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FRA Flashcards

1
Q

20-50% Stake, what does this mean

A

Call these associates - you have significant influence, but not controlling inflience.

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2
Q

Equity Method. Why is it called the one line consolidation?

A

Only one line item of info is recorded on each the balance sheet and income statement

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3
Q

How do associate incomes and dividends effect the investor’s balance sheet

A

Net income is multiplied by the stake the investor has, then added to the equity method’s line item. Dividend is the inverse, subtracted

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4
Q

How do you calculate Goodwill? What does the formula mean?

A

Its a doozy.
Excess Pruchase Price = Stake - (Book Value * Percentage Acquiring) .

Then Goodwill = Excess Purchase price - Percentage aquiriing * differences between book value and fair value.

This means that the premium/more money paid to acquire/invest in x company is somewhat attributable to the differences in accounting standards - the excess of these differences is the real premium paid.

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5
Q

Do your associate’s revenues effect your own

A

No.

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6
Q

Explain how upstream transactions effect net income of an investor

A

Upstream transactions – associate to investor – are not recorded until verified by a third party, and are thus removed from net income.

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7
Q

Partial and Full goodwill in controlling interest formulas please

A
  • Partial Goodwill: Stake – (% stake * change in assets [book value to fv)
  • Full Goodwill : Fair Value of entity – Fair value of assets
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8
Q

If you purchase a company where the price you pay is less than the fair value of assets, what happens

A

You record the gain on the income statement immediately and record no goodwill.

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9
Q

Are intercompany transactions included in the reporting if a company is consolidated with another

A

No way

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10
Q

If we wanted to compare the full goodwill and partial good will methods, recite the formulas and tell me which would make shareholder equity the highest.

A

Partial Goodwill = Paid - (Write up of assets to bv* Stake)
Full Goodwill = FV of entity - FV of assets

The highest would be full goodwill because goodwill will waterfall down to equity.

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11
Q

Explain the equity method of accounting

A

The equity method of acocunting is how a firm stipulates that it has a significant influence over another company, it records some of the firm in which it is invested (say 20%) on its income statement. So 20% of thier income becomes your income. On your balance sheet, this number carries over from the income statement, less dividends paid.

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12
Q

Is the income statement by the equity method effected by dividends

A

No. Dividends only effect the value on the balance sheet. Dividends have nothing to do with the income statement.

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13
Q

What is the consolidation method of accounting in an aquisition?

A

This is when you have a controlling interest in another company and you consolidate financial statements. Everything AT FAIR VALUE is added to your statements

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14
Q

Whether you have full or partial control of another firm, does it change revenue or net income?

A

Revenue will get a boost if you have full control

Net income will not, it will be not be any rate higher

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15
Q

Explain what vesting is.

A

Vesting is pretty much a provision on something else happening, usually to do with post retirement benefits.. Think of it like, you can’t sell your share until you have served 10 years with x company.

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16
Q

Explain defined contribution plan?

A

This is pretty much the same as superannuation in Aus. Take $x per month and put it into a superannuation account

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17
Q

Explain defined benefit plan?

A

Defined benefit plan is where you get x benefits for life post retirement in cash money from your former employer. This has serious credit risk

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18
Q

How is a defined benefit plan recorded on the financial statements, explain? What challenges come with this?

A

Pension obligation, pension liability etc. - it is the present value of all future pension payments. Since you have to discount it all back to present value, it takes alot into consideration, like a discount rate, how much it will pay etc.

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19
Q

Where do you record Defined Benefit plans’ surpluses or deficits on the financial statements? How do we calculate what we record.

A

Balance sheet

The plan value is just the value of the fund, like FGG, today, in $ and cents. The PV of the owing is how much they are going to have to pay. When these two are not equal, you mich create another line item on the balance sheet to reflect this. Too much cash = asset, not enough = liability.

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20
Q

Which pose a greater credit risk, DCP or DBP

A

Defined Benefit, as the firm has to make up any shortfall

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21
Q

Which has more more credit risk and why? DBP or DCP

A

DBP. The liability is on the exployer to pay this as soon as the employee retires - if they can’t find the cash in their account to pay this, too bad, they gotta find it somehow.

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22
Q

If you change the discount rate used to determine the Net pension liability, where do you record this change before it flows through to the balance sheet? What is this called

A

Other comprehensive income. Remeasurement

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23
Q

How do you calculate the asset/liability of a DBP? How is this calculated

A

It is the value of the fund (FGG for example) minus the PRESENT VALUE of the payments you gotta make. It is calculated using various assumptions on the interest rate, employee compensation increases, company policy etc.

