysis is helpful -Useful in identifying acquistions and goodwill - Remember goodwill is no longer amortized but subject to impairment
Calculating Currency Exposure
Exposure to closing rate: - Temporal Method Exposures: = (Cash + A/R) - (A/P + Current Debt + LTD) = Monetary Assets - Monetary Liabilities - Current rate method exposures = Assets - liabilities = Shareholders' equity These are the B/S accounts that are affected by the current rate(closing rate) for each method Appreciating overseas currency - buys more of reporting currency. Depreciating overseas currency, buys less of reporting currency.
Funded Status of PBO
Fair value of Plan Assets - PBO = Funded Status FV>PBO = Overfunded FV<PBO = Underfunded Funded Status= Economic Position of the Plan
Off B/S Financing
For analytical purpose, treat an operating lease as a finance (capital) lease - Increase assets and liabilities by the PV of the remaining lease payments - Remove rent expense (payment) from the I/S and replace with depreciation expense and interest expense Result: Higher leverage and lower interest coverage - Other off balance sheet techniques: - Receivable sales with recourse (if firm who buys cant collect cash from customer, you have to pay them, we treat cash received as a short term loan) - Debt Guarantee (cross guarantee debt in other companies, must bring to balance sheet) - Take-or-pay agreement (agree to take fixed amount of commodity or pay for it. Entitled to receive, and have to pay come payment date. Create A and L equal to PV of future cash outflows)
Cash Flow Based Accruals
GAAP -Div recieved, interest paid, interest recieved - CFO -Div Paid - CFF IFRS -Div recieved - CFO if finance company, CFI otherwise -Interest received - CFO, or CFI -Interest paid - CFO (interest is part of normal biz), CFI -Dividend Paid - CFO or CFF
Past (prior) service costs.
GAAP other comprehensive income amortized over the remaining service life of the affected employees. IFRS periodic pension cost in P&L immediately
Partial vs. Full Goodwill
GAAP - Full goodwill IFRS - either full or partial goodwill Full Goodwill: Total Fair value of Subsidiary - FV of net identifiable assets -noncontrolling interest is % not owned times fair value Minority interest 包含goodwill Partial good will: Goodwill is purchase price (of partial interest) - %owned*Fair Value of Net Assets Minority interest 不包含goodwill
Fair Value Through Profit or Loss(HFT or Designated at Fair Value) (Financial Asset)
HFT (GAAP) & Designated for Fair Value (IFRS) - Sell in less than 3 months - Reported at FAIR VALUE, CARRIED AT MARKET VALUE - Interest = Coupon +Amort. Discount - Amort. Premium - Change in value (realized/unrealized) reported in I/S - Income statement includes interest income AND the unrealized gain - Cumulative unrealized gain is the differential from unrealized gain period over period.
Other Post Employment Benefits
Healthcare - classified as DBP, liability is PV of expected future payments for health insurance - Assume healthcare costs rise then taper off to lower constant rate (ultiamte healthcare rate) -Need to disclose near term increase in HC costs, ultimate HC trend rates, year in which ultimate trend rate is reach.
Impairment of Financial Assets
Held-to-maturity (HTM) and Available-for-sale (AFS) securities be evaluated for impairment at each reporting period. Held-for-trading and designated at fair value securities because declines in their values are recognized on the income statement as they occur. GAAP reversal of impairment losses is not allowed. Impaired: security decline in value is determined to be other than temporary HTM/AFS: write-down to fair value is treated as a realized loss.(I/S) IFRS recognized in I/S. at least one loss event has occurred HTM: carrying value is decreased to the present value of its estimated future cash flows, using the same effective interest rate that was used when the security was purchased.maybe fair value. Reversals of impairments are not permitted for equity securities. Other can be reversed.
periodic pension cost and TPPC
Reported pension expense: 1, is what we report in the income statement. 2, uses EXPECTED return on plan assets. 3, is computed differently depending on whether we're using IFRS or US GAAP. Total periodic pension cost (TPPC): 1, is the true (i.e., economic) cost of the pension plan. 2, does not change depending on the accounting system chosen. 3, uses ACTUAL return on plan assets.
