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1www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Corporate Valuation
Accounting Refresher - Extract
Prof:...
2www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Accounting Refresher
3www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Understanding the Flows Between Statements (1/4)
Account...
4www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Understanding the Flows Between Statements (2/4)
Closing...
5www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Understanding the Flows Between Statements (3/4)
Closing...
6www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Understanding the Flows Between Statements (4/4)
Closing...
7www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Accounting Questions (1/2)
 Impact on I/S, B/S and CFS ...
8www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Accounting Questions (2/2)
 2 companies have the same N...
9www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Overview of Consolidation Methods
Full consolidation Pro...
10www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Non-Controlling Interests (1/3)
 If a parent company P...
11www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Non-Controlling Interests (2/3)
Building The Consolidat...
12www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Non-Controlling Interests (3/3)
Consolidated Cash Flow ...
13www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Associates (1/3)
 When a parent company P has signific...
14www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Associates (2/3)
Consolidated B/S Consolidated P&L
Note...
15www.ferdinand-petra.com – Valuation – All rights reserved 2018 ©
Associates (3/3)
Consolidated Cash Flow Statement Conso...
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Ferdinand petra - valuation - accounting (extract)

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Financial training on Corporate Valuation - Refresher on accounting

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Ferdinand petra - valuation - accounting (extract)

  1. 1. 1www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Corporate Valuation Accounting Refresher - Extract Prof: Ferdinand Petra (www.ferdinand-petra.com) Any reproduction, copy of this document is strictly forbidden without prior consent of the author
  2. 2. 2www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Accounting Refresher
  3. 3. 3www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Understanding the Flows Between Statements (1/4) Accounting Refresher 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 + Account Receivables + PP&E + Intangible Assets + Others = Total Assets Liabilities + Account Payables & others + Short Term Debt + Long Term Debt + Others = Total Liabilities = Shareholder’s Equity Working Capital Flows Accrual basis Cash basis (incl. other payables)
  4. 4. 4www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Understanding the Flows Between Statements (2/4) 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 + Account Receivables + PP&E + Intangible Assets + Others = Total Assets Liabilities + Account Payables + Short Term Debt + Long Term Debt + Others = Total Liabilities = Shareholder’s Equity Equity Flows Accounting Refresher
  5. 5. 5www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Understanding the Flows Between Statements (3/4) 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 + 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 + Account Receivables + PP&E + Intangible Assets + Others = Total Assets Liabilities + Account Payables + Short Term Debt + Long Term Debt + Others = Total Liabilities = Shareholder’s Equity Debt Flows + Short Term Debt Accounting Refresher
  6. 6. 6www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Understanding the Flows Between Statements (4/4) 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 + Account Receivables + PP&E + Intangible Assets + Others = Total Assets Liabilities + Account Payables + Short Term Debt + Long Term Debt + Others = Total Liabilities = Shareholder’s Equity Fixed Assets Flows Other Flows Accounting Refresher
  7. 7. 7www.ferdinand-petra.com – Valuation – All rights reserved 2018 © 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 Refresher
  8. 8. 8www.ferdinand-petra.com – Valuation – All rights reserved 2018 © 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
  9. 9. 9www.ferdinand-petra.com – Valuation – All rights reserved 2018 © 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 Accounting Refresher
  10. 10. 10www.ferdinand-petra.com – Valuation – All rights reserved 2018 © 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% Accounting Refresher
  11. 11. 11www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Non-Controlling Interests (2/3) 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 Accounting Refresher Parent P Assets Liab. & Sh. Equity Investment in S 8 SHE 48 Assets 100 Liabilities 60 Subsidiary S Assets Liab. & Sh. Equity Assets 15 SHE 10 Liabilities 5 Conso (end of Yr0) Assets Liab. & Sh. Equity Assets 115 SHE group share 48 = 108+15-8 = 48 - 8 + 80% x 10 NCI = 20% x 10 2 Liabilities = 60+5 65
  12. 12. 12www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Non-Controlling Interests (3/3) 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 Accounting Refresher Assets Liab. & Sh. Equity Assets 148.8 SHE group share 80.0 =115 + 33.8 = 48 + 32 NCI 3.8 = 2 + 3 - 1.2 Liabilities 65
  13. 13. 13www.ferdinand-petra.com – Valuation – All rights reserved 2018 © 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 Accounting Refresher
  14. 14. 14www.ferdinand-petra.com – Valuation – All rights reserved 2018 © Associates (2/3) Consolidated B/S Consolidated P&L Note: P owns 30% of A and no transaction between P & A Parent P Assets Liab. & Sh. Equity Investment in A 3 SHE 42 Other assets 100 Liabilities 61 Associate A Assets Liab. & Sh. Equity Assets 15 SHE 10 Liabilities 5 Conso (end of Yr0) Assets Liab. & Sh. Equity 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 Accounting Refresher
  15. 15. 15www.ferdinand-petra.com – Valuation – All rights reserved 2018 © 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 Assets Liab. & Sh. Equity 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 Accounting Refresher

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