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24
Q

What is the periodic pension cost, and what are its 3 components and where do you record it?

A

Period pension cost is the change in the asset/liability of the pension payment (The fund value - PV of oncoming payments). Its 3 components are service costs (having to pay for the employees who just served a year of work, their entitlements) interest cost (interest on the asset/liability itself, required rate of return) and premeasurement (actuarial changes.)

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25
Q

If the fund the pension is invested in gives a return above r, where do we record this?

A

In the income statement under periodic pension cost. it is a part of premeasurement. In other comprehensive income

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26
Q

Explain the relationship between periodic pension costs and net pension liability/asset - where each is on the financial statements, what is the formula for periodic pension costs

A

Periodic pension cost = Ending funded status – Employer contributions – Beginning funded status.
The periodic pension cost is the expense recorded on the income statement, and it effects the value of the balance sheet item of pension asset/liability.

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27
Q

What is presentation currency?

A

The currency that the financial statement is presented in

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28
Q

Foreign Currency transaction exposure. Explain

A

This is when there is a delay between the transaction itself and when the payment is made (accounts payable situation) where the currency used is not your presentation currency.

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29
Q

Is benefits paid a cash outflow?

A

No

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30
Q

Are unrealised gains or losses to do with currency recorded on the financial statements if the transaction in question falls between reporting dates.

A

Yes

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31
Q

Formula for working out currency translation gains or losses recorded on statements.

A

Value of accounts payable at time of transaction is the cash times excahnge rate. Then at the end of the period, an unrealised gain or loss is recorded based on the movement of the market.

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32
Q

What is the line item on the balance sheet that is adjusted for foreign currency translations

A

CTA

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33
Q

I change the DBP’s proposed future growth trajectory, where is this change recorded?

A

Remeasurement in OCI

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34
Q

Periodic pension cost formula. Explain which account standard allows amortization and what that means for net income

A
  • Service Cost + interest expense – expected return on assets (this is to smooth earnings) + Prior service cost (amortized from OCI) + Amortized Actuarial gains [THIS IS USGAAP]
  • Current Service cost + (Interest expense – Expected return on assets) + Prior service cost
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35
Q

Pension Contributions and effect on operating and financing cash flow

A

The difference between pension cost and pension contribution should be taxed, and the after tax amount is the amount added to operating/financing cash flows.

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36
Q

Explain the process of reporting dual currency transactions IF the transaction extends beyond one reporting period

A

If this transaction falls between reporting periods, report as if you paid the bill on the last day of the period. THEN record the actual realized gain or loss in addition to that in the subsequent reporting period. The thing that is ALWAYS CHANGED IS THE VALUE OF ACCOUNTS RECIEVALBE OR PAYABLE.

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37
Q

Name the 2 methods for reporting/transacting the currency exchange rate in dual currency transactions

A

There are 3 methods for transalting a balance sheet when there is a multinational parent in the mix:

  • Current method – use the current exchange rate.
  • Temporal Mehtod: Anything valued at its current value on the balance sheet is done at the exchange rate. All monetary transactions (Cogs, depreciation, revenues) should be converted as at the exchange rate at the time of transaction.
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38
Q

Explain how to use the temporal and current methods on the BS and IS

A

Current Method Temporal Method
Balance Sheet
- Monetary items Current Rate Current Rate
- Non Monetary (not cash AR, AP or Debt) Current Rate Historic
Income Statement
- Revenues Average Average
- Revenues (related to non-monetary assets) Average Historic (COGs related to Inventory)

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39
Q

Explain when to use the temporal method

A

IF THE FUNCTIONAL CURRENCY OF A SUBSIDIARY IS SOMETHING DIFFERENT THAT THE MAIN CURRENCY, USE TEMPORAL METHOD

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40
Q

List what each letter in CAMELs means, and what is it for?

A

Sussing out the risk of a bank

  1. Capital Adequacy: capital that a bank can access
  2. Asset Quality:
  3. Management Quality: How good is the management
  4. Earnings: How stable are earnings?
    a. ROIC vs Required rate of return
  5. Liquidity
  6. Sensitivity to market risk
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41
Q

Under the current method, Revenues are measured at what rate?

A

Average

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42
Q

Under the Temporal method, Debt is measured at what rate?

A

Current

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43
Q

Under the Temporal method, Fixed assets are measured at what rate?

A

Historic

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44
Q

Under the temporal method, equity are measured at what rate?

A

Historic

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45
Q

Does a bank loan have currency transaction risk?

