Balance sheet: statement of financial position
Income statement: P&L statement
Other comprehensive income:
Other comprehensive income is the difference between net income as in the Income Statement and comprehensive income, and represents the certain gains and losses of the enterprise not recognized in the P&L Account. It is particularly valuable for understanding ongoing changes in the fair value of a company's assets. Items that are other comprehensive income:
- Available-for-sale securities fair value changes that were previously written down as impaired
- Available-for-sale securities unrealized gains and losses
- Foreign currency transaction gains and losses that are hedges of an investment in a foreign entity
- Pension or post-retirement benefit plan gains or losses
Other comprehensive income + net income = comprehensive income
Statement of changes in equity:
Statement of changes in equity, often referred to as Statement of Retained Earnings in U.S. GAAP, details the change in owners' equity over an accounting period by presenting the movement in reserves comprising the shareholders' equity.
Cash flow statement
Financial notes
Management discussion and Analysis
Auditor Report
retained earning = opening re + net income - dividend
NWC = CA - CL
NOWC = (CA - cash) - (CL - interesting bearing debt)
change in NWC = CA - (CL - interesting bearing debt)
Accruals
Unearned(deferred) revenue: company receives cash before earning the revenue, it is a liability
Unbilled(accrued) revenue: company earns revenue before receive the cash, it is an asset
Prepaid expense: company pays cash payment before recognizing expense, it is asset
Accrued expense: company incurs expense but not yet paid, as of end of accounting period, it is liability.
Revenue Recognition
Long term contract
IFRS:
percentage of completion on prorated basis:
spent cost
revenue = --------------- * sales price
total cost
installment method:
profit
revenue = --------------- * downpayment
selling price
if outcome of the contract is not sure
US GAAP: completed contract method. only at contract completion
IFRS: cost recovery. revenue = cost spent
Earnings per share:
NI - preferred dividend
Basic EPS = ---------------------------------------------------------
weighted avg number of shares outstanding
NI
Diluted EPS = ----------------------------------------------------------------------------------------------
(preferred weighted avg number of shares outstanding + converted common shares
shares)
NI - preferred dividend
Diluted EPS = -------------------------------------------------------------------------------------------------
(stock weighted avg number of shares outstanding + (new share issued at option
option) exercise - share purchase with cash received upon exercise)*year proportion
NI + after tax interest - preferred dividend
Diluted EPS = ------------------------------------------------------------------------------------------
(convertible weighted avg number of shares outstanding + converted common shares
bond)
Financial Assets:
available for sale, measured at fair value
unrealised gains/losses recognised in other comprehensive income
held for trading, acquired for purpose of selling
measured at fair value, unrealised gains/losses are recognised as profit/loss on the income statement
Liquidity ratio (short term)
current asset
current ratio = ---------------------
current liabilities
cash + AR + marketable securities
quick ratio = ---------------------------------------------
current liabilities
cash + marketable securities
cash ratio = ----------------------------------------------
current liabilities
Solvency ratio (long term)
debt
debt to equity = ------------
equity
total assets
financial leverage = ----------------
total equity
debt
debt to capital = ------------------
debt + equity
Cash flow statements
In IFRS:
interest paid operating/financing
interest recd operating/investing
dividend paid operating/financing
dividend recd operating/investing
Financial Analyis
total asset turnover = revenue / avg total assets
ROA = NI / avg total assets
NI revenue avg total assets
ROE = ----------- * ------------------- * -----------------------------
revenue avg total assets avg shareholder equity
Inventory
IFRS: LIFO is not allowed
Inventory cost should not include:
- abnormal waste
- storage costs
- administrative overheads unrelated to production
- selling costs
- foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
Transportation cost incurred to ship inv. to customers are an expense, and may not be capitalised in inv. Inventory cost does not include storage cost (unless part of production process), all admin cost, selling cost. These costs are treated as expenses and recognized in the income statement.
IFRS measure inventory as lower of cost or net realisable value (NRV)
net realisable value = selling price - cost of selling
IFRS can recover previous write-down inv. but to the original write-down value
Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs. Any reversal should be recognized in the income statement in the period in which the reversal occurs
COGS = beginning inv + purchase - ending inv
Long-lived Assets
depreciation methods:
straight-line method
accelerated method
units of production method:
original cost - residual value
per unit cost = ----------------------------------
total production
year 1: units produced * per unit cost
year 2: units produced * per unit cost
year 3: etc.