Defined Contribution Accountingt
I/S: Employer contribution B/S: Asset - they paid you too much, Liabilities - paid you too little
Expected return on plan assets.
IFRS the expected rate of return on plan assets = discount rate used for computation of PBO a net interest expense/income reported
Past (prior) service costs
IFRS : expensed immediately. GAAP: amortized over the avg service life of employees.
Delayed Recognition of Pension Costs
IFRS allows for recognition of certain events that affect the pension cost in OCI Under GAAP, the events are amortized in the I/S over time (OCI until then) IFRS: Remeasurement gains and losses = actuarial gains and losses plus differences in actual and expected return on assets. GAAP: Actuarial gains and losses = IFRS definition of remeasurement gains and losses 1. Remeasurements( IFRS & GAAP) - Changes in actuarial assumptions affecting the PBO - From differences in the actual and expected return on plan assets 2. Past Service costs (GAAP) Changes in PBO due to plan amendments, sit in OCI.
Consolidation of SPEs
IFRS consolidation when sponsor has control, indicated by: - SPE benefits sponsor - Sponsor makes decisions - Sponsor absorbs rewards and risks - Sponsor has residual interest GAAP says an SPE is a VIE (and must be consolidated) if any are met: - Insufficient risk. Investment in equity is less than 10% of assets - Major shareholders lack decision making rights, and don't absorb expected losses, and do not receive expected residual retirms
Translation
Remeasurement involves converting the local currency into functional currency using the temporal method. Translation involves converting the functional currency into the parent's presentation (reporting) currency using the current rate method.
Recognition & Measurement in Acquistion
Identifiable assets & liabilities: - record at fair value - acquirer must recognize assets and liabilities that the acquiree had not recognized Contingent Liabilities: obligations from past - IFRS: Recognize fair value at acquisition - GAAP: Recognize fair value at acquisition if probable and can be reliably estimated Indemnification Assets: Acquirer must recognize an indemnification asset if seller contractually indemnifies a contignency, uncertainty, or future loss Financial Assets and Liabilities: Acquirer reclassifies at date of acquisition to bring in line with parent accounting policies In Process R&D: - In process R&D: Cap at acquisition then amortize as completed or impaired (IFRS & GAAP) - Restructing costs - not part of acquisition cost, expense when incurred (IFRS & GAAP)
Segment ANalysis
If 50% of rev is external If a division contributes AT LEAST 10% of a firm's revenue, earnings, or assets we must report: - For each segment, firm reports limited financial statement info. - For primary segments, must report rev, operating profit, assets, liabilities (IFRS only), capex, depreciation, and amortization
Corridor Approach
If actuarial gain/loss in OCI is > 10% PBO or Plan assets, have to amortize over the remaining service life
Funded Status B/S
If the funded status is negative, it is reported as a liability. If the funded status is positive, it is reported as an asset subject to a ceiling of present value of future economic benefits (such as future refunds or reduced contributions). overfunded pension plan would lead to either lower future contributions (i.e., savings in contributions for employers) or future withdrawals (refunds). limit the asset recognition to the present value of such refunds or reduced contributions.
Plan deficit / surplus
If the plan has a deficit, an amount equal to the net underfunded pension obligation is reported on the balance sheet as a net pension liability. If the plan has a surplus, an asset equal to the overfunded pension obligation is reported on the balance sheet as a net pension asset the amount of asset that can be reported is the lower of the surplus and the asset ceiling. (Ceiling)
Transaction Exposure
Imports and exports denominated in overseas currencies. - Transactions recorded at spot rate on date of transaction - Receipt or payment at a later date - Issue is change in spot rates between transaction and settlement date. - Record realized gain/loss at settlement date in income statement Settlement date B/S date -Record unrealized gain (loss) at B/S - When we settle, record further gain (loss) in subsequent year
Periodic System/Perpetual System
In a periodic system inventory values and COGS are determined at end of account period. In a perpetual, inventory values and COGS are updated continuously. Get same results
Balance Sheet Quality
Is complete (Completeness) - lacks off B/S financing, like operating leases, take or pay, or throughput agreements. Don't like equity accounted assets because brings in net assets. Has unbiased measurements (reflects subjectivity in m easurement of A/Ls) - Pensi on l uid inv e stments -goodwill impairment -inventory valuation and write downs -impairment of pp&e and intangibles Clear presentation - financial statements, disclosures, transactions are easy to follow
functional currency
It is usually the currency in which the entity generates and expends cash.