A

No. once you receive the cash from a loan, you have the money, there is no delay, therefore no risk of currency rates moving around. The rate of the bank is set.

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46
Q

Should you disclose the foreign exchange differences included in net income under IFRS?

A

Of course mate

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47
Q

Current Rate, explain it for balance sheet and income statement items

A

All assets and liabilities are translated at the current exchange rate at the balance sheet date.

Stockholders’ equity accounts are translated at historical exchange rates.

Revenues and expenses are translated at the exchange rate that existed when the transactions took place. For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, such as an average exchange rate, may be used.

These procedures essentially describe the current rate method.

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48
Q

Explain foreign currency gain or loss with an example

A

The gain or loss associated with each balance sheets submission must be highlighted. For example, the value of a truck (which doesn’t depreciate) that was bought in Colombia pesos will appreciate or depreciate in value based on the movement of the peso. This is captured in Foreign Currency translation gain or loss.

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49
Q

If you sell a subsidiary whose currency has appreciated in value, where do you record the gain?

A

Income statement

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50
Q

Why does the fair value of a company usually exceed the fair value?

A

Some assets held on the books are recorded at historic value, not current value

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51
Q

How to find interest expense on pension expense and what is US GAAP method for getting total expense?

A

Discount rate * plan assets at beginning of year.

US GAAP States Service cost + interest expense + anticipated return

52
Q

Difference in _____________ + _________ = total pension cost

A

Net pension liability, employee contributions

53
Q

Which sort of insurance company has more predictable claims

A

Life and Health insurance companies

54
Q

Is trading (securities) an efficient way to earn?

A

No way Jose

55
Q

If net income is higher than CFO, is that a warning sign?

A

Hells yes. Net income gets rekt by amortization at every step, CFO should be higher by a country mile

56
Q

Any change in assumption in a DBP is recorded in what

A

OCI and in the remeasurement section

57
Q

Expensing vs. capitalizing - where are the capitalized assets stored on the financial statements and what is the effect on CFO when you change to capitalizing an expense moving forward?

A

The assets are stored on the balance sheet

CFO will go up in future periods.

58
Q

What sort of outflow is a capitalized expense, and are there any other cash flows tied to a capitalized expense?

A

CFO and yes, interest expense, which is stored as a CFO

59
Q

Pension expenses, under which accounting standard is the discount rate and expected return equal

A

UNDER IFRS, discount rate and expected return are EQUAL

60
Q

Fund Market Value-PVDBO=Funded Status is the formula for the balance sheet item for pensions, explain the formula for the fund market value and PVDBO

A

Fund Market Value is return on assets + Contributions - Redemptions
PVDBO is Service Cost + Interest Expense + Past service costs + Actuarial Gains - Redemptions

61
Q

Pension Cost formula using US GAAP

A
  • Current Service cost + (Net interest expense in Plan assets and Obligation) + Prior service cost [USGAAP)
62
Q

Pension Cost formula using GAAP

A
  • Service Cost + interest expense – expected return on assets (this is to smooth earnings) + Prior service cost (amortized from OCI) + Amortized Actuarial gains [THIS IS USGAAP]
63
Q

Pension Cost formula using IFRS

A
  • Current Service cost + (Net interest expense in Plan assets and Obligation) + Prior service cost [IFRS)
64
Q

Key differences between IFRS and USGAAP on recording pension expenses?

A

IFRS does not allow amortization. This is when if there is a change in prior service cost, then this expense is stored on the OCI, then amortized into expenses on the income statement to smooth earnings. This is allowed under US GAAP

65
Q

Where is the difference between actual return on assets and expected return on assets stored under IFRS

A

OCI

66
Q

What is a pension obligation

A

The PV of what you owe your employees

67
Q

What is the funded status of a PBO

A

It is the Amount of money in your fund (assets) - pension obligation

68
Q

If the funded status is negative, what appears on your balance sheet

A

Net pension liability

69
Q

The periodic cost appears where and what does it represent

A

The change in the funded status of the PBP, and it appears on the income statement

70
Q

What are the 3 components of periodic cost and what do they mean

A

Service cost - increase in the benefits owed to employees through more service
Interest expense - basically Pension asset/liability * discount rate
Remeasurement - changes in the discount rate or changes in the performance of the plan itself

71
Q

Who bears the risk on a defined benefit plan?

A

The company

72
Q

Explain the whole process of the funded status of a DBO?

A

SO, the overarching formula is FV of Fund - Pension Obligation, or, how much you have - how much you owe. This is the funded status of the DBO (or if you have enough, or not enough money).

