University of Waterloo - FINANCE 11SchweserNotes+Book+2-2_112

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The topical coverage corresponds with the following CFA Institute assigned reading: 13. Intercorporate Investments The candidate should be able to: a. describe the classification, measurement, and ... disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities. (page 1) b. distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities. (page 1) c. analyze how different methods used to account for intercorporate investments affect financial statements and ratios. (page 27) The topical coverage corresponds with the following CFA Institute assigned reading: 14. Employee Compensation: Post-Employment and Share-Based The candidate should be able to: a. describe the types of post-employment benefit plans and implications for financial reports. (page 35) b. explain and calculate measures of a defined benefit pension obligation (i.e., present value of the defined benefit obligation and projected benefit obligation) and net pension liability (or asset). (page 37) c. describe the components of a company’s defined benefit pension costs. (page 41) d. explain and calculate the effect of a defined benefit plan’s assumptions on the defined benefit obligation and periodic pension cost. (page 48) e. explain and calculate how adjusting for items of pension and other post-employment benefits that are reported in the notes to the financial statements affects financial statements and ratios. (page 51) f. interpret pension plan note disclosures including cash flow related information. (page 53) g. explain issues associated with accounting for share-based compensation. (page 56) h. explain how accounting for stock grants and stock options affects financial statements, and the importance of companies’ assumptions in valuing these grants and options. (page 56) The topical coverage corresponds with the following CFA Institute assigned reading: 15. Multinational Operations The candidate should be able to: a. distinguish among presentation (reporting) currency, functional currency, and local currency. (page 65) b. describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses. (page 66) c. analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company. (page 68) d. compare the current rate method and the temporal method, evaluate how each affects the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios. (page 68) 2021新版CFAFRM 一二三级视频课程 需要加微信 cfafrm007 e. calculate the translation effects and evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s presentation currency. (page 77) f. analyze how the current rate method and the temporal method affect financial statements and ratios. (page 84) g. analyze how alternative translation methods for subsidiaries operating in hyperinflationary economies affect financial statements and ratios. (page 91) h. describe how multinational operations affect a company’s effective tax rate. (page 95) i. explain how changes in the components of sales affect the sustainability of sales growth. (page 96) j. analyze how currency fluctuations potentially affect financial results, given a company’s countries of operation. (page 97) The topical coverage corresponds with the following CFA Institute assigned reading: 16. Analysis of Financial Institutions The candidate should be able to: a. describe how financial institutions differ from other companies. (page 107) b. describe key aspects of financial regulations of financial institutions. (page 108) c. explain the CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) approach to analyzing a bank, including key ratios and its limitations. (page 109) d. describe other factors to consider in analyzing a bank. (page 119) e. analyze a bank based on financial statements and other factors. (page 121) f. describe key ratios and other factors to consider in analyzing an insurance company. (page 125) STUDY SESSION 6 The topical coverage corresponds with the following CFA Institute assigned reading: 17. Evaluating Quality of Financial Reports The candidate should be able to: a. demonstrate the use of a conceptual framework for assessing the quality of a company’s financial reports. (page 137) b. explain potential problems that affect the quality of financial reports. (page 138) c. describe how to evaluate the quality of a company’s financial reports. (page 142) d. evaluate the quality of a company’s financial reports. (page 142) e. describe the concept of sustainable (persistent) earnings. (page 145) f. describe indicators of earnings quality. (page 145) g. explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion. (page 147) h. evaluate the earnings quality of a company. (page 147) i. describe indicators of cash flow quality. (page 150) j. evaluate the cash flow quality of a company. (page 151) k. describe indicators of balance sheet quality. (page 152) l. evaluate the balance sheet quality of a company. (page 152) m. describe sources of information about risk. (page 153) The topical coverage corresponds with the following CFA Institute assigned reading: 18. Integration of Financial Statement Analysis Techniques The candidate should be able to: a. demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparables, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management’s discussion of financial results). (page 165) b. identify financial reporting choices and biases that affect the quality and comparability of