Operating Leases: Increase PP&E, Increase LT debt LIFO Reserve: Increase inventory, increase equity Contingent Liability: increase liabilities, decrease equity -> do NOTHING if think u wont pay MV debt increases (decreases): increase (decrease) liabilities, decrease (increase) equity Goodwill: decrease goodwill, decrease equity Capitalized interest: decrease asset, increase liability, decrease equity ADD ADD ADD
Presentation Currency is the currency in which financial statement amounts are presented. In most cases the presentation currency will be the currency of the country where the company is located. Functional Currency is the currency of the primary economic environment in which an entity operates. Normally the functional currency is the currency in which an entity primarily generates and expends cash. In most cases the functional currency and the presentation currency will be the same. Local Currency is the currency where the company is located. In most cases the company generates and expends cash in the currency of its location so the local, functional and presentation currencies are the same. Foreign Currency Transaction is any transaction denominated in any currency other than the company’s functional currency.
There are two different approaches for translating the foreign subsidiary’s assets and liabilities: All assets and liabilities are translated at the current exchange rate (spot rate on the balance sheet date Only monetary assets and liabilities are translated at the current rate. Nonmonetary assets and liabilities are translated at the historical exchange rate (rate that existed at the time of purchase). A variation of the monetary/nonmonetary method is the temporal method which is that assets and liabilities are translated so that the measurement basis is preserved after translating to the parent’s presentation currency. Translate assets held at current costs at current exchange rates and assets held at historical costs translated at historical exchange rates.
Analysis of and Adjustments to the Balance Sheet - Balance sheet suffers from two defects: o Some assets and liabilities are not recorded o Amounts which assets and liabilities are measured may differ significantly from their economic value - Can be enhanced by: o Adding off balance sheet assets and liabilities to B/S o All assets and liabilities are measured at current values Analysis of Book Value - Book value is the reported stockholder’s equity of the company, less the liquidating value of any preferred shares. Although book value per common share is often displayed in corporate and investment reports, it is frequently misunderstood. - Contains following three elements: 1. Original capital used to start the firm, plus proceeds from any additional shares issued, less the cost of shares repurchased. 2. Retained earnings accumulated over the firm’s life 3. Accounting adjustments. Direct to equity PUFE adjustments: P=Pensions U=Unrealized Gains / Losses due to Available for Sale Securities F=Foreign Exchange gains or losses E=Effective portion of a Cash Flow hedge. Adjustments to Assets - Book values of assets should be adjusted to current market value to approximate their value as collateral for creditors and resources available to equityholders. - GAAP required accruals and deferrals may impact reported asset amounts and must be evaluated for their relevance to value. Examples include the reserve for bad debts, asset impairment, the valuation reserve for deferred tax assets, and the impact of exchange rate changes. - Some nonfinancial assets, including real estate, timberland, and mineral properties should also be marked to market. Adjustments to Liabilities - Some liabilities must be eliminated or reclassified - some liabilities are not debt. - Examples of liabilities that should be excluded from debt: o Advances from customers - as this is unearned income, not debt. o Investment Tax Credits o Deferred Income Taxes - Analyst should examine source and likelihood of reversal. Components that are likely to reverse should be included, but restated to present value.
i was lookin for straight up adjustments to B/S. But theese are good reminders too thanks.
you can’t just synthesize adjustments to the b/s without linking to i/s and cf like the decrease in goodwill, you don’t just decrease goodwill (has an indefinite life), it has to be impaired which is a one-time CF from operation which is why it is written down on the balance sheet and an offsetting amount is removed from equity
For LIFO Reserve inventory adjustment to FIFO, I have also seen Increase inventory, increase equity, AND increase to deferred tax liability. ex. Schweser book 6 exam 3pm #72. Does anyone know why we are also increasing deferred tax liability in this case? Is it because there is a line for Accrued liabilities on B/S?