A positive number means you record an asset on your balance sheet, a negative number means you record a libaiblity on your balance sheet

73
Q

The Pension obligation at the begining of the year + what items = pension obligation at end of the year. Explain each step
US GAAP

A

PBO begining
PLUS Service cost = additional obligations from employees working another year
PLUS Interest Expense = PBO begining * interest rate
MINUS Expected rate of return * assets at begining of year
PLUS Amoritized Prior Service costs = Prior service costs is changing the inhouse rules of the DBO (so like we gunna pay you 100% of your final salary instead of 50%), this immediatly fully recorded on Balanace sheet in OCI, then amortized over life of fund
PLUSorMINUS Actuarial Gains/Losses = Change in discount rate or assumptions. Actuarial gains will decease PBO.
Minus benefits paid

DONT RATE THIS 5/5 ever

74
Q

Do you ever amortize under US GAAP

A

Yes, prior service cost and remeasurments

75
Q

Do you ever amortize under IFRS

A

NEVER

76
Q

What is a benefit of the US GAAP version of accounting for pensions

A

Since you amortize, there is a smoothing of earnings, there wont be some hectic volatility YoY with earnings

77
Q

What is the relationship between Net Pension liability/asset and Net pension expense

A

Net pension liability appears on Balance sheet, it is the increased or decreased version of itself from the prior period, changed by the amount of the net pension expense

78
Q

How do you calculate the change in the FUND value (like the FGG value). Its not too hard

A

The begining value + Increase in value % + contributions - withdrawrals

79
Q

What are the components of remeasurment, where is it stored and amortization status

A

Remeasurement is=
Change is discount rate AND Actual Return - Expected return of assets

It is stored on OCI and amortized over the life of the fund

80
Q

Under IFRS, what is the Expected return on assets equal to, and is this the same for US GAAP? (Hint, Interest income)

A

The interest rate

81
Q

Periodic Pension cost = Ending funded status - contros - Begining funded status. True False

A

TRUE

82
Q

What sort of cashflow is overcontributing to the fund?

A

Financing

83
Q

What does the corridor approach mean for amortization? Give me a breakdown

A

So, you check which is higher, assets in the plan, or pension obligation, then you get 10% of that. Only when something recorded on OCI is higher than that 10% does it need to be amortized

84
Q

What would an increased discount rate do to pension obligation? And why

A

It would decrease it cos the interest expense would go down. And the value of the PBO is being discounted by more

85
Q

How do you reconcile a US GAAP P.L pension expense to make it like an IFRS statement?

A

So, IFRS uses different line items for pension expense. US GAAP should add service cost to EBITDA, the add interest expense to interest expense, and add actual return to operating income

86
Q

Total Pension Cost = X + Y

A

It equals pension cost on PL plus pension costs on OCI

It can also be stated as Contributions + Change in funded states

87
Q

If a company has paid more in its contributions that it needs to, how should an analyst react?

A

He should record that the extra cash outflow is a financing outflow, and operating inflow, which would increase net income

88
Q

How to value stock options and grants as compensation for employees?

A

Use similar options in market, use the actual market value or use an option pricing model

89
Q

What are the accural formulas

A

NOA end (not cash or equivilents) - NOL end (not debt) /((NOA end + NOA beg)/2)

OR

NI - CFO - CFI /((NOA end + NOA beg)/2)

90
Q

Is a lower or higher accural ratio better and why?

A

Cash from Operations should be close af to Net income, so a lower accural ratio is best

91
Q

How to calculate interest expense on Pensions

A

NET PENSION LIABILITY at beg (funded status) * IR

92
Q

What would higher vol to a firm that has options outstanding for compensation

A

Reduce Net income

93
Q

Explain the differences in local currency, reporting currency and functional currency

A

Local currency is just the domestic currency in the district the firm does business, the functional currency is the currency the firm actually does its business in, and the functional currency is what the firm finally reports its statements in

94
Q

Explain monetary and non monetary assets and liabilities

A

Monetary assets and things like cash, cash equivalents and Accounts receivable. Nearly all liabilities are monetary liabilities.

Non-monetary liabilities are things like PPE and Goodwill

95
Q

Explain the temporal method, when you use it, and how it effects the balance sheet and income statement

A

Think of it like this, if the if the firm is well integrated. You convert all monetary balance sheet items at the current rate, and non monetary items at the historic rate. Then on the income statement, you use the AVERAGE rate, EXCEPT for depreciation, that is done at the historic rate too

96
Q

The current rate, explain it

A

The current rate is a transaltion method when firms are NOT well intergrated. It records assets and liabilities at the current rate, and all income statement items at the average rate. Equity is recorded at historic rate

97
Q

If you are converting using the current rate method, what sort of environment, in terms of rates, would do you well.