companies’ financial statements and explain how such biases may affect financial decisions. (page 167) c. evaluate the quality of a company’s financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions. (page 167) d. evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios. (page 177) e. analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company’s financial statements, financial ratios, and overall financial condition. (page 177) STUDY SESSION 7 The topical coverage corresponds with the following CFA Institute assigned reading: 19. Capital Budgeting The candidate should be able to: a. calculate the yearly cash flows of expansion and replacement capital projects and evaluate how the choice of depreciation method affects those cash flows. (page 200) b. explain how inflation affects capital budgeting analysis. (page 207) c. evaluate capital projects and determine the optimal capital project in situations of 1) mutually exclusive projects with unequal lives, using either the least common multiple of lives approach or the equivalent annual annuity approach, and 2) capital rationing. (page 210) d. explain how sensitivity analysis, scenario analysis, and Monte Carlo simulation can be used to assess the stand-alone risk of a capital project. (page 214) e. explain and calculate the discount rate, based on market risk methods, to use in valuing a capital project. (page 217) f. describe types of real options and evaluate a capital project using real options. (page 221) g. describe common capital budgeting pitfalls. (page 224) h. calculate and interpret accounting income and economic income in the context of capital budgeting. (page 225) i. distinguish among the economic profit, residual income, and claims valuation models for capital budgeting and evaluate a capital project using each. (page 229) The topical coverage corresponds with the following CFA Institute assigned reading: 20. Capital Structure The candidate should be able to: a. explain the Modigliani–Miller propositions regarding capital structure, including the effects of leverage, taxes, financial distress, agency costs, and asymmetric information on a company’s cost of equity, cost of capital, and optimal capital structure. (page 244) b. describe target capital structure and explain why a company’s actual capital structure may fluctuate around its target. (page 252) c. describe the role of debt ratings in capital structure policy. (page 252) d. explain factors an analyst should consider in evaluating the effect of capital structure policy on valuation. (page 253) e. describe international differences in the use of financial leverage, factors that explain these differences, and implications of these differences for investment analysis. (page 253) The topical coverage corresponds with the following CFA Institute assigned reading: 21. Analysis of Dividends and Share Repurchases The candidate should be able to: a. describe the expected effect of regular cash dividends, extra dividends, liquidating dividends, stock dividends, stock splits, and reverse stock splits on shareholders’ wealth and a company’s financial ratios. (page 263) b. compare theories of dividend policy and explain implications of each for share value given a description of a corporate dividend action. (page 265) c. describe types of information (signals) that dividend initiations, increases, decreases, and omissions may convey. (page 266) d. explain how clientele effects and agency costs may affect a company’s payout policy. (page 267) e. explain factors that affect dividend policy in practice. (page 269) f. calculate and interpret the effective tax rate on a given currency unit of corporate earnings under double taxation, dividend imputation, and split-rate tax systems. (page 270) g. compare stable dividend, constant dividend payout ratio, and residual dividend payout policies, and calculate the dividend under each policy. (page 274) h. compare share repurchase methods. (page 277) i. calculate and compare the effect of a share repurchase on earnings per share when 1) the repurchase is financed with the company’s surplus cash and 2) the company uses debt to finance the repurchase. (page 277) j. calculate the effect of a share repurchase on book value per share. (page 278) k. explain the choice between paying cash dividends and repurchasing shares. (page 279) l. describe broad trends in corporate payout policies. (page 282) m. calculate and interpret dividend coverage ratios based on 1) net income and 2) free cash flow. (page 283) n. identify characteristics of companies that may not be able to sustain their cash dividend. (page 283) STUDY SESSION 8 The topical coverage corresponds with the following CFA Institute assigned reading: 22. Corporate Governance and Other ESG Considerations in Investment Analysis The candidate should be able to: a. describe global variations in ownership structures and the possible effects of these variations on corporate governance policies and practices. (page 296) b. evaluate the effectiveness of a company’s corporate governance policies and practices. (page 299) c. describe how ESG-related risk exposures and investment opportunities may be identified and evaluated. (page 301) d. evaluate ESG risk exposures and investment opportunities related to a company. (page 302) The topical coverage corresponds with the following CFA Institute assigned reading: 23. Mergers and Acquisitions The candidate should be able to: a. classify