Financial Statement Analysis

What’s evidence of significant influence

20 - 50% voting stock, but facts like a say in operations or seat on board is better evidence

What’s the key to understanding degree of influence and control?

Influence and control in Preferred Equity and Debt is insignificant. Common Equity and things like seats on the board determine control and influence

When classification questions talk about holding assets until a specific selling price (and not collecting any coupons until sold) in order to sell it, what is the classification?

FVPL

When classification questions talk about holding assets until a specific selling price and collecting any coupons or dividends until sold, what is the classification?

FVOCI

When classification questions talk about bonds and holding until maturity to collect any coupons, what is the classification?

Amortized Cost

What are the two things I must think when I see Equity Method of Accounting

Do not market to FMV, and Div not

if we see a an interest between 20 - 50%, what should I think?

Significant interest, equity method, dividends are not income and do not mark to Fair Market Value

What’s the only tangible asset that does not get depreciated (non-amortizable)? Why?

Land, because it has indefinite useful life and therefore continued to be reported at FV

Under the equity method, is the investment marketd to market?

No

What is the exception that investment is marked to market under the equity method?

Unless they tell me to “designate” at fair market value (impaired), the investment is carried at FV

Under FVO, what happens to dividends received?

They become income, not a reduction of the carrying value

What are the equity earnings of an equity method investment?

(* Share of profit for all)

+% P/L

-% Depreciation

-% Intercompany

What do we think when we see that the question involves significant influence?

Equity method, do not market to FMV, Dividends are not income

What is an upstream sale?

Associate/affiliate sells to parent company

What is a downstream sale?

Parent sells to associate/affiliate company

Under IFRS, at acquisition, goodwill is allocated to:

cash-generating units

Under US GAAP, at acquisition, goodwill is allocated to:

Reporting Units

Under IFRS, impaitment test is:

Recoverable amount < Carrying Amount

Under US GAAP, impaitment test is:

Fair Value < Carrying Value

Under IFRS, impairment loss is:

Carrying value - Recoverable amount

Under US GAAP, impairment loss is:

Carrying value - Implied fair value

Under IFRS, impaitment loss applied first to:

Cash-generating units goodwill

Under US GAAP, impaitment loss applied first to:

Reporting Units goodwill

Under IFRS, after reporting units goodwill has been reduced to zero:

remaining amount of loss is allocated to all other assets in the unit on a pro rata basis

Under US GAAP, after reporting units goodwill has been reduced to zero:

No adjustments are made to the carrying amounts of units other assets or liabilities

What does a Speciali Purpose Entity (SPE) allow the sponsoring entity to do?

Retain control over SPE’s assets and operationgs while owning little or not voting interest in SPE

What was the goal historically of setting up SPEs

Avoid consolidation and use one-line equity method of account - avoiding disclosures, assets liabilities or anything that negatively impacted the quality of financial statements (better performance, more solvant, better valuation etc.)

What’s a Variable Interest Entity (VIE)

Controlled by a party that has < majority voting interest

Under what circumstance does an entity consolidate the (their) VIE

If one entity is expected to absorb a majority of the VIE’s losses while another entity would receive a majority of its expected profits, the fomer entity consolidates the VIE

How are contingent assets and liabilities recongised under IFRS

Assets are not recognised, liabilities are recognised if reliable measurable

How are contingent assets and liabilities recongised under US GAAP

Contractual and non-contractual

How is contingent consideration measured initially?

At fair value

How is contingent consideration classified as financial liability remeasured

Subsequent changes in fair value are recognised

How is contingent consideration classified as equity remeasured

No remeasurement is alllowed

How is in-procces R&D measured

Seperate intagible asset at fair value, amortised in subsequent periods

How is restructuring costs expensed?

In the period they are incrurred

Does IFRS or US GAAP allow debt securities to be reclassified?

IFRS

Can equity be reclassified?

No. Can be classified as FVOCI or FVPL and once selected, cannot be reclassified

When does IFRS allow debt securities to be reclassified?

In the rare instances that their business model changes

How are equity investments hed for trading measured?

FVPL

How does share-based compensation, as opposed to cash, affect CFO

remain higher (increase), because you’re not paying with cash

How does share-based compensation, as opposed to cash, affect EPS

Since shares outstanding increases, EPS will decrease

How does share-based compensation, as opposed to cash, affect ROE

Since shares outstanding increases, ROE will decrease

Why does restricted stock have temporary trading restrictions

Might have privy to material non-public information

Differences on restricted stock and restricted stock units on voting rights

restricted stock has voting rights, the restricted stock units do not

Differences on restricted stock and restricted stock units on dividends

Restricted stock units may or may not be entitled to dividends while as restricted stocks are

What is a Tax Windfall (Employee Compensation)

(Benefit) Settlement share price > Grant date share price

What is a Tax Shortfall (Employee Compensation)

(Disadvantage) Settlement Share Price < Grant date share price

What do you do if an intrstument is found to be antidilutive when calculating diluted EPS

Exclude it

When is a call option dilutive?