Accelerated Depreciation
Lower NI early years, greater later on. Most common accelerated depreciation is double declining balance
Designated at Fair Value (Fair Value Through Profit or Loss)
Management can report financial assets & liabilities that would be classified as HTM or AFS at Fair value - Treat like trading security, report on B/S at fair value -IFRS DOES NOT ALLOW RECLASSIFICATION OF THIS
Changes in actuarial assumptions
gains and losses that result from changes in variables such as mortality, employee turnover, retirement age, and the discount rate. An actuarial gain decrease benefit obligation.
Business Combinations
Merger. The acquiring firm absorbs all the assets and liabilities of the acquired firm, which ceases to exist. The acquiring firm is the surviving entity. Acquisition. Both entities continue to exist in a parent-subsidiary relationship. Recall that when less than 100% of the subsidiary is owned by the parent, the parent prepares consolidated financial statements but reports the unowned (minority or noncontrolling) interest on its financial statements. Consolidation. A new entity is formed that absorbs both of the combining companies.
GAAP Business Combinations (different from corp. finance)
Merger: A + B = Co A net assets transferred from B to A Acquisition: A + B = (Co A + Co B). Co A = parent, Co B = sub Consolidation: A + B = Co. C made and A&B cease to exist, C is new Variable Interest Entity (VIE): Control is not based on equity ownership
The effects of the equity method versus the acquisition method
NI same Acquisition method equity will be higher by the amount of minority interest. Assets and liabilities are higher under the acquisition method. Sales are higher under the acquisition method.
Corridor Approach (U.S. GAAP only)
Once the beginning balance of actuarial gains and losses exceed 10% of the greater of the beginning PBO or plan assets, amortization is required. The excess amount over the "corridor" is amortized as a component of periodic pension cost in P&L over the remaining service life of the employees.
Current Rate Method (Translation)
Overseas operation considered as an investment - All assets and liabilities are exposed to exchange rate risk - All I/S accounts translated at average rate, all B/S accts are translated at current rate (common stock at historical) - Exchange rate gains and losses are unrealized and stored in equity until the overseas operation is disposed of -CTA (cumulative translation adjustment) realized in I/S on disposal, carry's FX change Cumulative FX Gain/Loss is the plug figure to help shareholder equity balance because A & L are converted to current/closing rate,
Closing Obligation (the estimated defined-benefit obligation arising from his employment)
PBO(begin) + interest cost + Current Service Cost Interest cost = PBObegin * interest rate
FC = RC
Parents currency = subsidiay's functional currency: temporary method
Compare Temporal to Current Rate
Point: Temporal vs Current Rate are more difficult to analyze than Local Currency vs Current Rate method results. - Best to analyze ratios individual - Numerator and denominators are likely changed by different proportions. Process: Step 1: LC appreciating or depreciating? If appreciating, anything converted at converting rate will get bigger. Step 2: Examine numerator - translated at current, avg, etc? Will numerator thus be larger or smaller Step 3: Do step 2 for denominator Step 4: Determine impact on ratio
accounting methods used for business combinations:
Pooling-of-interests method/uniting-of-interests method Acquisition method
original versus the translated financial statements and ratios
Pure balance sheet and pure income statement ratios will be the same. foreign currency is depreciating translated mixed ratios (with an income statement item in the numerator and an end-of-period balance sheet item in the denominator) will be larger than the original ratio. foreign currency is appreciating translated mixed ratios (with an income statement item in the numerator and an end-of-period balance sheet item in the denominator) will be smaller than the original ratio.