merger and acquisition (M&A) activities based on forms of integration and relatedness of business activities. (page 310) b. explain common motivations behind M&A activity. (page 311) c. explain bootstrapping of earnings per share (EPS) and calculate a company’s postmerger EPS. (page 313) d. explain, based on industry life cycles, the relation between merger motivations and types of mergers. (page 315) e. contrast merger transaction characteristics by form of acquisition, method of payment, and attitude of target management. (page 317) f. distinguish among pre-offer and post-offer takeover defense mechanisms. (page 320) g. calculate and interpret the Herfindahl–Hirschman Index and evaluate the likelihood of an antitrust challenge for a given business combination. (page 323) h. compare the discounted cash flow, comparable company, and comparable transaction analyses for valuing a target company, including the advantages and disadvantages of each. (page 337) i. calculate free cash flows for a target company and estimate the company’s intrinsic value based on discounted cash flow analysis. (page 325) j. estimate the value of a target company using comparable company and comparable transaction analyses. (page 330) k. evaluate a takeover bid and calculate the estimated post-acquisition value of an acquirer and the gains accrued to the target shareholders versus the acquirer shareholders. (page 340) l. explain how price and payment method affect the distribution of risks and benefits in M&A transactions. (page 345) m. describe characteristics of M&A transactions that create value. (page 345) n. distinguish among equity carve-outs, spin-offs, split-offs, and liquidation. (page 346) o. explain common reasons for restructuring. (page 347) Video covering this content is available online. The following is a review of the Financial Reporting and Analysis (1) principles designed to address the learning outcome statements set forth by CFA Institute. Cross-Reference to CFA Institute Assigned Reading #13. READING 13: INTERCORPORATE INVESTMENTS Study Session 5 EXAM FOCUS There are no shortcuts here. Spend the time necessary to learn how and when to use each method of accounting for intercorporate investments because the probability of this material being tested is high. Be able to determine the effects of each method on the financial statements and ratios. Pay particular attention to the examples illustrating the difference between the equity method and the acquisition method. MODULE 13.1: CLASSIFICATIONS CATEGORIES OF INTERCORPORATE INVESTMENTS LOS 13.a: Describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities. LOS 13.b: Distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities. CFA® Program Curriculum, Volume 2, page 8 Intercorporate investments in marketable securities are categorized as either (1) investments in financial assets (when the investing firm has no significant control over the operations of the investee firm), (2) investments in associates (when the investing firm has significant influence over the operations of the investee firm, but not control), or (3) business combinations (when the investing firm has control over the operations of the investee firm). Percentage of ownership (or voting control) is typically used to determine the appropriate category for financial reporting purposes. However, the ownership percentage is only a guideline. Ultimately, the category is based on the investor’s ability to influence or control the investee. Investments in financial assets. An ownership interest of less than 20% is usually considered a passive investment. In this case, the investor cannot significantly influence or control the investee. Investments in associates. An ownership interest between 20% and 50% is typically a noncontrolling investment; however, the investor can usually significantly influence the investee’s business operations. Significant influence can be evidenced by the following: Board of directors representation. Involvement in policy making. Material intercompany transactions. Interchange of managerial personnel. Dependence on technology. It may be possible to have significant influence with less than 20% ownership. In this case, the investment is considered an investment in associates. Conversely, without significant influence, an ownership interest between 20% and 50% is considered an investment in financial assets. The equity method is used to account for investments in associates. Business combinations. An ownership interest of more than 50% is usually a controlling investment. When the investor can control the investee, the acquisition method is used. It is possible to own more than 50% of an investee and not have control. For example, control can be temporary or barriers may exist such as bankruptcy or governmental intervention. In these cases, the investment is not considered controlling. Conversely, it is possible to control with less than a 50% ownership interest. In this case, the investment is still considered a business combination. Joint ventures. A joint venture is an entity whereby control is shared by two or more investors. Both IFRS and U.S. GAAP require the equity method for joint ventures. In rare cases, IFRS and U.S. GAAP allow proportionate consolidation as opposed to the equity method. Figure 13.1 summarizes the accounting treatment for investments. Figure 13.1: A [Show More]

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