Tài chính doanh nghiệp - Chapter 5: Understanding balance sheets

Chapter 5Understanding Balance SheetsPresenter’s namePresenter’s titledd Month yyyyOverviewBalance sheet elements and formatAccounting issuesCurrent and noncurrent assets and liabilitiesMeasurement bases of different assets and liabilitiesComponents of shareholders’ equityBalance sheet analysisLiquidity and solvencyCopyright © 2013 CFA Institute2balance sheet contentsThe balance sheet is also known as the statement of financial position or statement of financial condition. The balance sheet discloses, at a specific point in time,what an entity owns (or controls), what it owes, and what the owners’ claims are. Assets = Liabilities + Owners’ equityCopyright © 2013 CFA Institute3balance sheet elementsAssets (A): resources controlled by the company as a result of past events and from which future economic benefits are expected to flow to the entity.Liabilities (L): obligations of a company arising from past events, the settlement of which is expected to result in an outflow of economic benefits from the entity.Equity (E): represents the owners’ residual interest in the company’s assets after deducting its liabilities.Copyright © 2013 CFA Institute4equityThe balance sheet provides important information about a company’s financial condition.However, balance sheet amounts of equity (assets, net of liabilities) should not be viewed as a measure of either the market or intrinsic value of a company’s equity.Why? The balance sheet is a mixed model with respect to measurement (some items at historical cost, some items at current value).Even current value reflects a value that was current at the end of the reporting period.Future cash flows, which affect value, are driven by items excluded from the balance sheet (e.g., reputation, management skills). Copyright © 2013 CFA Institute5Balance sheet: example Colgate-Palmolive company (assets)Copyright © 2013 CFA Institute6Colgate's Annual ReportBalance sheet: example Colgate-Palmolive company (liabilities)Copyright © 2013 CFA Institute7Colgate's Annual ReportBalance sheet: example Colgate-Palmolive company (equity)Copyright © 2013 CFA Institute8Colgate's Annual ReportBalance sheet formatLiquidityFor a company overall, its ability to pay for short-term obligationsFor a particular asset or liability, its “nearness to cash”Balance sheet ordering according to liquidity Companies using U.S. GAAP (e.g., Colgate) order items on the balance sheet from most liquid to least liquid. Companies using IFRS order balance sheet information from least liquid to most liquid.Copyright © 2013 CFA Institute9Balance sheet: example Henkel AG (assets)Copyright © 2013 CFA Institute10Henkel's Annual ReportBalance sheet: example L’ORÉAL (assets)Copyright © 2013 CFA Institute11L’Oréal's Annual Reportcurrent and noncurrent assets and liabilitiesBalance sheet must distinguish between and present separatelycurrent and noncurrent assetscurrent and noncurrent liabilitiesException to the current and noncurrent classifications requirement, under IFRS: Current and noncurrent classifications are not required if a liquidity-based presentation provides reliable and more relevant information.In a liquidity-based presentation, all assets and liabilities presented in order of liquidity.Liquidity-based presentation are often used by banks.Classified balance sheet: Balance sheet with separately classified current and noncurrent assets and liabilities. Copyright © 2013 CFA Institute12Balance sheet: example Barclays plc (assets)Copyright © 2013 CFA Institute13Barclays' Annual Reportcurrent and noncurrent assets and liabilitiesCurrent assets: Assets expected to be sold, used up, or otherwise realized in cash within one year or one operating cycle of the business, whichever is greater, after the reporting period. Noncurrent assets: Assets not classified as current. Also known as long-term or long-lived assets.Current liabilities: Liabilities expected to be settled within one year or within one operating cycle of the business. Noncurrent liabilities: All liabilities not classified as current.Working capital: The excess of current assets over current liabilities.Copyright © 2013 CFA Institute14Measurement bases of current assets:cash and cash equivalentsCash Equivalents: Highly liquid, short-term investments that are so close to maturity that the risk of significant change in value from changes in interest rates is minimal.Examples: demand deposits with banks highly liquid investments with original maturities of three months or less (e.g., U.S. T- bills, commercial paper, money market funds) For cash and cash equivalents, amortized cost and fair value are likely to be immaterially different. Copyright © 2013 CFA Institute15Measurement bases of cash and cash equivalents: example disclosures“Cash Equivalents. Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost.”Procter & Gamble (2011), annual report“Cash and cash equivalents. Cash and cash equivalents consist of cash in bank accounts, units of cash unit trusts and liquid short-term investments with a negligible risk of changes in value and a maturity date of less than three months at the date of acquisition. . . . Units of cash unit trusts are considered to be assets available for sale. As such, they are valued in the balance sheet at their market value at the closing date. Any related unrealized gains are accounted for in Finance costs, net in the income statement. The carrying amount of bank deposits is a reasonable approximation of their fair value.”L’Oréal (2011), annual reportCopyright © 2013 CFA Institute16Measurement bases of current assets:trade receivablesTrade receivables: Amounts owed to a company by its customers for products and services already delivered. Also referred to as accounts receivable. Typically reported at net realizable value, an approximation of fair value, based on estimates of collectability. Aspects of accounts receivable often relevant to an analyst:overall level of accounts receivable relative to sales,allowance for doubtful accounts, andconcentration of credit risk. Copyright © 2013 CFA Institute17Measurement bases of receivables: L’ORÉAL ExampleBased on the note below, what percentage of its receivables did L’Oréal estimate will be uncollectible?Copyright © 2013 CFA Institute18Answer: For 2011, €46.2 divided by €3,042.3 = 1.52%.For 2010, €48.1 divided by €2,733.4 = 1.76%.For 2009, €50.2 divided by €2,493.5 = 2.01%.Measurement basis of current assets: InventoryGoodsPurchasedBeginningInventoryGoodsAvailableforSaleEndingInventoryCost ofGoods SoldBalance SheetIncome StatementInventory Cost FlowCopyright © 2013 CFA Institute19Measurement bases of current assets:inventoryU.S. GAAPLower of cost or market (LCM):Market defined as replacement cost with a floor (Net realizable value, or NRV, less normal profit margin) and a ceiling (NRV).NRV defined as estimated selling price less estimated costs of completion and sale.Reversals of prior write-downs are NOT allowed.Permits last in, first out (LIFO). IFRSLower of cost or net realizable value (LCNRV):NRV defined as estimated selling price less estimated costs of completion and sale.Reversals of prior write-downs can be made and recognized in income.Does not permit LIFO.Copyright © 2013 CFA Institute20Measurement bases of noncurrent assets:Property, plant, and equipment Property, plant, and equipment (PP&E): Tangible assets that are used in company operations over more than one fiscal period.Under the cost model, PP&E is reported at historical cost less any accumulated depreciation and less any impairment losses.Depreciation: Systematic allocation of cost over an asset’s useful life.Land is not depreciated.Impairment losses reflect an unanticipated decline in value.Reversals of impairment losses are permitted under IFRS but not under U.S. GAAP.Under the revaluation model, PP&E is reported at fair value at the date of revaluation less any subsequent accumulated depreciation.The revaluation model is NOT permitted under U.S. GAAP.Copyright © 2013 CFA Institute21Measurement bases of noncurrent assets:Property, plant, and equipment U.S. GAAPPermit only the cost model for reporting PP&E.Reversals of prior impairment losses are NOT allowed.IFRSPermit either cost model or revaluation model.Can use different models for different classes of assets.Must apply same model to all assets within a particular class.Reversals of impairment losses are permitted.Copyright © 2013 CFA Institute22Measurement bases of Property, plant, and equipment: example disclosure“During 2008, Portugal Telecom changed the accounting policy regarding the measurement of real estate properties and the ducts infra-structure from the cost model to the revaluation model. . . . [Revaluation amounts totaled] Euro 1,075,033,022 that was recognized in the Consolidated Statement of Comprehensive Income. . . . Portugal Telecom performed another revaluation of the real estate assets and ducts infrastructure in the year ended 31 December 2011. . . [resulting] in a net reduction of tangible assets amounting to Euro 131,418,994, of which Euro 126,167,561 was recognized directly in the Consolidated Statement of Comprehensive Income (Note 44.5) under the caption ‘Revaluation reserve’ and Euro 5,251,433 was recognized in the Consolidated Income Statement under the caption ‘Depreciation and amortization.’”Copyright © 2013 CFA Institute23Portugal Telecom (2011), Form 20-F, note 37.4Measurement bases of noncurrent assets: intangible assetsIntangible assets: Identifiable nonmonetary assets without physical substance (e.g., patents, licenses, trademarks).Goodwill, which arises in business combinations and is not a separately identifiable asset, is covered separately in IFRS. Measurement models for intangible assets:IFRS allow either a cost model or a revaluation model for intangible assets.U.S. GAAP allow only the cost model.Measurement of intangible assets subsequent to acquisition:Intangible asset with finite useful life: Amortize over useful life and assess for impairment when indicated.Intangible asset with indefinite useful life: Do not amortize, but assess for impairment (annually under IFRS; only after qualitative assessment under U.S. GAAP).Copyright © 2013 CFA Institute24Measurement bases of noncurrent assets: goodwillGoodwillArises when a company acquires another company for a price in excess of fair market value of net identifiable assets acquired.Is equal to purchase price of business minus fair market value of net assets acquired.Represents value of all favorable attributes that relate to a business enterprise.Is recorded only when there is an exchange transaction that involves the purchase of an entire business.Is not amortized, but must be assessed for impairment.Accounting goodwill does not equal economic goodwill.Copyright © 2013 CFA Institute25Measurement bases of financial assetsCopyright © 2013 CFA Institute26Financial AssetsMeasured at Fair ValueChanges in Value through Profit and LossTrading Securities (stocks and bonds)Changes in Value through OCIIFRS: Designated Equity InvestmentsU.S. GAAP: Available-for-Sale Debt