A

Since things are translated on the balance sheet at the current rate, an inflationary/ increasing foreign currency would be great, your assets would go up if it is translated at the current rate.

98
Q

Inventory and COGs are measured at what rate under the temporal method

A

Historic (yes historic)

99
Q

The temporal method is used when, and when is the current method used?

A

Temporal method is used if the functional currency of the subsidiary is the same as the parent company. So the subsidiary operated in AUD, when its parents is an Aus company.

The current method is used when the temporal method is not

100
Q

Dividends are always recorded (under both temporal and current methods) at the x price

A

Historic

101
Q

When will the current rate be beneficial? and why

A

When the subsidiary current is appreciating. Because the retained earnings is calculated first (from the balance sheet) and that will be LOWER under the temporal method (the historic cost for big ticket assets will decrease earnings

102
Q

Formula for retained earnings in multinational operations

A

RE (end) = RE (beg) + NI - Divs - Amortization

103
Q

Using the temporal rate method, do you create the Balance sheet or income statement first>

A

Balance sheet

104
Q

Assets transalted at what rate (historic, current or average) are exposed to foreign currency risk. What does this mean for current method and temporal method?

A

All assets translated at the current rate.

This means that if assets > liabilities, the net assets will move in the same direction as the appreciation in the currency, meaning the firm will get a transation gain

105
Q

Where do you record CTA and what does it mean

A

Currency translation adjustment, only avalaible on current method and on Balance sheet

106
Q

Why does the foreign currency translation change from current to temporal method?

A

Some line items are current and some are historic or average. It changes per method of accounting

107
Q

Using temporal method, what assets are changed at the current rate

A

Monetary assets - everything that isnt cogs or inventory or fixed assets

108
Q

What do you do in a hyperinflationary economy to record? Under ifrs then us gaap

A

IFRS = create inflation adjusted statements, then use current rate. US GAAP = use temporal method

109
Q

Is roll return positive or negative when market is in contango? Derivatives

A

Negative

110
Q

What are CAMELS

A 
Capital Adequacy
Asset Quality
Management
Earnings Quality
Liquidity
Sensetivity to Market
111
Q

Fixed rate swap and floating rate swap, what are the durations?

A

Fixed rate swaps have a duration of less than 0, floating rate swaps have a duration above 0.

112
Q

Explain capital adequecy

A

Capital adequacy is the capital the bank has. It is broken up by tier 1 and tier 2 capital. The higher the better

113
Q

Asset quality, explain it from camels

A

It is the credit risk. Remember the loans a bank gives out is an ASSET, and the deposit it recieves is a liability.

It is how risky those loans are, and making sure that there is a Loan loss allowance on the balace sheet to capture loans that are not repaid

114
Q

Loans and deposits, where do they fall on the balance sheet

A

Loans, asset, depost, liability

115
Q

How does a bank earn most of its money?

A

Trading securities (volatile), interest income (loans, deposits), service costs (fees for having an account)

116
Q

How does a bank earn majoirty of its money>

A

Security trading (yes, not loans)

117
Q

How do IFRS and US GAAP differ in terms of how a BANK can record securities on its statements

A

Equity is allowed to be recorded at held for trading ONLY under US GAAP, and HFT and Avalaible for sale under IFRS

118
Q

What are the 2 main liquidity ratios for banks. And what is the minimum these ratios can be (as a number)

A

Loan coverage ratio (liquid assets / expected outflows)

Net stable funding ratio : Liabilities / assets

These must be over 1

119
Q

What are the other things you must consider when analysing a bank

A

Govt support, comp enviornment, etc.

120
Q

Which is more risky, Property and Casualty or Life and Health insurance

A

Property and casualty - it is more unpredictable

121
Q

Goodwill in equity method of accounting

A

Price paid - (BV of Firm * stake) - (stake * write up in assets to FV)

122
Q

For the equity method, depreciation is already included in net income, so you only need to amortize the excess amount.

A

not a question

123
Q

Do you want the combined ratio high or low? What is this ratio for?

A

Insurnace companies, they measure costs for making premiums and the quality of underlying activies. You want it LOW

124
Q

What is the real meaning of pensin expense?

A

The expense for THE CURRENT PERIOD for the PBO

125
Q

Where is the carrying value of a financial investment stored on financial statements

A

Always on the balance sheet, dividends and income are listed on the income statement or OCI, based on whther it is FVPL and FVOCI

Cfa GM (11 decks)

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