IFRS 9 Reclassification
Reclassification of debt (not equity) securities from HTM to FVPL (or vice versa) amortized cost allowed IF BUSINESS MODEL HAS CHANGED
Comparison of Equity Method Vs Acquisition Method
Sales/Expenses: EM - 1 line consolidation, comes after tax expense. Only see parent company's sells AM - parent company's sales and subsidiaries sales NI: same for both, arrive at different ways A&L: EM - lower b/c see only 1 line AM - higher combine assets & liabilities of parent and subsidiary SH: EM - Lower if minority interest exists AM- Higher if minority interest exists (even tho doesn't belong to shareholders) Leverage: EM/AM- Depends on debt relative to minority interest Current Ratio, Gross Profit margin: EM/AM - depends on whether sub has a higher or lower ratio compared to parent ROE: EM: Higher because equity is lower AM: Lower because if minority interest exists, shareholder equity is greater.
Calculation of PBO
Service Cost - increase in PBO due to employee's effort over the year (PV of additional value from working another year) Interest cost - increase in the PBO resulting from passage of time. PBO at start of period * discount rate GAAP - Discount rate and % expected return rate can be different rates IFRS - expected return rate must equal discount rate Actuarial G/L - Gains or losses from change in actuarial assumptions affecting PBO (discount rate, life expectancy, increase in salary). If increases PBO, it is an actuarial loss. Past Service Costs - Retroactive impact on past benefits awarded to employees resulting from plan amendments. Example: Changing payout from 60% to 65% of final salary Benefits Paid - payments made from the fund to existing retirees
exposure in TM and CM
TM : Monetary Asset - Monetary Liabilities CM: Equity = Total Asset - Total Liabilities
pooling-of-interests method
The assets and liabilities of the two firms were simply combined. The two firms are combined using historical book values. Operating results for prior periods are restated as though the two firms were always combined. Ownership interests continue, and former accounting bases are maintained.
Netting pension assets and liabilities preferred reason
The employer largely controls the plan assets and the obligation and, therefore, bears the risks and potential rewards. The company's decisions regarding funding and accounting for the pension plan are more likely to be affected by the net pension obligation, not the gross amounts, because the plan assets can only be used for paying pension benefits to its employees. total assets and total liabilities less
Interest cost
The increase in the obligation due to the passage of time. pension obligation at the beginning of the period * discount rate.
Stock appreciation rights
gives the employee the right to receive compensation based on the increase in the price of the firm's stock over a predetermined amount. limited downside risk and unlimited upside potential no dilution to existing shareholders
Accruals Scaling
To make accruals comparisons, it is necessary to scale the accrual measure for differences in size. Scaling is done by dividing the accruals measure by average NOA for the period. Balance sheet Method: NOAend - NOAbegin / [(NOAend+NOAend)/2] Cash Flow Method: (NI - CFO - CFI) / [(NOAend +NOAbegin)/2]
Periodic Pension Cost
Total Periodic Pension Cost = Contributions - Change in Funded Status TPPC = Income Statement Expense + Change in OCI SAME UNDER IFRS/GAAP. Differ on where cost is reflected (Income Statement for GAAP, OCI for IFRS)
Translation Exposure
Translation of foreign currency financial statements: -Converting the accounts of overseas subsidiaries to reporting currency -Three step process 1. Identify subsidiaries functional currency 2. Convert foreign currency into functional currency 3.Convert functional currency balances to parent's reporting currency using closing rates (if there is a difference)
Accruals
Under accrual accounting - rev recognized when earned, expensed when incurred. Because of this subjectivity in revenue and expense recognition, disaggregating income into two major components, cash and accruals, exchanges its quality as an input for forecasting future earnings. Non-discretionary accruals are accruals that occur as part of normal business. Discretionary accruals results from non-normal transactions or non-normal accounting choices and sometimes used to manipulated earnings. Red flag when quality is raise when a company reports positive net income while reporting neg operating CFs. NOTE: Another red flag is when company meets or barely beets consensus estimates.