IFRS
- Cost model, historical cost minus accumulated depreciation
- Revaluation model, revalue at fair value less accumulated depreciation (not allowed under US GAAP)
Revaluation model:
- Increase in carrying amount goes to other comprehensive income, accumulated in equity under account called "revaluation surplus"
- Loss in carrying amount show in income statement
US GAAP
for machinery
- cost model
For investment property
- IFRS: cost model or fair value model
fair value model, no depreciation, fair value changes in P/L
- US GAAP: historical cost model
IFRS:
- Impairment is recorded when an long-lived asset's carrying amount exceeds the higher of the asset's value in use (discounted present value of the asset's expected future cash flows) and (fair value - costs to sell).
- The impairment loss is measured as the amount by which the asset's carrying amount exceeds its recoverable amount.
- If so happens, reduce carrying amount to the higher of value in use or (fair value - cost to sell)
- possible to reverse impairment loss
US GAAP:
- compare carrying amount with undiscounted expected future cash flows
- cannot reverse impairment loss
Should include capitalised interest in the calculation of interest coverage ratio, will provide better picture of solvency, eg, EBIT / interest payment
Expenditures related to long -lived assets are capitalised as part of cost of the assets if provide benefits beyond one year. Otherwise, expenditures are expensed as incurred.
Interest cost related to acquire or construct asset that is long-lived must be capitalised.
Tangible assets - depreciation
Intangible assets - amortization
Income Taxes
for temporary differences, consider:
deferred tax assets / deferred tax liabilities
deferred tax assets: taxes that have been recognised for tax reporting purposes but not yet on income statement
deferred tax liabilities: taxes that is on income statement but not yet payable under the regulations
- accounting profit on income statement
- taxable income subject to income tax
- tax base of asset / liability is the amount the asset / liability is valued for tax purposes, carrying amount is the amount valued to accounting principles.
- deferred tax assets must be assessed for their recover probability, if will be recovered partly, the carrying amount should be reduced.
For US GAAP, it is done through valuation allowance. For valuation allowance, it happens when there is doubt on company's ability to pay the tax in future.
- higher reported tax expense relative to taxes paid will increase deferred tax liability
- lower reported tax expense compared to taxes paid will increase deferred tax asset
- if the deferred tax asset or liability is reversible (the result of timing difference), the deferred tax is a future asset or liability
- if the deferred tax will not reverse in the future, it should be treated as equity
- tax credit that reduce taxes is permanent difference, it does not cause deferred tax.
Long-Term Liabilities
- bonds payable
carrying amount > face value
interest expense < coupon payment
- issued at discount(interest expense reflects interest payment plus amortization of the discount),
carrying amount < face value
interest expense > coupon payment
eg, 1,000,000 face value, sales proceeds 957,876
market interest rate 6%, 5% interest payment
interest payment = 5%*1,000,000
interest expense = 6%*957,876
interest payment -> IFRS, operating or financing cash outflow
US GAAP, operating cash outflow
interest expense -> income statement
debt extinguishment: net carrying amount of the bond (including bond issuance cost) less the amount required to redeem the bond
- leases
- financial lease is economically similar to borrowing money and buying an asset. lessee reports lease asset and lease payable on balance sheet. On income statement, lessee report interest expense on the debt, and maybe depreciation expense.
- the lessor reports sale of an asset (remove the asset), and record lease receivable
operating lease
- lessee record lease expense on income statement, lease payment on operating cash flow
- lessor record lease rental income on income statement
financial lease has higher debt and expenses than operating lease.
lease payment for interest expense -> operating cash outflow
lease payment for lease liability -> financing cash outflow
Financial Report Quality
- fraud triangle
1. incentive or pressure
2. opportunities
3. rationalise the behaviour
fraud from cash flow statement:
- securitizing of receivables: boost operating cash flow, gain on income statement.
- tax benefits from stock options:reduce tax return reflecting difference between strike price and market price of option, reduce tax payable, increase equity of balance sheet
- financing payables: use 3rd party to pay the payables, and pay the 3rd party later, re-classify account payable to short term loan
- stretch payables: improve cash flow from operations
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