Avg. share price > exercise price

When is a call option antidilutive?

Avg. share price < Exercise price

When is an RSU dilutive?

Avg. share price > share price on grant date

When is an RSU antidilutive?

Avg. share price < share price on grant date

What is the rule with Dilutive and Basic EPS?

Dilutive EPS <= Basic EPS

Where must the nature and extend of SBC arrangements during the period be disclosed?

Financial statement footnotes

Where the fair value of equity instruments garnted during the period was dervised be diclosed?

Financial statement footnotes

Where must SBC payment transactions impacting net income (loss) and shareholders’ equity be disclosed?

Financial statement footnotes

How does funding work for a DC pension plan?

Company and employee contribute to individual accountsHo

How does plan funding work for a DB pension plan

Comapny prefunds, often via pension trust

How does funding work for OPB benefits

company typically does not prefund

How do benefits work for a DC pension plan

Depends on plans performance

How do benefits work for DB pension plan

Depend on plans formula

How do benefits work for OPB

Depend on type of plan

What are the company future obligations for a DC pension plan

No future obligations

What are the company future obligations for a DB pension plan

Future obligations estimated during the current period and recognised as a liability

What are the company future obligations for a OPB

Future obligations estimated during the current period and recognised as a liability

How does risk work for a DC pension plan

Employee bears risk for plan underperformance

How does risk work for a DB pension plan

Company bears risk if assets < obligations

How does risk work for a OPB

Company bears risk if assets < obligations

How does company reporting work for a DC pension plan?

Simple: Employer contributions expenses periodically

How does company reporting work for a DB pension plan?

Complex: requires actuarial assumptions (such as Wage Grow Average WGA) and periodic allocation of costs

How does company reporting work for OPB

Complex: requires actuarial assumptions (such as Wage Grow Average WGA) and periodic allocation of costs

What are the benefit payments for DB plans tied to?

Employees: Years of service, final year’s salary, life expectancy

How are service costs current and past treated under IFRS?

current and past pension expense comes under P&L

How are service costs current and past treated under US GAAP?

Current pension expense comes under P&L, Past comes under OCI

How are changes in pension cost assumptions treated under IFRS?

OCI

How are changes in pension cost assumptions treated under US GAAP?

OCI

What are the disclosure requirements for DC Plans?

Company only legally required to disclose amount recognised as an expense

Are salaries and annual cash bonuses long or short-term benefits?

Short-term

How are salaries and annual cash bonuses expensed?

As service is completed

How are salaries and cash bonuses recognised?

As a liability until the settlement date

How are stock options expensed?

According to verting period

How are stock options recognised?

In an equity account

What is the presentation currency (PC)?

Parent company’s reporting currency

What is the functional currency (FC)?

Primary business environment’s currency

What is the Local Currency (LC)?

Currency of the subsidiary’s country

What is current rate?

Exchange rate on the balance sheet date

What is average rate?

Average exchange rate over the period

What is historical rate?

Exchangra tae on the original transaction date

what method do we use when the subsiduary is independent?

Current Rate Method

What exchange rate/computation do income statement components use under current rate method?

Average rate

What exchange rate/computation do balance sheet components use under current rate method?

Current Rate, except for capital stock and dividends (historical rate), and cumulative translation adjustment (plug-in number)

What does it mean if the functional currency is the same as the presentation currency?

Parent Controls and we are using Temporal Method

When we identify that it’s hyperinflation (i.e. 100% in 3 years), what do we do for US GAAP?

Temporal Method

When we identify that it’s hyperinflation (i.e. 100% in 3 years), what do we do for IFRS?

Balance Sheet = non-monetary, Assets, Liabilities, Paid in Capital = Restate for inflation

All Assets, Liabilities, Paid in Capital = current

Income Statement = Revenue, expenses = restate for inflation

all revenues, expenses = current exchange rate

In a hyperinflationary environment, where does the transalation of any gain or loss shown for IFRS? and US GAAP?

Both are shown on the Income Statement

How to identify Organic Sales Growth?

Net Sales Growth - Foreign Exchange Impact - Acquisition/Divestitute Impact

= Organic Sales Growth

is Days Sales Outstanding (DSO) larger or smaller under Current Rate Method, compared to Temporal Method? What does this mean?

Neither, it’s the same for both as they both use the same rate. This means that DIO, DPO, and therefore CCC are also the same under both

What are the requirements of the Basel III Framework?

• Minimum Capital Requirement

• Minimum Liquidity Requirement

• Stable Funding Requirement

What’s the CAMELS Approach

• Capital Adequacy

• Asset Quality

• Management Capabilities

• Earnings

• Liquidity Position

• Sensitivity to Market Risk