Ferdinand petra - valuation - accounting (extract)

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Corporate Valuation
Accounting Refresher - Extract
Prof: Ferdinand Petra (www.ferdinand-petra.com)
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Accounting Refresher

Understanding the Flows Between Statements (1/4)
Closing Balance SheetOpening Balance Sheet Income Statement Cash-Flow Statement
Assets
+ Cash
+ Inventory
+ Account Receivables
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables*
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
= Shareholder’s Equity
Revenue
- Cost of Sales
= Gross Profit
- SG&A Expenses
+ Other Income
- Other Expenses
= Earnings Before
Interest and Taxes
+ Interest Income
- Interest Expenses
= Profit Before Tax
- Tax
= Net income
Net Income
+ D&A
+ Other Non-cash Charges
+/- Change in WC
+/- Change in LT Assets /
Liabilities
= Operating Cash-Flow
- Capital Expenditure
- Dividends
+/- Change in Equity
+/- Change in Debt
= Change in Cash & Cash
Equivalent
Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables & others
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
Working Capital Flows Accrual basis Cash basis
(incl. other payables)

Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
Revenue
- Cost of Sales
= Gross Profit
- SG&A Expenses
+ Other Income
- Other Expenses
= Earnings Before
Interest and Taxes
+ Interest Income
- Interest Expenses
= Profit Before Tax
- Tax
= Net income
Net Income
+ D&A
+/- Change in WC
+/- Change in LT Assets
/ Liabilities
- Dividends
+/- Change in Debt
Equivalent
Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
Equity Flows Accounting Refresher

Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables
+ Long Term Debt
+ Others
= Total Liabilities
Revenue
- Cost of Sales
= Gross Profit
- SG&A Expenses
+ Other Income
- Other Expenses
= Earnings Before
Interest and Taxes
+ Interest Income
- Interest Expenses
= Profit Before Tax
- Tax
= Net income
Net Income
+ D&A
+/- Change in WC
+/- Change in LT Assets
/ Liabilities
- Dividends
+/- Change in Debt
= Change in Cash &
Cash Equivalent
Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
Debt Flows
+ Short Term Debt

Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
Revenue
- Cost of Sales
= Gross Profit
- SG&A Expenses
+ Other Income
- Other Expenses
= Earnings Before
Interest and Taxes
+ Interest Income
- Interest Expenses
= Profit Before Tax
- Tax
= Net income
Net Income
+ D&A
+/- Change in WC
+/- Change in LT
Assets / Liabilities
- Dividends
+/- Change in Debt
Equivalent
Assets
+ Cash
+ Inventory
+ PP&E
+ Intangible Assets
+ Others
= Total Assets
Liabilities
+ Account Payables
+ Short Term Debt
+ Long Term Debt
+ Others
= Total Liabilities
Fixed Assets Flows Other Flows Accounting Refresher

Accounting Questions (1/2)
 Impact on I/S, B/S and CFS of the following events (each question is independent)
− Increase of 10 in Depreciation
− Machine acquisition for 100 (depreciable over 10 years), financed 60/40 by new loan (4%) and new
equity
− Buy 10 of inventory from a competitor (paid cash straight away)
− Buy 10 of inventory from a competitor (paid next year)
− You pay a supplier for 20 in cash
− Decrease of 10 in account receivable
− Issue 100 of new equity through a rights issue (fees paid to banks: 1%)
− Record a PP&E write-down of 10
− Buy a building for 100 and immediately resell it for 120
− Increase of deferred revenues by 10 (+ give an example of deferred revenue)
− Decrease of prepaid expense by 10 (+ give an example of prepaid expense)

Accounting Questions (2/2)
 2 companies have the same Net income but one has 10 more of D&A. All other things being equal, what’s
the difference in cash generation between the 2 companies?
 Why dividend is not shown in the I/S but in the CFS? (hint: tax impact?)
 What is the purpose of “Change in Working Capital” in CFS? (hint: accrual vs. cash basis)
 Give examples of “other non-cash charges” added back in the CFS (CF from operations part)?
Introduction

Overview of Consolidation Methods
Full consolidation Proportional Equity method
Principle
 Considered fully owned  Sub. considered fully owned  Considered like a financial
investment
Conditions
 Control of the entity
 Usually >50% voting rights
 Joint control with other
partners
 Significant influence on the
entity
 Usually >20%
B/S impact
 Assets/liabilities added at
100% + non-Controlling
interests in equity
 Assets/liabilities added at %
ownership level
 Added as Financial
investment (i.e. shares
owned)
P&L impact
 Income/expense added at
100%
 Share of net income not
owned by parent subtracted
 Income/expense added at %
ownership level
 Share of net income owned
added (income from
associates)
Comments
 Does not reflect economic
truth
 Reflects economic truth
 Not allowed anymore (since
Jan-14 for IFRS)
 Does not reflect full risks of
entity
Note: table does not include minority investment (usually <20% ownership) – treated as financial assets