Parent Exposure to Changing Exchange Rates
Under the current rate method, exposure is defined as the net asset position of the subsidiary, the subsidiary's equity, that are exposed to changing exchange rates. if the subsidiary has a net asset exposure and the local currency is appreciating, a gain is recognized. Under temporal method, subsidiary's net monetary asset or net monetary liability positionare is exposed to changing exchange rates. most firms have net monetary liability exposures. If the parent has a net monetary liability exposure when the foreign currency is appreciating, the result is a loss.
combined ratio
Underwriting loss ratio + Underwriting expense ratio 越低越好
Differences between IFRS and U.S. GAAP treatment of intercorporate investments
Unrealized foreign exchange gains and losses on available-for-sale securities are recognized on the income statement under IFRS and as other comprehensive income under U.S. GAAP. IFRS permits either the partial goodwill or full goodwill method to value goodwill and noncontrolling interest in business combinations. U.S. GAAP requires the full goodwill method.
Transaction with Associates - Equity Method
Upstream transfer - profit on transaction in associates account Downstream transfer - profit on transaction in parents (investor's) account Pro-rata shares of profit not confirmed through resale or use is eliminated from equity income
Pension Expense GAAP
Use EXPECTED return on plan assets to smooth events. Unamortized past service cost and actuarial gains and losses in OCI
Equity Method
Used in Associates and Joint Ventures, have influence but not outright control. B/S: Report at Cost + Earnings - Dividends I/S: Earnings Balance Sheet investment: % Share in company * Change in Retained Earnings Impairment under IFRS: Fair value < Carrying Value and not temporary (loss event, impact on future CFs, reliable measurement). Must be written down. Impairment under GAAP: Fair Value < Carrying and permanent No reversal for GAAP or IFRS, which is odd because IFRS usually allows reversal. Goodwill not separately tested, already included.
Divisional Analysis
We are going to compute - % of rev from each division - % of assets used by each division -% of EBIT contributed by each division -% of capex attributed to each - Divisonal Margin (Segment EBIT/ Segment Sales) -Resource allocation (% Capex/% Assets) >1 - division is expanding, adding more resources <1- division contracting, fewer resources receiving allocation
Bargain Purchase
acquisition purchase price is less than the fair value of net assets acquired gain in the income statement
In-Process R&D
an intangible asset amortized (if successful) or impaired (if unsuccessful).
annual unit credit
auc = PV退休金 / N工作年限 PV是退休后每年养老金折现求和到退休时点 annual unit credit / (1+r)^n --> CSC
current rate, average rate, historical rate
current rate: is the exchange rate on the balance sheet date. average rate: average exchange rate over the reporting period. historical rate: actual rate that was in effect when the original transaction occurred.
funded status of the plan
benefit obligation - plan assets negative : overfunded positive: underfunded
Joint Ventures
equity method Proportionate consolidation method(rare) investor (venturer) only reports the proportionate share of the assets, liabilities, revenues, and expenses of the joint venture no minority owners' interest is necessary higher assets and liabilities equity same
underwriting expense ratio
exp(comission) / net premium earned
Restructuring Costs
expensed when incurred and not capitalized as part of the acquisition cost
Contingent Consideration
fair value : acquisition. non equity: subsequent change recognized in I/S equity : changes then settle within equity
Contingent Assets and Liabilities
contingent asset: potential benefit contingent liability: potential loss IFRS only contingent liabilities whose fair value can be measured reliably are recognized at the time of acquisition subperiod max(value initially recognized, the best estimate of the amount needed to settle the liabilities.) Contingent assets are never recognized GAAP divides contingent assets and liabilities into contractual and noncontractual Contractual contingent assets and liabilities are recorded at their fair values on the acquisition date contingent assets : Min(initial value, the best estimate of the future settlement amount.)
Associate : equity investment
cost + equity income- dividend received
FC = LC
current rate method
Impairment Under GAAP
fair value < carrying value, permanent Reduced to fair value, I/S No reversal.