this is just copying another post from another thread but… SYNOPSIS FSA ADJUSTMENTS: ASSET SIDE- Cash and cash equivalents: no adjustments AR: if you sold with recourse, add back receivables sold but not collected. CA up, CL up. treat as ST loan, imputed interest expense goes to I/S. restate proceeds from transaction from CFO to CFF INVENTORY: use FIFO calculations (LIFO ending inventory + LIFO reserve) so up A and up E by amount of LIFO reserve INVESTMENTS IN AFFILIATES: replace equity method investments with prop consolidation Investment in 20% - 50% sub, eliminate the equity one liner, and do a proportionate consolidation: up A, up L, but E = PENSIONS: on B/S, replace net pension asset with fair value plan assets - PBO. if it were a liability you’d replace the liability with PBO - fair value of plan assets. if liability: A same, you’d up L but then also down L a bit by the drop in deferred tax liability. so E down, but not by the full amt of the L you threw up on the B/S *we probably should find and do a problem with this to solidify it* GOODWILL: eliminate it unless the firm is earning excess returns from acquisitions So A down, E down. Per MWVT9- GW not removed in RI models if the results are from an acquisition DEPRECIATION: if you move from let’s say DDB to SL- you’d what, down A, down E? maile- you posted it- elaborate a bit if you can w/ an example? LIABILITY SIDE- DEFERRED TAXES: if no reversal, drop L and up E by full amount. if reversal, the difference b/t the reported value and the PV should be reclassified as equity (drop L, up E for that difference) LEASES: operating make capital- so A up, L up by the PV of the lease payments. remove rent expense from I/S and replace with depreciation and interest expense. COMMITMENTS AND CONTINGENCIES (I have not confirmed these in books- let’s chat them through)- ENVIRONMENTAL- someone said up L, up A. how come up A and not down E? LITIGATION- someone said up L, down E. you’d adjust the B/S by PV of this transaction. LTD: replace book value w/ mkt value. if it’s an increase, you’d up L and down E. CAPITALIZATION OF INTEREST: down A, down E, reduce NI by int expense (can someone confirm this one?) SPE: consolidate them. Up A, up L (both ST and LT assets and liabilities said someone here- pls confirm) STOCKHOLDER’S EQUITY SIDE: PREFERRED STOCK: restate to either mkt or liquidation value. can somone confirm if we’d up the value then, it’d be up equity, up assets? INCOME STATEMENT MOVES: DEPRECIATION- changing methods- change in depr x (1-t) added to NI says maile- this would be let’s say if you went DDB to SL so you’d up your NI since you’re taking less depr out early? ADJUST FIFO COGS TO LIFO LIFO COGS = FIFO COGS + (beginning FIFO inventory x firm/industry approx. inflation rate) if anyone wants to elaborate on this stuff, LIFO liquidations, etc… that’d be super.
Can someone please elaborate a little on pension accounting stuff ?
Please correct if I am wrong: If the B/S shows a net pension liability of (500) and the funded status is 1000 then to adjust the B/S I would remove the liability from the B/S and show an asset of 1500 as the funded status
sidd Wrote: ------------------------------------------------------- > Please correct if I am wrong: > > If the B/S shows a net pension liability of (500) > and the funded status is 1000 then to adjust the > B/S I would remove the liability from the B/S and > show an asset of 1500 as the funded status not 100% sure, but i’d say you - remove the (500) liability - increase assets +500, and equity +500
I do not think you are correct… as we need to reflect the funded status in other words the true net pension asset or liability… I do not see any point in adjusting the equity Can someone else confirm ?
> For LIFO Reserve inventory adjustment to FIFO Inv_FIFO = Inv_LIFO + LIFO_Reserve If you keep COGS ay LIFO, then there is no tax effect, but should you decide to adjust COGS to FIFO, then: COGS_FIFO = COGS_LIFO - Delta(LIFO_Reseve) (1-t) You saved some money because you used FIFO for COGS, but you need to pay he tax on the diference. If you just change Inv to FIFO from LIFO, then when you used LIFO earlier, you paid a lot for your COGS (COGS are overstated). So, bring COGS down, which raises your NI, and equity. But you have to book a tax liability for the added benefit (the increased pretax income). Chime in, cpk.
The show, > Contingent Liability: increase liabilities, decrease equity -> do NOTHING if think u wont pay Don’t you also add same thing to assets? As in take-something-throughput something?
The funded status is the only thing that stays, so you just show +$1000 as asset. Everything else is in teh footnotes.
COGS FIFO=COGS LIFO - Delta LIFO Reserve The (1-T) part goes into Net Income. Net Income FIFO=Net Income LIFO + Delta LIFO Reserve * (1-T)
some updates: litigation or other contingent liabilities >>> L up E down funded status, move 500 liability to equity, and A and E up capitalized interest >>> expense in NI, lead to E down, and A down preferred stock >>> if MV < BV, adjust to MV, and adjustment LEAVE IN E, no matter if you reclassify it to liability or not
there seems to be conflicting views on the funded status stuff can someone else confirm what Dreary has said above wrt to the funded status query ?
yeah. CP etc. plz confirm the funded status stuff. much appreciated.
If the B/S shows a net pension liability of (500) and the funded status is 1000 then to adjust the B/S I would remove the liability from the B/S and show an asset of 1500 as the funded status < reverse it out. L Up 500, E Down 500 A=L+E is still in sync. New Asset 1000 needs to be shown A Up 1000 E Up 1000 A=L+E is in Sync still. Net effect L Up 500, A Up 1000 E Up 500 Also please note the correction to Dreary’s thread on the COGS adjustment above… Please.