Non-Controlling Interests (1/3)
 If a parent company P owns >50% (voting rights) of a subsidiary S (i.e. control), this subsidiary will be fully
consolidated
− All subsidiary’s assets and liabilities will be consolidated individually at 100%
− A shareholders’ equity account will be created (called Non-controlling Interests , previously known as
Minority Interest) to reflect the share of equity of the subsidiary not owned by the Parent company
shareholder
100%
Assets of
P+S
100%
Liabilities
P+S
Group SHE
NCI
 P owns 80% of its subsidiary S
Definition
Consolidated B/S Shareholding Structure Example
P
S
Minority
shareholders
Shareholders
of P
20%
Minority
shareholders
80%

Building The Consolidated B/S Building The Consolidated P&L
Parent P
P&L Yr1
Revenues 100
Costs (80)
Net income (NI) 20
Subsidiary S
P&L Yr1
Revenues 30
Costs (15)
Net income (NI) 15
Conso
P&L Yr1
Revenues (P+S) 130
- Costs (P+S) (95)
= Net income group (P+S) 35
- Minority interest (20% S) (3)
= NI Group share 32
= (100% NI of P + 80% NI of S)Note: P owns 80% of S and no transaction between P & S
Parent P
Assets Liab. & Sh. Equity
Investment in S 8 SHE 48
Assets 100 Liabilities 60
Subsidiary S
Assets 15 SHE 10
Liabilities 5
Conso (end of Yr0)
Assets 115 SHE group share 48
= 108+15-8 = 48 - 8 + 80% x 10
NCI = 20% x 10 2
Liabilities = 60+5 65

Consolidated Cash Flow Statement Consolidated Balance Sheet (end Yr1)
Note: P owns 80% of S and no transaction between P & S
Events Occurring in Yr1
 Subsidiary S pays a dividend during Yr1 (dividend payout ratio of 40%) – P does not pay dividend
 For both P & S companies
− No Capex/D&A
− All revenues and costs are cashed-in and -out the same year
CFS Yr1
NI Group share 32
+ Minority Interest 3
- Div paid to MI (40% x 3) (1.2)
Change in cash 33.8
Assets 148.8 SHE group share 80.0
=115 + 33.8 = 48 + 32
NCI 3.8
= 2 + 3 - 1.2
Liabilities 65

Associates (1/3)
 When a parent company P has significant influence and no control on another company (let’s call it A)
− Usually needs >20% voting rights (and <50% otherwise full consolidation)
 On P’s consolidated B/S, an Asset account will be created : Equity Affiliates (or Associates)
− Share of equity of A. attributable to P
Assets
(P)
Liabilities
(P)
SHE
(P)
 P owns 30% of A (no control on A but a
significant influence on it)
Equity Method Of Accounting
Consolidated B/S Shareholding Structure Example
P
A
Other
shareholder(s)70%
30%
Associate

Associates (2/3)
Consolidated B/S Consolidated P&L
Note: P owns 30% of A and no transaction between P & A
Parent P
Investment in A 3 SHE 42
Other assets 100 Liabilities 61
Associate A
Assets 15 SHE 10
Liabilities 5
Conso (end of Yr0)
Invest. in Associates 3 SHE 42
= 30% x 10
Other Assets 100 Liabilities 61
Parent P
P&L Yr1
Revenues 100
- Costs (80)
Net income (NI) 20
Associate A
P&L Yr1
Revenues 30
- Costs (15)
Net income (NI) 15
P&L Yr1
Revenues (P only) 100
- Costs (P only) (80)
+ Income from Associates 4.5
= 30% x NI of A
= Net income 24.5

Associates (3/3)
Consolidated Cash Flow Statement Consolidated Balance Sheet (end Yr1)
Events Occurring In Yr1
 Associate A pays a dividend in Yr1 (dividend payout ratio of 40%)
 For both P & A companies
− No Capex/D&A
− All revenues and costs are cashed-in and -out the same year
Note: P owns 30% of A and no transaction between P & A
CFS Yr1
Net Income 24.5
- Income from Associates (4.5)
+ Div paid by Associates 1.8
= 40% x 4.5
Change in cash 21.8
Invest. In Associates 5.7 SHE 66.5
= 3 + 4.5 - 1.8 = 42 + 24.5
Other Assets 121.8 Liabilities 61
= 100 + 21.8

Ferdinand petra - valuation - accounting (extract)

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