Stock grants
fair value of the stock on the grant date The compensation expense is allocated over the employee's service period.
defined contribution plan
firm contributes a certain sum each period to the employee's retirement account. The investment decisions are left to the employee, who assumes all of the investment risk. pension assets for the defined contribution plan do not appear in financial statements.
turnover ratio / Margin ratio
fixed asset turnover asset denominator profit margin net income nominator
Funded Status of a Pension Plan
funded status = fair value of plan assets − PBO balance sheet asset (liability) = funded status
hyperinflationary
the local currency will rapidly depreciate relative to the parent's presentation currency because of a deterioration of purchasing power. exceeds 100% over a 3-year period GAAP : temporary method, no need restate for inflation, historical rate. COGS 大 IFRS: restate for inflation, INFL adjusted Revenue = Revenue * GPI(Current) / GPI(AVG) current rate COGS 小
Fair Value Option
no goodwill irrevocable
Fair Value of option for stock option compensation
observable market price of a similar option if one is available. option-pricing model
presentation (reporting) currency
parent company prepares its financial statements.
The shareholders' equity
post-acquisition consolidated balance sheet will consist of the capital stock and retained earnings account of the parent and the non-controlling interest of the minority shareholders.
Statutory tax rate
provided by the tax code of the home country.
GOODWILL
purchase price - FV net asset% GAAP: full goodwill = (fair value of equity of whole subsidiary) − (fair value of net identifiable assets of the subsidiary) IFRS: partial goodwill = purchase price − (% owned × FV of net identifiable assets of the subsidiary) partial goodwill = % owned × full goodwill
Impairment Under IFRS
recoverable amount < carrying value, permanent. recoverable amount (the higher of the NRV and value in use) Reduce to recoverable amount,I/S No reversal.
Benefits paid
reduce the PBO
Share-based compensation plans
stock options and outright share grants. motivate and retain employee compensation expense should be spread over the period for which they reward the employee, referred to as the service period.
Effective tax rate
tax expense in the income statement /pretax profit
goodwill impairment
test: Carrying value > Fair Value GAAP Each "reporting unit" should be tested for goodwill Implied goodwill = % * (New FairValue of Net Assets - Book Value of Net Assets) Impairment Loss = Old Goodwill - Implied goodwill calculated above. IFRS Each "cash generating unit" should be tested for goodwill impairment Carrying Value - recoverable amount
Changing Pension Assumptions on Balance Sheet Liability and Periodic Pension Cost
the discount rate and compensation growth rate should reflect a consistent view of inflation. otherwise there may be manipulation
defined-benefit plan
the employer assumes the investment risk. shorter vesting period : more PBO
Excess of Purchase Price Over Book Value Acquired
the excess of the purchase price over the proportionate share of the investee's book value is allocated to the investee's identifiable assets and liabilities based on their fair values. Any remainder is considered goodwill. purchase price allocation to the investee's assets and liabilities is included in the investor's balance sheet. the additional expense that results from the assigned amounts is not recognized in the investee's income statement. one-line investment account: net assets at fair value and the goodwill.
Phantom stock
the payoff is based on the performance of hypothetical stock instead of the firm's actual shares. privately held firms and firms with highly illiquid stock.
total periodic pension cost (TPPC)
total periodic pension cost (TPPC) =(ending funded status − beginning funded status) - employer contributions total periodic pension cost = current service cost + interest cost − actual return on plan assets +/- actuarial losses/gains due to changes in assumptions affecting PBO + prior service cost total periodic pension cost = periodic pension cost in P&L + periodic pension cost in OCI.
Pure income statement and pure balance sheet ratios
unaffected by the application of the current rate method. all of the components of the ratio are from the balance sheet, or all of the components are from the income statement. current ratio (current assets / current liabilities) Gross profit margin Net profit margin Interest coverage (EBIT / interest expense)
discount rate for DBO
yield on high quality corporate bonds.
annual compensation growth rate r
要注意如果第一年工资给了，算退休时点工资。 current salary * （1+r)^(n-1) 第一年不增长