or EquityMeasured at Amortized Cost:- Held-to-Maturity- Debt InstrumentsCommon types of Current liabilitiesTrade payables, also known as accounts payable: Amounts that a company owes its vendors for purchases of goods and services—in other words, the unpaid amounts of the company’s purchases on credit as of the balance sheet date. Notes payable: Financial liabilities owed by a company to creditors, including trade creditors and banks, through a formal loan agreement. Accrued expenses (also called “accrued expenses payable,” “accrued liabilities,” and other “nonfinancial liabilities”) are expenses that have been recognized on a company’s income statement but that have not yet been paid as of the balance sheet date.Deferred income (also called “deferred revenue” and “unearned revenue”) arises when a company receives payment in advance of delivery of the goods and services associated with the payment. Copyright © 2013 CFA Institute27Common types of nonCurrent liabilitiesLong-term financial liabilities: Include loans (i.e., borrowings from banks) and notes or bonds payable (i.e., fixed-income securities issued to investors). Usually reported at amortized cost on the balance sheet. In certain cases, liabilities, such as bonds, issued by a company are reported at fair value. Deferred tax liabilities: Amount of income taxes payable in future periods with respect of taxable temporary differences.Result from temporary timing differences between a company’s income as reported for tax purposes (taxable income) and income as reported for financial statement purposes (reported income). Copyright © 2013 CFA Institute28components of shareholders’ equityCapital contributed by owners (or common stock or share capital)Preferred sharesTreasury shares (or treasury stock)Retained earningsAccumulated other comprehensive income (or other reserves, items recognized directly in equity)Noncontrolling interest (or minority interest)Copyright © 2013 CFA Institute29Balance sheet: example L’ORÉAL (equity and liabilities)Copyright © 2013 CFA Institute30L'Oréal Annual ReportAnalysis of balance sheetsLiquidity A company’s ability to meet its short-term financial commitments. Assessment focus: The company’s ability to convert assets to cash and to pay for operating needs. Solvency A company’s ability to meet its financial obligations over the longer term.Assessment focus: The company’s financial structure and its ability to pay long-term financing obligations.Analytical Tools Common-size analysis. Balance sheet ratios.Copyright © 2013 CFA Institute31common-size balance sheetsCopyright © 2013 CFA Institute32($ thousands)ABCASSETSCash, cash equivalents, marketable securities1,9002003,300Accounts receivable5001,0501,500Inventory 100950300Total current assets2,5002,2005,100Property, plant, and equipment, net7507504,650Goodwill03000Total assets3,2503,2509,750LIABILITIES AND EQUITYAccounts payable02,500600Total current liabilities02,500600Long-term bonds payable10109,000Total liabilities102,5109,600Total shareholders’ equity3,240740150Total liabilities and shareholders’ equity3,2503,2509,750common-size balance sheetsCopyright © 2013 CFA Institute33(percent of total assets)ABCASSETSCash, cash equivalents, marketable securities58.46%6.15%33.85%Accounts receivable15.38%32.31%15.38%Inventory 3.08%29.23%3.08%Total current assets76.92%67.69%52.31%Property, plant, and equipment, net23.08%23.08%47.69%Goodwill0.00%9.23%0.00%Total assets100.00%100.00%100.00%LIABILITIES AND SHAREHOLDERS’ EQUITYAccounts payable0.00%76.92%6.15%Total current liabilities0.00%76.92%6.15%Long-term bonds payable0.31%0.31%92.31%Total liabilities0.31%77.23%98.46%Total shareholders’ equity99.69%22.77%1.54%Total liabilities and shareholders’ equity100.00%100.00%100.00%common-size balance sheetsCopyright © 2013 CFA Institute34(percent of total assets)ABCASSETSCash, cash equivalents, marketable securities58%6%34%Accounts receivable15%32%15%Inventory 3%29%3%Total current assets77%68%52%Property, plant, and equipment, net23%23%48%Goodwill0%9%0%Total assets100%100%100%LIABILITIES AND SHAREHOLDERS’ EQUITYAccounts payable0%77%6%Total current liabilities0%77%6%Long-term bonds payable0%0%92%Total liabilities0%77%98%Total shareholders’ equity100%23%2%Total liabilities and shareholders’ equity100%100%100%Balance sheet Ratios: liquidity ratiosRatioCalculationCurrentCurrent assets /Current liabilitiesQuick (acid test) (Cash + Marketable securities + Receivables) / Current liabilitiesCash(Cash + Marketable securities) / Current liabilitiesCopyright © 2013 CFA Institute35Liquidity ratios indicate a company’s ability to meet current liabilities.Balance sheet Ratios: Solvency RatiosRatioCalculationLong-term debt to equityTotal long-term debt  Total equityDebt to equityTotal debt  Total equityTotal debt (also known as debt to assets)Total debt  Total assetsDebt to capitalTotal debt  (Total debt + Total equity)Financial leverageTotal assets  Total equityCopyright © 2013 CFA Institute36Solvency ratios indicate financial risk and financial leverage and a company’s ability to meet its financial obligations over time.summaryBalance Sheet: what an entity owns (or controls), what it owes, and what the owners’ claims are at a specific point in time.Balance sheets usually present current and noncurrent assets and liabilities.Accounting issues relate primarily to measurement (historical cost versus fair value).Tools for balance sheet analysis include common-size analysis and balance sheet ratios.Balance sheet ratios indicate liquidity and solvency.Copyright © 2013 CFA Institute37